If you are forex price action trading rules of charts overloaded with indicators then the following material will help you to view the markets in a simpler, more effective way. Although traders tend to use different tools when trading forex, I will walk you through the most classic way of trading. It is a price action trading system. Price action trading in forex is a trading method based solely on analyzing previous price behaviors.
This means that a trader analyzes market conditions on a naked chart without using additional indicators or oscillators. The most important process in a price action trading strategy is in identifying ongoing trends. The trend is really your friend. You should always try to trade in accordance with the prevailing trend whenever possible. Price consolidation is when the price is ranging without any clear direction. This means that the price of the forex pair is not increasing or decreasing.
It is rather moving sideways, and usually not providing any high probability trading opportunities. For most traders, a good trading rule would be to stay out of the market when the price is consolidating in order to avoid whipsaws. Some traders tend to attack currency pairs when trend lines are getting exhausted. The reason for this is that trend reversals give you the opportunity to be in the market right at the beginning of a trend. When looking for reversals, traders try to enter before the crowd does, in order to maximize the potential reward to risk ratio offered on such trades.
A trend correction occurs when the price is moving in a direction opposite to the prevailing trend. Typically a correction or retracement will bounce off the sloping trendline, which can confirm the resumption of the trend. Corrections usually move the currency pairs with an amount lower than the regular trend movement. Some traders feel that corrective trend movements should be avoided because the actual trend movement provides significantly better opportunity. On the other hand, there are traders who prefer counter trend trading. If you can master market timing, you will find trading corrections can be quite profitable as well. But in general, I believe you should not try to trade corrections if you are not yet an experienced trader.
Although indicators are not typically used in the framework of a price action trading strategy, price action traders do rely on various chart patterns. I am going to introduce you to some of the most popular chart patterns found in the markets. Support and resistance are on-chart levels, where the price is expected to react. These are usually psychological levels where investors’ attitude tend to match. These levels are easily spotted on the chart.
When you see the price attempting to pass thru a certain level several times but is met with buying or selling pressure, then you have a psychological level. And at the other end of the spectrum, if the price approaches the level in bearish direction, it is a support. Note that every support can be broken and then turned into a resistance. The same is in force for the resistance itself. It could always be broken and turned into a support. Traders use support and resistance levels to set entry and exit points on their trading position when trading with price action.
May 19, 2015, showing the price of the Yen consolidating between a support and resistance area. Every forex trading strategy can benefit from proper support and resistance identification. Most forex traders, whether novice or experienced will look at support and resistance levels before initiating a trade. Trend lines act the same way as a horizontal support or resistance lines.