Price Action Trading
Price action trading in Forex is basically a method or a trading method based only on analyzing previous price behavior. What traders do is that they are looking back in time and look for patterns like candlesticks or support and resistance levels in trying to forecast those levels on the right side to find a good entry or exit places for their trades.
This means that a trader analyses market on a naked chart without any indicator, or oscillator, so no ASI, no CCI. No nothing but pure, simple candles. The most important process in price action is identifying ongoing trade you should always try to trade in the in the direction of a trend. There is a saying also that the trend is your friend.
Now, this is not something that you want to fade. Price consolidation appears when prices ranging without a direction, without a clear direction. Usually, the Asian session is full of ranges, full of consolidations as the biggest financial centers are still London and New York. So, London session will be much more animated as well as the North American one rather than the Asian one.
A good trading rule would be to stay out of the market where and price is consolidating so trading in the Asian session, the FX market is a bit tricky. Traders use support and resistance levels as well to set entry and exit points on their trading position when trading with price action.
Now, this is important because of the support and the resistance level. It is transforming in the sense that by the time the support is being broken it becomes resistance and by the time resistance is being broken, it becomes support. Every Forex trading strategy can benefit from support and resistance or from proper identification of support and resistance levels.
Let’s take this one, for example, there is US dollar/ Japanese Yen on the daily chart. So, what do we have here? We have a move to the downside as we can see here that hits our support area. This yellow line is the support area and in doing that we have a red candle with a huge shadow and a small body. This one is being called a hammer.
Now, this hammer is a bullish reversal pattern. So, staying on the long side in here is not advisable and then we see the market tries to break high in phase, one time, two times, three times and then rejected all the way to the downside.
Informing this attempt to break the resistance basically, it forms a bearish reversal pattern that, this one is being called an evening star. We have a huge red candle, a small huge green candle, a small red one and then another red candle to the downside comes into our support. So, in here we are not interested to be short anymore.
This is being called the Morning Star another bullish pattern and so resistance holds again. Then comes into Support comes in to support again, forms a possible double bottom is being called goes to the so-called neckline of the double bottom and forms take a look in here for testing one, two times a double top. Then approaches and breaks the double top, well by the time this break is coming we can say the resistance area is being broken.
The Break Outs
One of the most common ways to trade key levels is simply trying to go with the market flow. Basically when the range is being broken or when support or resistance level is being exceeded.
Trend lines are really important when it comes to trading not only when it comes to creating a fixed market but when it comes to trading generally. As they act the same way as the horizontal support and resistance.
The difference is that a trend line can be also being diagonal this being called Dynamic support and resistance in the sense that you will have a resistance every time price comes and hits this trend line it will be resistance, resistance, resistance. Only that the resistance level is not on the horizontal like it was in the previous example. But it is actually on a declining, downward trend.
Channels are also important as they act in a way, in the same way like the trend line with the difference is that these channels have another level which forms a corridor with the trend. This is a channel, the US Dollar/Japanese Yen on Forex chart.
Now, take a look here, we have resistance to the upside, support, resistance, support, dynamic again. Dynamic support resistance was broken or the channel is broken forms here some kind of a pennant or a continuation pattern and then the new trend resumes. It is very important to use candlestick patterns to like we used in the previous example with the horizontal support and resistance levels as this is a very common technique for price action traders.
This is also a good example in the sense of that this Euro/ US dollar Forex chart comes after a bearish trend, forms a huge red candle then a hammer candle and a huge green candle. This one is being called a morning star that has the hammer in the middle of the pattern. It extremely bullish so staying short here is not advisable. So you don’t need any indicators of something but only watching classical, old price action.
These chart patterns are specific formations and figures on the charts that give clues for trend continuations or reversals in our case, in the previous example, it was a reversal. Sometimes a pattern forms a measured move like it was with a double top or the double bottom. The measured move will be the minimum distance that the marker needs to travel but careful with these measured moves. It doesn’t mean that markets should stop there.
In this example, we have the Great British Pound/US dollar on the Forex charts forming a head and shoulder, with this being the neckline. Normally the measured move or the target is the same distance from the head until the neckline.