The history of the financial market is full of people who used different approaches to trading. There are long-term investors like Warren Buffett who buy and hold securities for decades. There are short-term traders like George Soros who are only interested in the short-term movements in the price of securities. There are James Simmons and Ken Griffin who rely on algorithms to trade. This means that it is possible to earn a living as a trader using different approaches.
In the forex market, there are traders who specialize in swing trading while others specialize on day trading and scalping techniques. In this article, I will explain the price action strategy and how you can use it to trade profitably.
This strategy involves looking at the charts, observing the patterns, and making informed decisions about it. Unlike other forex trading strategies, the price action strategy does not require having detailed knowledge about the fundamental issues of the currency pairs. For example, if you are trading stocks, price action does not require you to know complex details about the company like the management and its valuation.
A good example of price action is in what happened after the financial crisis of 2008. During that year, most stocks fell. Therefore, an investor who used price action well and bought the stocks would be worth more money today. This is because after the crisis, most stocks gained by more than 100%.
Technical indicators are important tools that can help you use the price action strategy well. There are three main types of these indicators:
- Trend indicators
- Volume indicators
Trend indicators are used by traders to identify when the trends are forming. A trend is a consistent downward, upward, or sideways movement of a financial asset. The goal of any trader is to enter a buy trade when an upward momentum is starting and a sell trade when a downward trend is starting. Examples of these indicators are moving averages, standard deviation, Average Directional Index (ADX), and Bollinger Bands.
Oscillators are indicators that show the behavior of traders. They do this by identifying the oversold and overbought position. In an ideal situation, a trader should buy a currency pair that is oversold and sell one that is overbought. Examples of these are Relative Strength Index (RSI), Relative Vigor Index (RVI), and stochastic.
Volumes indicators, on the other hand, are used to confirm the trends. When the trend indicators predict that a new upward trend is starting, it should be confirmed by the volumes indicators. A trend that is not confirmed by the technical indicators is often a false breakout. Examples of the volumes indicators are Accumulation-Distribution and Money Flow Index.
Apart from these indicators, there are other tools that help you know where to place the stop loss and take profit. One of those tools is the Fibonacci Retracement. This is derived from the complex mathematical formulas of Fibonacci sequence. It is provided by most trading platforms. By charting the Fibonacci on the chart, you can easily identify key levels that the currency pair will move to in a certain price action.
While fundamental analysis is not very relevant in price action trading, it plays a role. Before you initiate a price-action trade, you should be aware of the potential news or economic calendar events that will affect its movement. For example, if you initiate such a trade in the morning, it might work out well but when key economic data is released, it will reverse.
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