Price Action Forex Trading
Price action is a type of technical forex trading, based solely on the bare prices and charts, which supply the required information, in place of using the usual indicators. The most popular and interesting price action trading methods or techniques are highlighted, although these are not all in the entirety.
Tape Reading involves the use of analysis of data from quotes displayed in broker’s terminal for trading. It represents the most basic method but cannot be used for long term entries. Japanese candlestick patterns are usually quite small, not too reliable, require some basic chart analysis but they can be spotted on all timeframes. Price fluctuations create chart patterns like triangles, wedges, double tops, double bottoms which often serve only for long term market evaluation. Chart patterns are valued and utilized for their strong fundamental basement as well as popularity in the forex market.
Point-and-Figure charts are graphical representations of price changes independently of the time those changes occurred. These charts represent a whole new approach to the conventional charts, dwelling on the most important point – the prevailing force on the market at a particular moment without a consideration of time.
As shown below, a column of X’s represents an uptrend while that of O’s represent a downtrend and each column can last an indefinite period of time. Two important parameters considered in drawing a point-and-figure chart are box size and reversal distance. Box size indicates the amount of pips represented by each X and O. For example, if the box size is set at 10 pips, each X represents an uptrend movement by 10 pips and each O, a downtrend movement by the same amount.
The reversal distance is the number of boxes that should be passed by price in an opposite direction before a new reverse column can start. 3 being the most commonly distance, implies that in an ‘X column’ uptrend, price has to reverse by 3 boxes for a new ‘O column’ downtrend to start.
Trends can easily be read in such charts and many traders easily catch new trends. With price action techniques, you can always scale in and out and flexibly change strategies. Although these techniques can be used alone, it will also be interesting to confirm other methods.