Forex Price Action is the analysis of the price movement over time, without the help of technical indicators, with the objective of identifying recurring patterns that can be profitably traded.
All the economic data and world events that affect the markets are ultimately reflected via Price Action. Whether a released economic number is filtered down through a human trader or a computer trader, the movement that it causes in the market will be obvious on a price chart. That’s why we can say that Price Action goes right to “the root of the matter”.
Price Action strategies look at obvious price patterns formed at or around key levels. Traders can use support and resistance lines and watch for price action hints around such levels in order to make buy and sell decisions.
Things that can affect price action and the order flow behind it:
- the liquidity available in the market on a particular instrument
- the total number of buy/sell orders executed in the market
- the position size of the executed orders.
The markets tend to be either:
- Range-bound – there is a balance between the buyers and sellers in terms of orders.
- Trending – there is an imbalance in the order flow between buyers and sellers. This will create a directional bias in the price action. And it is this balance or imbalance that we can learn to read in the price action.
Let’s see an example:
In the blue section of the chart, we can see a balance in the order flow. Buyers and sellers are in agreement regarding the fair price of the AUD/USD pair, and price action reflects that balance via a lateral price movement of equilibrium.
The red section of the chart reflects a strong imbalance in the order flow, with sellers imposing their will on the market with large selling orders that cause a fast decline in price. The conviction of the sellers is reflected in price action via:
– large bearish candles;
– candles mostly closing toward the lows;
– candles only have wicks to the upside, which communicates quick rejection of any higher prices;
– a sharp downward-sloping angle in price.
How to trade Forex with Price Action Strategies
The market participants have a certain repetitive nature to the way they react to situations and economic variable; that’s the reason why the price action of a market tends to repeat itself.
Keep in mind:
– price action allows works on any time-frame, instrument or environment;
– price action communicates whether the larger players are heavily buying, selling, and where.
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