Price action trading, regardless of what you are trading (Forex, stocks, commodities, futures) is the art of looking at individual or groups of candlesticks to determine where the currency pair has the higher probability of moving to next.
We want to know if the currency pair has a better chance of going up, going down, or even becoming a trading range.
Benefits Of Price Action Trading
Price action trading does not need any trading indicators (they lag price anyhow) and can tell you through price action analysis, who is in control of the market at certain points in time. Each group or singulur candlestick can tell you if the bulls, bears, or neither is fully in charge.
You can actually see supply and demand play out on the chart as the bull bear battle plays out in the price movement.
So with that in mind, here are 5 Price Action Trading Tips to help you with your forex trading.
Identify Support and Resistance Levels
Why do you need to identify support and resistance levels on your chart? Here are the most important reasons why:
- Resistance and support levels are market turning points – price reverses when it hits these levels. If you don’t identify them, you will wonder why price is turning at a particular price level and you may be getting into a trade at the wrong time!
- Resistance and support levels also cause explosive price moves when these levels are broken so its better to identify and pay attention to see what the market will do around these levels.
- Resistance and Support Levels are also levels watched by institutional traders and the guys with fat Forex trading accounts, that move the Forex market with the sheer money and trading power they have.
The Forex chart below may make the points mentioned above much more easier to understand:
Analyze Swing Points In Price
Swing points refer to those areas on your Forex chart where prices may reverse. How do you find swing points?
- Fibonacci retracement levels like 38.2, 50 % 61.8
- Support And Resistance Levels
- Trend lines
- Price Bouncing off moving averages
Have a look at the chart below to see what I’m talking about:
Identify Where Price Forms A Narrow Channel
What I mean by narrow tunnel is this: sometimes, you will see on your forex chart that the price is neither going up or down much but is going sideways in a horizontal line.
The candlesticks are often short and are constricted within a narrow tunnel or narrow range. When you see such a situation happening, its good to pay attention to that.
Why?
Because when price breaks out of this narrow range, it is usually an explosive move either upwards or downwards.
Have a look a the forex chart below to see what I mean:
Find Rejected Price Levels
What are rejected price levels? Well, simply put, these are levels where price made a drastic turn!
Rejected price levels are easily spotted with an Hammer or a shooting star candlestick pattern. Watch out for them and pay attention to the levels where price was rejected from.
Look at the Forex chart below to see what I mean:
Decide Where Price Is In The Current Trend
Would you rather take a trade at the beginning of a trend or at the end of a trend? If you are say “at the end of the trend”, you can be either a fool (and happy to part with your money) or you are very smart!
There are only two types of trade you can take at the beginning of a trend or at the end of a trend. But here’s the thing… know also that the beginning of a new trend is the start of another trend.
For example, if you take a long trade at the end on an uptrend, are you are fool or smart person? If you say, “fool”, you are right. Its so damn foolish to get into a long trade when the uprend is just about to end or is losing steam and has no more momentum to keep going up!
But!
On the other hand, if you take a short trade at the end of and uptrend, you are very smart! Because you’ve timed your trade entry right and you will start to make profit immediately as price starts to move down.
So before you get into a trade, you need to ask yourself this question:
Am I trying to get into a trade in a trend that is already had come a long way or the trend is just starting?
You know what the most frustrating thing is?
Its when you get into a trade and price goes nowhere or worse, the trend changes direction right where you enter! To avoid this, pay attention to what part of the trend you are entering the trade from? If its in the beginning, then awesome! If its in the middle, that’s still ok. If its where the trend is losing steam, avoid it.
Here’s what I’m talking about:
If you don’t know how to predict trend changes or trend reversals, this post will help you. Click and Read: How To Predict Trend Reversals
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