A forex trading strategy is made up of detailed and precise actions that traders can take to execute a trade in the best way possible. These strategies normally include actionable techniques to find the best signal to enter into a position and also for existing out of one.
The key word in the intro was action. And that is what we are going to talk about in this article. The forex trading strategy known as price action strategy.
Price action is simply the use of price movements and their analysis to find the best signal of entry. But we will go over the definition with more details soon. Together in this article we will find out all about price action strategy and how it works.
What Is Price Action Trading Strategy?
Simply put, price action is a trading strategy that involves analyzing prices as they currently are in the market and relying on them to make trading decisions. This also means that you merely rely on price action and not other more complex forms of analysis.
This makes price action more straightforward than many other trading methods. A lot of day traders will exclusively use this trading strategy to obtain profits from the short term price movements in the market.
So, in price action trading, a trader would not solely depend on technical analysis and those indicators in order to analyze the market. Rather they would only use the recent price movements to make decisions about upcoming changes in prices. In this regard, one can assume that price action trading is a little bit subjective and dependent upon the perspective of the trader.
Price action trading gives little sway to technical analysis. Well, this means it leaves no room for fundamental analysis and only uses recent data with regard to price to come up with its final verdict.
But as mentioned the traders who are looking to use price action strategy for short term profits do so within the purview of their own subjective technical analysis. Although, at the same time, many other tools and programs for analysis can be implemented.
What Tools Can Be Used with Price Action Strategy?
Due to the nature of price action strategy, which involves the actions that price has taken in the recent past, so called the price movements that have occurred, then any tool that is related to such a notion can be used.
This is of course the very definition of technical analysis. Because technical analysis is used to look at recent price movements and also historical data with regard to trading volume in order to obtain the correct analysis.
Therefore, any tools in technical analysis that are useful for obtaining such data can also be an accompanying tool kit for price action trading. These could include any indicators that provide information about concepts such as trend, range, averages, support, resistance, breakout, etc.
How to Use Price Action Trading Strategy?
When traders want to analyze the current prices and recent price movements to predict the price action that is going to take place in the market, they will use a wide variety of techniques. The reason being that using just one would naturally result in improper and inaccurate predictions that would not hold up under real conditions.
But in general, price action usually starts with the identification of the common trajectory in the market. This means the trader will specify whether the prevailing trend in the market is bearish or bullish.
When either an uptrend or a downtrend have been established, then it is time to make predictions about them. For instance, if it has been established that there is currently an uptrend in the market, the trader can use various indicators to see if the trend will continue, reverse, or experience a retracement.
Then based on those analyses, the trader can enter into a position and also find out when it is the best time to exit.
When Should Price Action Strategy Be Used?
Price action is a strategy that has a lot to do with the trader himself or herself. This means, if the trader has enough knowledge and expertise, then they can make precise predictions about upcoming movements based on the current price data available to them.
But as a whole, speculative trading is a good match for price action trading. Traders who want to speculate can do so with the help of price action.
Speculating is a common form of trading wherein the trader will open a position in anticipation that fluctuations will occur in price which will end positively after the position has been closed.
This form of speculative trading can be seen predominantly in markets such as the foreign exchange market in addition to the stock market.
Why Do Traders Use Price Action Often?
Price action is quite the popular trading strategy among traders. The reason can be seen in its nature. Price action can be very useful for day traders who are looking to make profits from short term positions. This is quite alluring for those who are looking for fast returns.
In addition, there is a prevailing thought out there about financial markets, that no one can really predict the market. Despite what many experts and economists might say, some believe that accurate prediction of the market is simply impossible.
Therefore, they believe that using tools related to technical analysis in conjunction with price action strategy is the best method for predicting the coming market patterns.
But there is more to price action. Among other advantages of this strategy we can mention the great adaptability of this method. It is not designed to fit one or a limited number of situations. Using this method, traders can go about analyzing any situation in the market.
Furthermore, because of this adaptability, it is very easy to use and implement. Though it requires that the traders know a lot about trading and the market, even novice traders can implement it.
Are There Disadvantages in Price Action Strategy?
The biggest disadvantage that can be associated with price action trading is the fact the results can be quite subjective. This means that the results of the analysis totally depend upon the discretion and judgment of the individual trader. Given the same conditions, therefore, two traders can come up with two different analyses.
As a result, it is always sound advice that traders should not only use this one strategy in their trading process. To provide further confirmation of the prediction that you have obtained, it is always necessary to use other tools and strategies for further assurance.
There are certain trading strategies that do not leave a lot of space for improvisation by the trader. They provide a tight plan of action that ought to be followed exactly. But not price action.
Price action trading strategy is among the most subjective trading strategies, where it provides a lot of freedom to the trader to look at the data related to price movements and then make a prediction about what is going to happen.
Price action traders may also use other tools and techniques, especially technical analysis indicators, to further their chances of accurate and precise prediction.