BENEFITS OF PRICE ACTION AND HOW IT CAN IMPROVE YOUR TRADING

Forex trading systems come in a variety of complexities, you get those on one end of the scale which are built on heavy mathematical engines, while others are more simplified in nature. Our stance at ‘The Forex Guy’ is, “simple is the better approach” in the markets. There is no better way to approach the Forex markets, and that’s how we approach our trading every day.

 If it seems too hard or complicated, then you’re doing it wrong. Keeping things as simple as possible will give you better clarity in your trading and allow to you move forward instead of feeling like you’re ‘running fast but getting nowhere’. In this article, we are going to discuss the benefits of price action and how it can improve your trading.

If you’re not sure what price action trading is, it’s basically the skill of interpreting raw price movements and identifying patterns that you can base confident trading decisions on. We are passionate about price action traders here because we love the simple, less involved, ‘lazy’ approach to trading.

Price action trading doesn’t require anything special to get set up. You can trade using any trading platform you like, from any location in the world. If you really wanted to, you can trade from home in your pajamas. These are just some of the many benefits of price action trading. Getting started isn’t a hard task either. All you really need to do is load up the candlestick chart, clear off all the indicators, and you’re ready to begin. Many traders start to taste the sweetness of trading success, only after learning how to trade strictly off-price itself.

 By focusing on the price action, a trader can learn how the market behaves at its very core. Trading from raw price movements will eventually transform you into a ‘master chart reader’.

There are many reasons why price action trading strategies are becoming an increasingly hot topic among traders. It’s because they work very effectively and are often considered the ‘holy grail’ of technical trading. I’ve already highlighted some of the benefits of price action trading alright. Below you can read about more benefits that we enjoy as price action traders…

PRICE ACTION TRADING IS SIMPLE

Straight up, the concept of price action trading not hard to understand at all. A lot of people truly believe to become a professional trader, you need to have some high-level commerce, mathematical or economic degree. This is due to a huge misconception that Forex trading is complicated. FALSE!

It’s not a prerequisite to have any fancy university degrees, or other qualifications in any special fields to become a trader. In fact, the ‘high school dropout’ has just as good of a chance of becoming a successful trader as any doctor, engineer or physicist would.

The simple nature of price action gives everybody an equal opportunity to become successful in this industry. Regardless if you’re a single mum, studying full time, or even have a day job. Price action trading doesn’t discriminate, it can be learned by anyone and fit well into your busy lifestyle! The benefits of price action trading have transformed my abilities as a trader, and I am confident it will do the same for you.

NO INDICATORS ARE REQUIRED

One of the largest benefits of price action trading is the fact you don’t need to worry about indicators anymore. You only need to concern yourself with one indicator, and that’s price itself. Introducing external variables like indicators to your chart template will only work against you. They actually get in the way of your trading. Some traders find the concept of trading without indicators impossible. Let me reassure you that it’s not. Trading without indicators or other fancy chart tools is actually a much more powerful approach to the markets. Remember what I said before, “simple is better”.

Forex Indicators are basically mathematical algorithms that draw squiggly lines all over the price chart. Their function is to “help” traders analyze the market and assist in making trading decisions. All they really manage to do is confuse traders. When traders look at indicator data, they tend to come up with exotic analysis that is so disconnected with what’s really going on in the markets. Indicators are notorious for generating bad buy/sell signals, especially in tough market conditions. Eventually, the trader goes into ‘mental meltdown’ and sadly burns up their trading account.

Indicators hide the real price feed, obstructing what you should really be focusing on. Many traders believe there is an edge using indicators and other expensive third party analytic software. The truth is, there is no better edge that analyzing raw price movements.

Another common ‘flaw’ in indicator design is its outputs lag. Indicators are renowned for their slow responsiveness to price changes. It’s not uncommon for an indicator to signal you to ‘buy the market’ after the entire rally is already over. A price action based signal would have likely positioned you in at the bottom of the move. I see this happen every day.

Here is an example of a ‘typical’ indicator based trading strategy chart template.

Just for the record – this isn’t a chart template we conjured just to make indicators look bad. This chart is actually a default template in the most common charting tool used by traders today, ‘Metatrader 4’. The template name was actually called ‘popular’. As you can see it’s loaded with the most commonly used indicators; RSI, Stochastic and the MACD. This chart is just too ‘busy’ and would be a frustrating environment for trade-in.

Have a look at the chart template shown below. It is the template that we use every day in the markets.

That’s much better! Straight away, you can see the difference in clarity. When the indicators are removed it’s much easier to interpret what’s really going on with the market.

This is the exact chart template that we use in our everyday trading. The next step would be to mark some support and resistance lines on the chart, and we are good to go.

You may have noticed 2 moving averages on the chart. These are the 10 and 20 exponential moving averages used to ‘map out’ the mean value of price. The mean value area is where the market generally finds ‘value’. The market considers this to be a balanced, or ‘fair price’ for the currency. Mean value analysis is used heavily with our Price Action Protocol trading system.

The benefits of price action trading with this sort of clean chart template are clear. It’s simplified, easy on the eye, and brings out the clarity in the market. With this arrangement, we can really start to build a good foundation where low risk, high probability trading opportunities are easily identified.

FORGET THE NEWS

Many people believe that it’s key to know what’s going on economically and keep on top of world events to be able to make sound trading decisions. Economic data releases, like unemployment figures and interest rate decisions, can produce crazy unpredictable volatile swings in the market. The market can move dramatically in a matter of seconds causing extreme widening of spreads (the commissions you pay) to unrealistic levels.

The bottom line is news event trading is unpredictable. During an economic data release, a trade order is very hard to execute and can be expensive if timed wrong. Traders who engage in this type of trading put themselves through such psychological pressure and levels of stress.

We’ve actually come across people who try to scalp the Non-Farm Payroll release. NFP is the largest economic data release which causes disturbing amounts of volatility in the markets. Scalping NFP is very reckless, and a quick way to Forex trading failure.

You don’t need to be ‘in tune’ with the news to trade profitably with price action. This is actually one of the key benefits of price action and why traders make the switch to price action trading. Most people would prefer to trade price action data from the charts to make confident trading decisions instead of stressing out over what the news is going to do. We actually don’t even look at the economic calendar. If we do it’s just out of curiosity.

The news can be a catalyst for large price movements. The beautiful thing is, there is generally a price action signal that will get you into a trade before the news event. Sometimes the news can work against you, and trigger your stop loss, but that’s something out of your control. We believe it’s better to be ignorant toward the news and focus on the candlesticks.

PRICE ACTION TRADING SIGNALS ARE EASY TO IDENTIFY.

There is a mountain of price action setups out there, but we’ve gone and isolated the price patterns that yield the best results. Some are derived from our own original observations. We use price action patterns to accurately anticipate future price movements and target single candlestick patterns, like rejection candles as the framework to build our trades off.

Here is an example of one of our price action signals is the Breakout Trap & Reverse trade.

The breakout trap and reverse trade is a two candle setup. The second candle is the ‘trigger candle’. This particular example is a bearish breakout trap and reverse trade setup. The basic principle of trade works like this.

First, the market breaks out above the previous candle high’s. The initial breakout encourages buyers to jump on board with the bullish momentum. However, this is not the true intent of the market. The breakout collapses back in on itself and the sellers take full control. There is less resistance for the market to move lower due to the fact all the buyers just got washed out in the initial bullish breakout trap. Price likes to follow the path of least resistance.

Aggressive selling can cause explosive price movements on the chart. The trigger to go short is when the price breaks out the other side of the previous candle’s range. The explosive nature of the breakout trap and reverse signal makes this one of our favorite price action setups.

: Here is an example of a bearish breakout trap and reverse trade triggered on a live chart…

The chart above shows a bearish breakout trap and reverse price action trade setup on the AUDUSD daily chart.

Notice the explosive price movements from this setup. This is how we can generate

 high return, from low initial risk. This concept is the backbone of all our money management plans. We like to aim for at least 2-3 times what we risk on the trade. We call this concept ‘positive geared money management’, and it marries a good price action trading system.

BENEFITS OF PRICE ACTION TRADING CONCLUSION

 As you can see price action trading is a versatile and logical way to approach trading. In our opinion, it’s the most consistently profitable method used by traders in the markets today.

Most trading systems have an expiry date. They are generally tailored to the market conditions at the time making them obsolete when market conditions change.

The markets are dynamic in nature. An important benefit price action trading is that it’s compatible with changing market conditions because price action trading is dynamic itself. We’ve been using price action for many years, utilizing it mostly during strong trending conditions, ranging markets and even through market crashes with continued success.

 The benefits of price action are the reasons why we love it so much and will continue to passionately trade it, so long as the markets are available to trade.

If indicators are giving you a headache, or you want to move away from news trading and reap the benefits of price action trading for yourself. You can learn how to trade with price action in our advanced price action course that you get access to by becoming a War Room Trader.

I hope this article has been an eye-opener for you and made you realize there is a better way to go about your trading. If you enjoyed this article, please share using the buttons below. Cheers to your future trading success!