Price Action Trading Explained
1- The Definition Of Price Action
2- Trading with “Messy” Vs “Clean” Forex Charts
3- How to identify trending and consolidating markets
4- How to trade Forex with Price Action Trading Strategies
5- How to use chart confluence and Price Action Signals
What is Price Action ?
Basic Definition: Price Action Trading (P.A.T.) is the discipline of making all of your trading decisions from a stripped down or “naked” price chart. This means no lagging indicators outside of maybe a couple moving averages to help identify dynamic support and resistance areas and trend. All financial markets generate data about the movement of the price of a market over varying periods of time; this data is displayed on price charts. Price charts reflect the beliefs and actions of all participants (human or computer) trading a market during a specified period of time and these beliefs are portrayed on a market’s price chart in the form of “price action” (P.A.).
Whilst economic data and other global news events are the catalysts for price movement in a market, we don’t need to analyze them to trade the market successfully. The reason is pretty simple; all economic data and world news that causes price movement within a market is ultimately reflected via P.A. on a market’s price chart.
Since a market’s P.A. reflects all variables affecting that market for any given period of time, using lagging price indictors like stochastics, MACD, RSI, and others is just a flat waste of time. Price movement provides all the signals you will ever need to develop a profitable and high-probability trading system.
These signals collectively are called price action trading strategies and they provide a way to make sense of a market’s price movement and help predict its future movement with a high enough degree of accuracy to give you a high-probability trading strategy.
“Clean” Charts vs. “Messy” Indicator-laden Charts
Next, to demonstrate the stark contrast between a pure P.A. chart and one with some of the most popular forex indicators on it, I have shown two charts in the examples below. The chart on the top has no indicators on it, there’s nothing but the raw P.A. of the market on that chart. The bottom chart has MACD, Stochastics, ADX and Bollinger Bands on it; four of the most widely used indicators AKA “secondary” analysis tools as they are sometimes called.
The image example below shows a clean price chart, with no mess, and no indicators, just pure price bars:
The image example below shows a messy price chart, with lots of clutter, indicators and mess:
It’s worth pointing out how in the indicator-laden chart you actually have to give up some room on the chart to have the indicators at the bottom, this forces you to make the P.A. part of the chart smaller, and it also draws your attention away from the natural P.A. and onto the indicators. So, not only do you have less screen area to view the P.A., but your focus is not totally on the price action of the market like it should be.
If you really look at both of those charts and think about which one is easier to analyze and trade from, the answer should be pretty clear. All of the indicators on the chart below, and indeed almost all indicators, are derived from the underlying P.A.. In other words, all traders do when they add indicators to their charts is produce more variables for themselves; they aren’t gaining any insight or predictive clues that aren’t already provided by the market’s raw price action.
