The term used to describe the analysis of the price movement over time is “price action”. Traders use price action in order to determine the consistency of any recurring chart pattern, which provide clues as to whether the trends will continue or reverse. Traders also use price action to discover a particular market directional bias. Price action analysis is done without any indicators (which I believe were created for amateurs to lose money). Instead, price action just uses the raw movement of price over time. Price action is discussed in depth in our free ebook The Forex Source Code.
What creates Forex price movements? Some of the most important factors are, but are not limited to, the following: economic news releases, commodity prices, large cap stocks, and the Fed. Traders’ reactions to fluctuating news (via buying and selling) are then translated into price action in real time. However, the Agents of the Fed are primarily responsible for moving the markets as they often have billions in equity with which to trade.
How to trade price action
- Order Flow;
- Price action pin-bar setup;
- Price action inside bar setup.
At the centre of it all, the main reason as to why I prefer analyzing price action versus fundamentals is the fact that the market always moves via order flow – this describes the total sum of buying and selling. This order flow translates into the price movement that is shown to you on the chart. Not many Forex brokers offer “live” order flow, however the broker we use is a true ECN broker that does provide this.
Trading price action allows traders to identify time-tested price action setups, which is ultimately the most important piece of information that can then be used for making intelligent trading decisions. The price will always act as an indicator for you when trading, regardless of the time frame, pair, or environment. What constitutes a successful trader? One who can identify what the market is communicating, and then trade effectively based on that information.
Price action helps traders establish high probability setups as it provides confirmation of key support areas. When executed correctly, price action on any time frame can help you understand what is going on in the markets.
Price Action Pin-Bar Setup
A valid pin-bar is an example of a price action setup that is used to identify a possible reversal of the current trend. This important price action signal is also often seen at market tops and bottoms. As the name suggests, this setup shows great price rejection and indicates that the current trend is about to reverse.
The Agents of the Fed are those that move the market and ultimately direct the trend. Thus, it is only natural then when you learn to trade with the trend, you are then trading with the order flow in your favour. What the pin-bar setup allows you to do is discover when a trend will reverse or continue, via a trend setup. Here is an example of a pin bar trade:
It is important to note that pin bars on smaller time frames (e.g. the minute chart) does not provide the accuracy of a pin bar on a longer time frame.
Price Action Inside Bar Setup
Another pattern of which you should be aware is the inside bar. This is a very significant pattern as it can help you in finding a specific entry to access the trend when used effectively. The inside bar could mean that profits are being taken from the markets and the trend will continue course if there are enough buyers who re-enter the market. However, if there is a lack of new buyers entering into the market, the inside bar will signal a period of market exhaustion and will reverse course.
As previously mentioned, all economic news and accompanying information is reflected in the price movement. Thus the advised method is to trade using price action analysis as opposed to analyzing all information relating to an economic indicator. The reason why trading based on price action is very popular is because traders have now acknowledged that trading based on technical indicators (such as moving averages or RSI) contain a greater lagging factor which results in delayed entry into the market. This is because technical indicators use the previous market action and not what is currently happening in the markets.