Identifying Favorable Conditions for Price Action Trading
Although price action trading techniques is arguably the most reliable method for sustained long term profits, there are favorable conditions, which should be identified before trading in the markets, that optimize the effectiveness of price action strategies. Trending markets, fondly called friendly markets, signifies constant movement in one clear direction – bullish or bearish, and favors the application of price action signals but trends have to be studied on longer time-frames in order to be convinced that the movements are sustained and regular. Heavy fluctuations of currency pairs between upper and lower limits create ranging markets, with neither currency having the required strength to break out of the limit areas.
Price bounces between a specific high price (resistance level) and a low price (support level) without breakthrough in either direction. In clear terms, the buyers and sellers have equal strength with no one overwhelming the other. When a group of traders (say sellers) overpower their counterparts and breaks through a support level or vice versa, then a range breakout has occurred, that is, the price makes a clean break from its previously constrained limits and you have to be careful in interpretations so as to be sure that the supposed breakout is still not within the limit areas. The unique feature of price action strategies lies in evaluating the aforementioned favorable conditions within a short while and setting the right pending orders to have your positions open automatically, without having to sit in front of the computer monitoring trades for so long. Price action analysis strategies will be maximally profitable if you have had a good understanding of these favorable conditions.