The study of price action entails reading past prices, to build an approach or plan for the future. Price action will never lie to us, as traders, because it never purports to tell us what WILL happen; but rather it only tells us what HAS happened. Any indicator or indication of what MAY happen in the future is just a possibility. So, regardless of the strategy - those same boring concepts of risk, trade, and money management are of the upmost importance to the trader.
But after that - traders can focus on getting the probabilities on their side as much as possible through analysis, and this is where price action can really shine. Below are four simple ways that traders can become better at reading, reacting, and analyzing price action. We talk about this A LOT because of all the aforementioned reasons, and quite simply - it works.
Not that it works in telling us the future, but it works in allowing us to see the past as efficiently and honestly as possible. Gra de Trends by Focusing on Swings. And the reason for this goes right back to one of those very first things we touched on at the beginning of this article: The future really is unpredictable. But trends take place for reasons, right? Maybe it was a QE announcement, or a Debt Crisis - whatever the reason, trends exist much like the tide of the ocean exists.
And just like swimmers in the ocean, traders are often best served by going with the flow. If what has happened continues happening, I may stand a better-than-fair chance at success. Traders can read and gauge trends using solely price action.
We expand on this topic in our Introduction to Price Action ; but we can simply look to the chart to point out the trend. Up-trends will often be highlighted wit h higher-highs, and lower-lows.
Image taken from Price Action, an Introduction. Meanwhile, down-trends will se e lower-lows, and lower-highs. And this, in-and-of-itself, is very powerful The second primary aspect of technical analysis is Support and Resistance , and this is another message that the study of prices can bring to us. Image taken from Price Action Swings. A swing can, quite simply, be classified as an inflection point in the market. We discussed this topic in the article Price Action Swings, and have added an illustration below to highlight this point.
The swing in the market is the point at which demand outstripped supply in the case of a swing low setting support , or supply ran over demand creating a swing high of resistance before prices moved lower.
Traders can use these progressively higher swing-highs, and higher swing-lows to define an up-trend. They can also use progressively lower-lows, and lower-highs to denominate a down-trend. We can even rope in some additional Support and Resistance studies in an attempt to find really important levels.
Psychological levels , for instance, can be a great way of pointing out swings that might have a little more importance in the market place. Fibonacci can be another fantastic addition to Price Action to point out levels that other traders may be watching for. After traders can identify swings with support and resistance inflections, traders can then begin looking to buy up-trends cheaply, at or near support; while traders can look to sell expensively when prices are at or near resistance.
Which brings us to the exact entry of the trade…. After the trend has been identified, and after traders have found support and resistance via swings displayed in the marketplace, traders can begin looking for formations to decide when, and how to enter into positions.
Most recently, we highlighted five of the most common bearish reversal patterns in the article, Trading Bearish Reversals. Image taken from Trading Bearish Reversals. We also published this piece specifically on the hammer and inverted hammer formations. And, a favorite of price action traders, the pin bar can offer some excellent entry opportunities. I know that when I was learning price action, much of it, at least initially, felt very esoteric.
So, in our constant effort to provide the best possible education for our traders, we offer numerous price-action based webinars every single week.
I do a webinar on DailyFX e ach week. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Price action and Macro. Price Action is a form of technical analysis that focuses solely on past prices that have traded in the market This article contains a simple, and complex method for new traders to begin learning price action This study can be furthered in the live sessions on DailyFX in which Analysts and Instructors explain price action in real market conditions One of my favorite phrases to use in webinars is as follows: Foundations of Technical Analysis: Classic Chart Patterns, Part I.
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