Why Price Action Trading?

By November 21, 2013Articles

audusd_11-12-2013Why would anyone want to trade the forex market using price action trading alone? The world is full of different trading strategies and methodologies that promise unlimited easy wealth by buying and applying a ‘proprietary’ indicator of their own creation. Price action trading strips the currency pair chart down to a clean chart and uses only lines, a moving average or two, and possibly a Fibonacci retrace level, although not all of these must be applied at once.

Price action trading is based on simple principles like uncluttered charts, no indicators, support and resistance, and candle patterns. I can assure you that simple does not mean easy. There are skills that need to mastered to be a great price action trader. It should be simple to quit smoking. It’s not, it’s an addiction. Trading cluttered charts is much the same. It’s an addiction to complexity. You don’t need complexity to be a successful trader. Let’s take a look at what price action trading is all about.

Clean Charts

Charts are the life blood (besides our trading capital) of trading. It’s where it all starts. They’re what we use to figure out, how we decide to make a trade or pass on a trade. How the chart is annotated means a great deal to us. The cleaner and less cluttered a visual reference is, the easier it is to understand. If we can get all the information we need from a chart that’s clean, why on earth would we want to put a bunch of indicators all over it? There are some additions to MT4 charts that are called indicators, but are really just helpful plugins like the day’s range or markings for particular candle patterns if they’re not too intrusive. We want to keep the chart uncluttered and readable in order to make clear, well thought out decisions in real time.

We set up our charts in a top down approach. This means we start off on the large time frames like weekly and daily charts, then work our way down to four hour or 60 minute charts. In this way we get only the most important levels.We get the same levels that the ‘big boys’ are tracking. Isn’t that what you want? Let’s face it, the big players are the ones moving the market and we want to be on their side and we want to be there as early as possible. Take a look at these two charts…which would you rather spend your time looking at?

messy_chart

Messy Indicator Driven Chart

Clean Price Action Trading Chart

Clean Price Action Trading Chart

No Indicators

Price action trading means we don’t use any ‘indicators’ on our charts. Why not? Indicators by their very nature are lagging. This means they don’t give you information in real time. They take information from the market, run it through an algorithm, and spit a bit more information out in the form of a line or curve or something that’s passed a 70% level, etc.  When you’re counting on an indicator to give you an entry signal in real time, the last thing you need is to be waiting for the information to be calculated and displayed, a particular horizontal line to be crossed, only to find out a few candles later that the signal was not really a signal after all! Of course at that point you’re already in the trade and now trying to rectify the voice in your head that’s asking how are you going to get out of this trade? I have personally seen charts so full of indicator windows that there is no possible way to make an entry decision, let alone an exit decision for profits. We keep indicators off the charts where they belong.

Support and Resistance

Support and resistance is the backbone of price action trading. We use swing points, horizontal support and resistance, trend lines, round numbers and the 50% retrace level as out guides in determining where price action is likely to go. Will price continue, reverse or consolidate? Is there more supply or demand at the level we have mapped out? No one knows for sure but we can get a very good idea using price action trading. The tools outlined above, used in an array of conditions, can provide the correct information when the price action trader is assessing the hard right edge of the currency chart in real time.

Candle Patterns

Candle patterns are our signals for entry into the market. They are the last piece of the puzzle to fall into place. In price action trading, candle patterns can be a single candle or a series of candles. It all depends on what the market shows you. Candle patterns are very powerful because so many traders use them as their entry signals. They almost become a self fulfilling prophecy as they are a mirror into the collective consciousness of the market participants. At Forex Market Master we teach several different candle patterns that, in conjunction with support and resistance, give price action traders the confidence needed to make an entry into the market.

Excellent Reward to Risk Ratios

By using the principles of price action trading to find entries in the market, you automatically reduce your risk to it’s lowest possible level. We learn to keep our risk consistent no matter the size of our stop loss. Analyzing risk quickly to determine trade sizing is a hallmark of price action trading. In most circumstances we keep our reward at 2X risk or better, but never lower than 1:1.

Bringing It All Together…

Price action trading is truly the best option for individual or small groups of traders to trade the market. By using clean charts, no lagging indicators, solid S/R levels and skillfully administered candle patterns, the price action trader can exploit their edge in the market place. It’s a simple methodology that takes time to master. The best way to learn to master price action trading is by joining the Forex Market Master Community today. You’ll get the support you need to move your skills as a trader to the next level in the quickest possible amount of time.

Just below you’ll see a screen capture of a trade taken recently using our price action trading strategies. If you missed this trade, you may want to consider becoming a Forex Market Master member where mentoring support is available to help find entries of this caliber. Check your charts and you’ll see that this trade hit it’s target of 2:1 reward to risk ratio resulting in a substantial profit.

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