Price Action Charts – Clean vs. Messy

By August 31, 2011Articles

Price action charts are easily the best way to visualize the forex/currency market from a purely technical viewpoint. Today’s article enhances trader knowledge by explaining the differences between clean price action charts and messy, indicator laden charts.

 

Most traders are initiated into the world of currency  (forex) trading through various free trading sites on the internet. Doing a Google search for forex trading you would find many, many articles espousing the use of indicators like RSI, stochastics, CCI, Aligator, ADR, ATR, ZigZag, etc. Those are some of the freely available indicators on the market and usually come standard with most charting packages. There are also a myriad of fee based proprietary indicators that claim an end to losing trades if you use them exactly as they describe. The trouble begins when traders start applying one or multiple indicators to their charts. Being beginning traders they haven’t yet learned that those ‘magical’ indicators are what is known as lagging indicators. A lagging indicator is one which tells you what happened in the recent past, not what’s happening now. The trader adds an RSI and a stochastic set to certain values that in hindsight sometimes appear to be reading the market’s mind. They’ll look for divergence or the stochastic value to pass a certain level that indicates ‘buy’ or ‘sell’. Most of the time a trader ends up in the move too late or out too early thus reducing profits substantially because of poor reward to risk ratios.

 

Another problem with indicator infested charts is that they create an absolute mish-mash of information on the charts. Conflicts abound! How in the world can a trader focus on what is really happening in the market when all of their attention is diverted to what the indicators are telling them?

Take a look at the chart below and ask yourself is that a readable chart?

 

 

 

Now, contrast the above chart with a clean price action chart. Price action charts contain only a few markings to help us discern what the market is likely to do. Typically, price action charts will be viewed as Japanese candlesticks, a very visual way to view price in real time. Added to that are horizontal lines denoting levels of support and resistance in the the market. These are areas of value as determined by market participants, not mathematical indicators. These areas are levels that will be tested or will be looked at to be tested for value again by the market. As price action traders, we know that and can anticipate that price may create a pattern we can use for entry at those pre-defined levels. There may be an EMA (exponential moving average) or two applied and a few trend lines. That’s it. We’re allowing price to tell us what to do, not some lagging indicator.

 

Take a look at this clean, price action chart and notice the lack of confusion on the chart:

 

 

It’s pretty obvious which chart makes more sense. Trading is about keeping only pertinent information in front of you for quick informed decisions about entry and exit. Don’t become an indicator troll, keep your charts clean. Simplicity is a way of life in trading. Don’t make this more difficult than it needs to be. Much of what I teach comes down to getting traders to accept that trading is not as difficult or complex as they imagine it to be. Price action charts are clean, enabling you to trade what you see, when you see it.

 


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