How to Build Your Trading Strategy on Price Action?
Currency traders ought to learn the basics of price action in the financial Forex markets. In general, price action stands for a general approach when a trader applies the data from a clear price chart. In this case, a trader doesn’t use any lagging instruments like Moving Average. If you want to understand how to build an effective trading strategy based on price action tools, the following guide will be extremely helpful.
Price action: definition
Defined as the upward/downward movement of an asset’s price plotted over the chart’s time, price action stands for the foundation for all tech analysis of practically all asset charts, including currency pairs. Short-term FX traders use only the exclusive data on price action and trends appearing due to its indicators.
Take price action like a footprint of money. Every exchange of currencies between the FX market’s participants leaves a trail that is revealed on a price chart. And a FX trader needs to learn how to find such trails. The movement of almost any asset’s price tends to be repetitive. Such patterns are quite accurate and predictive, logically, they can be used for the benefit of traders.
The major benefit of using price action is that the strategy should not be complex. Just a simple price chart and sound thinking can help to develop a successful trading method. The most effective strategy is to use certain price action setups and hot entry/exit points of the FX market. For instance, price action data can be combined with different support and resistance levels.
Another good point in favor of price action strategies is that a trader can use them on any preferable time frame.
Expert advice from the AMarkets broker: concentrate on the higher timeframe trading when the major timeframe is the daily chart.
Major points about price action:
Tools used by price action traders
Price action is exceptionally popular among trend and swing FX traders. They implement the fundamental analysis to interpret the resistance and support levels. In such a way, it’s possible to forecast consolidation and breakouts. But a bunch of additional factors like the trading volume and the periods of time must be taken into account. Interpretations will be more accurate.
The indicators you have to learn about reading the price action charts:
Using all these indicators, FX traders can apply various chart combos for the interpretation of trends, reversals, and breakouts. The most popular examples are:
Candlestick charts may help to visualize the movement of the asset’s price because they display high, low, open and close points during an upward/downward trading session.
Don’t be scared away by all these indicators you need to master for the proper interpretation of price action. It is a systematic approach supported by certain tech analysis instruments and a price movement history.
Price action: limitations
The main problem with price action strategies is subjective interpretation. Two various FX traders can draw different conclusions looking at the same price action chart. One trader may see a selling (bearish) downtrend, while the other one can honestly believe that the price is going up at the current point.
It’s essential to remember that price action predictions based on the time scale are mostly speculative. That is why a trader must apply as many different tools for confirmation of price action as possible.
The AMarkets expert Alex Melkumyants strongly recommends double-checking all price action charts before making any trading decision. But remember about the speculation factor and that the risk of misinterpreting a price action chart is very high.
3 price action rules every FX trader must learn:
1. One price action strategy at a time
It’s pointless to learn more than one trading strategy based on the interpretation of price action. Any expert trader will recommend mastering one price action setup before going to another.
2. Use high timeframes first
This is the most effective method to avoid overtrading that may literally drain your account in a few hours. Just filter the price “noise” on the low timeframes and you will be able to increase your success rate exponentially.
3. Follow the methods developed by more experienced price action traders
Why invent the wheel when you can ride a bicycle from the first day of your price action trading? Apply the most efficient price action strategies that already proved hundreds of successful practical examples. Reduce the learning curve by avoiding a trial and error stage and just follow the trading advice of skillful brokers or traders.
Your strategy doesn’t mean that much if you are aware of how to read and trade the price action. Such knowledge will help to improve your trading progress, even if your daily strategy doesn’t involve much of price action use. AMarkets recommends learning the basic indicators and tools for building a reliable price action strategy. You ought to understand and follow the quickly changing price dynamics inside the Forex markets, to avoid any problems.
Don’t forget – the mentorship of an expert brokerage service or skillful traders can drastically change your success rate, so try not to miss such a great opportunity to learn from the best ones.