One of the struggles of the new trader, or even the seasoned trader for that matter, is they have not found a methodology which they are happy with and consistently use in the markets. Generally traders will be jumping from system bleeding away their capital in their search for the ultimate indicator or best performing trading robot.
If you're looking for the “Holy Grail”, I am going to tell you the closest thing you're ever going to get to it and that is trading straight from price action itself.
Price action is basically the measurement of the price movements and the collected value of a specific market over specific points in time. In layman’s terms, it’s the study of the actual raw price movements on the chart, basing your trading decisions straight off the candlesticks.
Acquiring knowledge of price action trading and being able to apply it is the most important skill a trader could have. Price action is basically what every technical trading system and indicator is derived from so why not cut out the middle man and work directly with the market movements.
Let’s have a look at some of the advantages you can enjoy by adopting price action trading into your trading life.
No more relying on Indicators
Every time a trader shows me their chart and I see that it’s loaded up with indicators, to the point where it looks more like a star chart rather than a price chart, it sends shivers down my spine.
Generally the trader is frustrated and having trouble finding an edge in the market. Ironically traders will generally believe the more indicators they put on their chart, the more ‘reliable’ their analysis will be.
What’s really happening is the trader is adding way too many extra variables in the mix and cannot make sense of all the data, to the point where the actual candlesticks aren't even considered.
The first thing we recommend to the trader is to remove all the indicators and start from scratch with a plain vanilla chart template which contains no indicators at all. The only indicator you’re ever going to need is price itself and that’s it.
It’s a common fact that indicators produce lagging data, and it’s true. Most of them have moving average based algorithms, some of them pass data through multiple average maths and the output is just so bogged down. This makes indicator reaction time very slow and will generally not signal you into a move until most of it is already over. During ranging or consolidating conditions indicators really let traders down by signalling the trader into so many ‘trap’ trades.
Cut yourself free of indicators, they are only holding back your trading potential.
Cut yourself free of indicators, they are only holding back your trading potential.
You don't need to study the news
We know that fundamentals and economic events are the ‘fuel for the fire’ so to speak and are part of the engine that drives movement in the markets, but despite popular belief you don’t need to be an expert in this field to be a professional trader.
Trading the news releases is difficult enough, generally most of the market is already priced into the news event before you can already pull the trigger. To make things even harder for the news trader, volatility can be so high during news releases that when you do finally pull the trigger you will keep getting re-quotes from your broker because they can't fill the price you're asking for, and you miss out.
News event trading is stressful; it puts you in a dangerous emotional state. You will find yourself getting frustrated really easily and ‘chasing price’ as it fluctuates all over the screen.
Price action will reflect the output of the economic and fundamental events, so by reading the raw price movements and taking note on how the candles are closing, you will be able to make trading decisions based off price action that was caused by the news.
The above chart shows the classical example where economic and news events are reflected in the price action. Back in 2011 the SNB pegged the value of the Franc to the Euro at $1.20. This caused huge moves across the market, but we didn’t miss out, there was a bullish price action signal just before the move.
If you don’t understand your trading system then you are never going to be confident about placing trade orders. There will always be that uncertainty in the back of your head and you will second guess yourself all the time.
This is typical for indicator based systems where you don't really know what’s going on inside that ‘box’ which is spitting out all data on your chart you’re basing decisions off.
With price action trading you can develop an understanding of what you are actually doing by ‘reading’ the actual market and observing how the market reacts with support and resistance or trend lines. You're making trading decisions based from what you see not what you've been told by external variables.
No more taking trades blindly because that fancy indicator you just bought told you to, or the signal service you've subscribed to said so. You can start making trades based off logical conclusions from your own understanding of market movements.
Build confidence in yourself as a trader
If you don’t understand your trading system then you are never going to be confident about placing trade orders. There will always be that uncertainty in the back of your head and you will second guess yourself all the time.
This is typical for indicator based systems where you don't really know what’s going on inside that ‘box’ which is spitting out all data on your chart you’re basing decisions off.
With price action trading you can develop an understanding of what you are actually doing by ‘reading’ the actual market and observing how the market reacts with support and resistance or trend lines. You're making trading decisions based from what you see not what you've been told by external variables.
No more taking trades blindly because that fancy indicator you just bought told you to, or the signal service you've subscribed to said so. You can start making trades based off logical conclusions from your own understanding of market movements.
Price action trading is easy
Traders naturally believe from their real life experiences, “The more complicated something is, the better it is going to work”. This might apply to things to cars and computers but there is no room for this type of thinking when it comes to the Forex market.
Complicated Forex trading systems only lead to headaches, anxiety and high stress levels. This is not the state of mind you want to be in when in front of the charts.
Believe it or not, simple strategies work best in the market, and price action trading is just that, simple. Don’t mistake simplicity for less desirable results though, the real fact here is simple price action strategies are one of the most powerful and lucrative methods used in today's markets.
I know traders who work in professional firms and they tell me most of the traders that work there, trading with very big money I might add, are mostly trade with price action. Sure you get the odd trader in there who gets into his RSI a bit, but they mostly are all price action orientated and for good reason, it the most effective trading methodology.
You can use re-occurring price action patterns like outside candles to give you the ‘early warning’ flag a reversal is about to take place in the market. Combine these signals with key focal points on the chart and you can easily identify low risk / high reward trading opportunities.
The above chart is an example of a bearish outside candle trade I took on the USDJPY. The outside candle was a nice early warning sign that the counter trend retracement terminated at a focal point on this chart and was a good opportunity to go short.
We believe you can really benefit from learning how to trade forex from a price action perspective because price action is an easy and stress free way to trade. Nearly every trading strategy can benefit from a good foundation of price action knowledge.
For us, combining price action trading with high risk/reward money management is as close as you will get to the holy grail of Forex systems. Anyone can learn it, even the high school dropout , and believe me once you get a feel for trading with price action you will wonder how you ever managed to trade without it.
Conclusion
We believe you can really benefit from learning how to trade forex from a price action perspective because price action is an easy and stress free way to trade. Nearly every trading strategy can benefit from a good foundation of price action knowledge.
For us, combining price action trading with high risk/reward money management is as close as you will get to the holy grail of Forex systems. Anyone can learn it, even the high school dropout , and believe me once you get a feel for trading with price action you will wonder how you ever managed to trade without it.
