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How To Use Price Action In Forex Trading

Last Updated September 15th 2021
7 Min Read

Are you using price action basics in your forex trading strategy? For a currency trader, it is important to know about price action trading in forex. It is mainly a strategy in which you can predict market movements by reading or analysing patterns or signals in the price movements. It implies that there are no lagging forex indicators present.

In this article, we will look into the price action in forex and different trading strategy using price action. But before that let us learn about price action and why it is important for forex traders.

What Is Price Action?

In trading, price action means analysing the performance of your commodities, securities, currencies, and indexes to know their trends in the future. If the price action tells you that the price will rise, you may take a long position. On the other hand, you can short the asset if the price is going to fall.

In price action trading, you have to seek patterns and recognise the key indicators that can influence your investments. With this information, you can form opinions and take decisions on key price levels and assess the risk involved. In price action trading, the first step is trend identification as other indicators of price action requires trend basis for analysis.

Why Do Forex Traders Use Price Action In Their Trading Strategy?

Forex traders use price action trading due to following reasons:

  • As forex is a liquid market, traders can easily and quickly open and close their positions with price action indicators.
  • There is always some movement in the forex market but very big highs and lows are rare. Thus, new traders who wish to experiment with small trades can use price action to gain expertise.
  • Due to the maturity of the forex market, it is easy to spot recurring patterns and trends.

Check Out: Price Action Trading: How To Trade Market Movements Successfully

Difference Between Price Action, Technical Analysis And Indicators

Any signal on the trading chart that indicates the emergence of a trend is known as a price action indicator. Experienced traders can use these indicators to make profitable trades on the market in real-time.

Technical analysis is the complete evaluation of the future price movements and price action indicator is the initial form of evaluation. Price action will govern the information that a price action indicator will give on the chart. 

A trader must first understand what price action is doing and following this, he must consider the indicator for an entry signal in the trend direction. In trading, a trader trade on the price value, and thus, the focus is on the change in price rather than the change in value of the indicator. 

A price action indicator is better than other trading indicators because:

  • Indicators lag whereas price action leads.
  • Price action is simple to understand for the beginners.
  • Indicator charts are messy, thus, naked trading is better.

How To Read Price Action In Trading

If you want to trade-in price action, you must learn to analyse the trending waves and pullback waves. These are also known as the impulse and corrective waves respectively. If the trending wave is bigger than a corrective wave, it means that a trend is making progress.

To identify the direction of the trend, you must take note of the length of the trending and pullback waves. In an uptrend, the price rises when there are higher swings and higher lows. In a downtrend, there are lower highs and lower lows. The peaks and troughs of these trendlines remain between the support and resistance lines of a price chart.

What Makes A Forex Trading Strategy Good And Effective?

  • Firstly, the strategy should be precise and definable.
  • Secondly, it must put the adverse conditions in your favour.
  • Thirdly, the strategy must have a good track record in the past.
  • Finally, a good trading strategy always tells you what the market is doing and not what you think.

Trading Strategies Using Price Action Signals

There are several strategies where you can use price action in trading. These are:

Price action trend trading: This refers to the study of trends of the price action. You can use several methods to spot and follow the trends of price action such as head and shoulders trade reversal. This is a very effective tool as it allows you to learn from experienced traders by following their price action trends as and when they become visible. From the green uptrends, you can open a buy position and from the red downtrends, you can open a sell position. 

Pin bar: The pin bar patterns look like a candle having a wick on it. Thus, it is also known as the candlestick strategy. In this, you can see a sharp reversal and rejection of a particular price. The wick will show the range of price that was rejected. In this, traders assume that price will move in the direction opposite to that of the wick. Accordingly, they can take a short or long position in the market.

For example, if the bar has a long lower tail, it indicates the trend where lower prices were being rejected. This implies that prices will move up now.

Inside bar: This strategy consists of two bars where the inner bar is smaller than the outer bar. The inner bar lies within the high and low range of the mother bar (outer bar). The inside bar appears when there is consolidation in the market. However, they can also act as a red herring which indicates a possibility of the turning point in the market. Experienced traders can easily guess whether this inner bar is indicating consolidation or a shift from the ongoing trend. With the size and position of the inner bar, you can guess whether the price will move up or down.

Trend following retracement entry: This is a quite simple strategy where you have to follow the existing trends in the market. You can take a short position if you notice a clear downturn with consistently created lower highs. On the other hand, if the prices are rising with higher highs and lows, you might want to buy in.

Trend following breakout entry: In this trend, you can track any major movements in the market assuming that after a hike in price, a retracement can occur. When the market moves above a resistance line, it is known as a breakout. This is the point of action. If the trade is trending upwards, take a long position and if the trade moves below the support or resistance line, it is better to take a short position.

Head and shoulders reversal trade: As it is clear with the name, this trend forms a structure of head and shoulders. In this, price rises and falls back, then rise to even further and fall, and finally rise higher (lower than previous) before a drop. This price action trading strategy is quite popular. In this, you can easily choose an entry point i.e., right after the first shoulder. You can set a stop-loss after the second shoulder and take benefit of the temporary peak at the head.

High and low sequence: Price action trading is mainly a game of highs and lows. You can study these highs and lows to understand the emerging trends in the market. An upward trend occurs when a price is trading at higher highs and higher lows. On the other hand, a downward trend means that the price is trading at lower highs and lower lows. Based on your knowledge, you can pick an entry and exit point.

Price action scalping strategy: In this, you take profit and losses quickly as the trade only lasts for few minutes. In scalping, you enter and exit a position very quickly so that you can take benefit of little price movements. Scalping in forex involves using 3-5 pip stop loss and 5-10 pip target. 

In scalping, investors look to trade in a direction of the trend. They enter the trade during pullback when the price comes back in the trending direction.

Read Also: Advanced Forex Trading Techniques

How To Learn Price Action In Forex

  • Firstly, you must master only one price action forex strategy. With this, you will learn the inside out of price action set up. Sometimes, traders jump from one strategy to another without excelling in one which makes no sense. 
  • Secondly, you must understand how to use price action with higher time-frames. This way you can protect yourself from overtrading. Whenever there are disturbances in the lower time-frames, you will be unaffected by them.
  • Thirdly, try to follow examples and experiences of successful traders of price action. This is the most efficient and effective way of learning FX price action trading.

Why You Must Trade Currencies Using Price Action?

The price is the main component of any financial market. Thus, if you fail to read the price action of a market, you will not know what the price action is telling you. As a result, you will not able to do FX trading using price action. Current price trends show you the result of all the other variables associated with the market. 

Learning price action is one of the important strategies that you need to master to become successful in forex trading.

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