The reason the alternate term of trading naked is used simple price action forex charts because the price action trader relies on the chart without the use of trading indicators. Since all trading indicators use information from the movements of price, they require price to move first therefore they lag price. Price action traders have developed the skill of understanding that the movement of price can point to the probability of one thing happening over another. Those who believe that all price movement is random would NOT would not be suited to a price action based trading strategy.
Price Action Traders And Crowd Psychology Price action traders believe that the trading chart is combination of the many beliefs and emotions that other traders have in regards to a certain trading instrument. They believe that all price movement occurs due to the psychology of the crowd, and that the dominate crowd belief will push the market. When reading a price chart, price action traders will look for various trading patterns that are formed by the movement of price. These price patterns will then lead them to make decisions based on the context the pattern is found in.
As shown in this chart, price action traders will often highlight support and resistance zones on the chart where the market has responded to in the past. While this chart may make it appear the price action trading is easy to do, it is not. It is a specialized form of technical analysis that requires a solid understanding of market mechanics as well as the meaning or implied meaning being the relationship between individual candlesticks or bars. Since it is a form of discretionary trading, price action trading requires traders to have a firm grip on trading psychology especially fear and greed. Price action trading is fairly robust which means it can apply to most liquid markets as well as time frames which makes it ideal for day trading all the way to position traders. Price Action Trend Determination One of the basic ways of using the movement of price is to determine the trend of the market you are looking at. But price does not just trend up and down.
It can also range and that is when we start seeing a mixture of the two states combined as you can see with the 2 red lines. We get a possible trend change when price moves up the latest lower high on the right side of the chart and puts in a higher high. We need to see price hold the higher low to confirm a trend change however in this case, price broke back to the downside reaffirming our trend direction down. Support And Resistance Trading One of the uses a Forex trader may have for price action trading is in relation to support and resistance levels.
In simple terms, support is defined as the price level where price has bounced up from after it had been moving downwards. A resistance level is a price level where price after going up for some time, falls back from as noted with the top red line. While many traders think multiple hits makes a support or resistance level stronger, the opposite is often true. Many traders place their stop just beyond these levels and often times traders will be hit by a stop run that takes them from their trades and then price movement continues in the direction the trader wanted. This is the general area that you will see the formation of a pin bar which is a price action pattern you can trade depending on the location it is found. Price movement indicates strong bull interest easily seen by the bullish candlestick patterns that are forming. The moving average is to illustrate the price has moved a good distance away from the mean and is possibly overbought at this point.
Price puts in a high and drops back putting in a potential resistance zone. Price action afterwards shows momentum bear candles pointing to profit taking or shorts in play. Price moves over the resistance zone, puts in an upthrust and collapses back inside. I hope you can see the power of being a price action trader and the opportunity it gives you to be able to trade many markets including Forex. Learning simple price action trading techniques such as the strategy I presented can go a long way in helping you find trading success. Both comments and pings are currently closed. The Authority’ on Price Action Trading.
In 2016, Nial won the Million Dollar Trader Competition. I want to give you guys a little insight into my core trading philosophy, why I trade the way I do, what I teach, and how I can help you become a better trader. I hope that you enjoyed taking this free course as much as I enjoyed making it, and you should now have a solid foundation on the basics of what the Forex market is and how it’s traded. Knowing the basics of Forex is great, and every trader needs to know them, but if you are serious about making consistent money in the markets, you need to learn real-world trading strategies that will provide you with a high-probability trading edge. I’ve been trading the markets for over 10 years now, and I have learned every lesson you can imagine along the way. I try to convey to my students and it’s why I don’t use a ton of indicators or messy trading systems.