Forex price action, in simplest terms, refers to the “action of price”. It serves to identify market movements, its trends and support and resistance levels.
Using the Forex price action in trading also involves buy and sell signals. If you use buy and sell signals together with key levels and momentum, the result is a simple and efficient trading approach.
How to Use Forex Price Action to Your Advantage?
One of the largest benefits of trading in this manner is that it helps you locate the buy and sell orders. Traders utilize the upper and lower wicks of candles to identify these orders. By analyzing the Forex price action, your aim is to generate buy and sell signals. Here is a few ways on how to do this in a simple fashion.
Draw the Key Levels
Once you’ve opened a new chart, the first thing you need to do is draw support and resistance levels. Drawing them sometimes involves trend lines, horizontal areas or patterns like the ascending and descending channels, triangles, wedges, flags, etc.
Once support and resistance levels are defined, you wait.
Wait For the End of the Daily Session
If you want to trade the daily frame, you should wait for the close of the session. If you’re trading New York close charts, you need to wait until 5 pm EST. Bear in mind that not all Forex brokers provide this kind of chart but if you’re taking Forex price action seriously, using New York close charts is probably essential.
Forex Price Action and a Momentum Indicator
If you’re using the daily time frame, the first thing you should do is spot the swing highs and swing lows.
Remember, you’re trying to find the market’s turning points. The span of time between these points can be between several weeks to several months. That’s why you should look at the last six months, more or less.
Once you’ve done that, you should notice a pattern. If the market is producing higher highs and higher lows, that’s an indicator of an uptrend. Once this pattern is broken, this is likely a signal that the market is getting ready to change its trend direction.
In that case, you want to be with the bulls. On the other hand, if the market is making lower highs and lower lows, you’re looking at a downtrend.
Here, you should stick with the bears.
If swing highs and lows create a trend line, which they normally do, identifying reversals in the trend becomes incredibly easy.
This approach is great because the price action does most of the work for you and there’s usually no need for using other momentum indicators like Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) or Average Directional Index (ADX).
In conclusion, using price action when trading lets you look at supply and demand in a very useful way. It allows you to spot buyers and sellers without employing other indicators. However, don’t forget that patience is essential when trading with Forex price action and quality of the setups is considerably more important than the quantity.
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