What is Forex Price Action Trading

By Louis H-P on December 5, 2018

Forex price action trading is the use of the movement in a security’s price to identify a time to place a trade. All trading involves price action as you are looking to profit from a price moving. Fundamentally you are trying to find some order in what appears to be the random movement of an asset price.

Traders will use price action when identifying trading patterns on charts, and deciding whether to subsequently trade. Humans being what they are, you will find few who will interpret a price action in the same way. The favorite type of chart that traders prefer to use is candlesticks. They are particularly helpful when it comes to visualizing Forex price action trading.

Technical vs Fundamental trader

There are two types of traders, technical and fundamental ones. Technical traders will base their Forex price action trading on analysing charts. Fundamental traders will look at various economic outputs. These will include economic growth or the unemployment rate. In truth, different traders will all be influenced by price action trading. Any trader who is interacting with markets is doing so in the hope of getting the best price possible. It can be attractive to take from both methods. 

How traders can make money from price action

Forex price action trading relies on volatility to create movement in a share price. This volatility can be driven by all sorts of factors:

• Rumour
• Political or economic change
• Natural disasters
• A large bunch of traders coming to the same conclusion

A trader who can correctly identify which side of the trade to be on when volatility appears, can profit from the move in the share price. This could give you the opportunity to trade Forex for a living.

Examples of price action patterns

One of the most popular ways of analysing Forex price action trading is by using candlestick charts where there are number of chart patterns to look for. Examples include:

Bullish engulfing,  (seen left) when the larger green candlestick engulfs a small red candlestick. Within Forex price action trading this is a bullish trend in the asset you are trading. Bearish engulfing is the reverse of the above and would suggest that a bearish trend is about to start.

Head and shoulders is a pattern which signals that a previously identified trend is in the process of reversing. There are two types of head and shoulders, one which informs traders of a bullish move (seen left) or one a bearish move. In the case of a bullish move, there will be three lows in a chart, with the middle low being deeper than the previous two. The lesser two lows are the ‘shoulders’ and one deeper low is the ‘head’.

Bending is better than breaking

Any Forex price action trading article will speak about support and resistance levels. Although this is not necessarily wrong it may be best to use zones. For example if you were going to sell a currency at 100, then maybe have a target sell zone of 0.96 to 0.99 would be best. You should consider that if you have decided to sell at 100, then several others will probably have come to the same conclusion. Although we have highlighted having a Forex trading plan, a little flexibility does no harm. The ability to take a smaller profit than envisaged, but critically a profit is sometimes worth it. Indeed the New York Fed in its capacity for communicating interest rates expectations produces a dot plot to inform the market of the width of its current thinking. If the NY Fed is prepared to be imprecise, maybe there is something in it for us?

Develop your own Forex trading strategy

Like any good aspiring trader you will have read and followed other traders and coaches to avoid beginner mistakes. This is a positive way of starting your development as a trader. Refining this approach into your own trading plan is important. Following someone else’s theories without adapting to suit your trading style will often lead you to make mistakes. These mistakes will occur as you do not fully understand a trading strategy you did not create.

Forex price action trading applies to other asset classes

It is not just currency trading pairs where price action strategies work, the same principles apply across commodities, equities and Indexes. Any asset class which provides volatility will also provide opportunities for you to trade price action.

Conclusion

Every trader will look at the price of an asset and predict in their mind where this price will go. Without knowing it, that person had just started to price action trade. No-one involved in trading wants to buy higher and sell lower than they can. Looking at a chart is the instinctive reaction of any trader to ensure you get the best price you can!

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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