Price Action Forex Strategy

Price Action Forex Strategy

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Updated: Aug 24, 2022
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Since no two people analyze every aspect of price action in the same way, this concept can be difficult to grasp. However, price action simply refers to everything that an asset’s price does and, like many other things, is totally subjective.

There are many ways you can apply this knowledge to the forex market and one of them is price action trading strategies. The purpose of this article is to explore the basics of this strategy and provide some examples.

I. Important Price Action Trading Terms

Before we start with price action strategies, we will clarify most of the terms used in this topic.

Japanese candlesticks and Forex bars are important tools for analyzing price action as they allow you to see the movements of the market. The word “candlestick” refers to Japanese candlestick charts. Let’s delve deeper into the subject.

In a basic price action strategy, you will often see the word “Japanese candlestick” used interchangeably. On the other hand, “bars” are a type of chart that do not use Japanese candles, but rather simple bars that show the same information as candles (albeit in a less flashy way).

Similarly, we must mention the bullish bars. These kinds of bars are characterized by having high and low points higher than the preceding bar, and usually appear in an uptrend. In general, in these bars the closing price is higher than the opening price, although not necessarily (it can happen in aggressive trends). It is worth mentioning that bullish bars are a sign that buyers are in control.

There are also bearish bars, which are characterized by high and low points lower than the preceding bar. As you might guess, bearish bars are a sign that sellers are in control of the market.

Another important term to understand forex price action strategies is “inside bars”. This chart pattern is characterized by a bar whose high and low points are within the range of the preceding bar. Some traders consider a bar to be non-inside if its highs and lows are the same as the previous bar. This formation represents indecision in the market. Just like any other type of bar, the closer the opening and closing prices are, the higher the level of indecision in the market.

Price Action Trading Signals

“Outer bars” are another concept you may come across when studying price action strategies. These bars are also called “mother bars” or “enveloping bars”, and are characterized by high and low points that exceed those of the preceding bar (hence the name “enveloping”). On these bars, if the closing price is considerably higher than the opening price, it means that the buyers are in control of the market.

Also, when the opening price is in the first 3/4 of the bar and the close price is in the last 3/4, the bar is said to be bullish and the buyers are in control. On the other hand, when the open price is in the last 3/4 of the bar and the close price is in the first 3/4, the bar is said to be bullish and sellers are the predominant force.

Another concept that applies to this formation, especially if using candlesticks in a price action trading strategy, is that the opening and closing prices have to be higher and lower, respectively, than the previous bar. That is, do not apply high and low points in this case. With this idea, it is not necessary for the outer bar to have upper high and low points. In fact, the first definition probably only applies to bar charts, where it is more difficult to find the opening and closing prices.

II. Price Action Trading Signals

The markets are in constant movement and always leave a “footprint”. Price action is this imprint and occasionally, it leaves clues as to the direction the market will take. Price action clues go by different names: patterns, formations, signals, and price action trading strategies. As a trader, your goal is to find such signals to enter the market. Later we will explain how to use convergence price action to execute highly successful trades.

III. Forex Price Action Strategy: Trading Convergences

Convergences are points in the market where two levels intersect, forming a point where price consolidates and then heads in one direction. In other words, a convergence refers to the point where two or more technical indicators intersect.

It is important to show an example of a price action trading strategy that uses such convergences.

Convergence points represent trading opportunities. Imagine that a pin bar is rejecting a horizontal resistance and a dynamic resistance formed by the EMAs of 8 and 21 periods. Another convergence factor may be downtrends. Similarly, a trend-aligned price pattern is considered a point of convergence.

Going back to the Forex price action strategy example, there are 3 convergence factors that you need to consider to open a position: downtrend, rejection of horizontal resistance, and rejection of dynamic resistance.

the market trend

IV. How to use price action to identify the market trend

When prices are trending up, they make higher highs and higher lows. Likewise, when they are in a downtrend, they make lower highs and lower lows. However, the price does not always behave in this way, which is understood as a period of consolidation. These periods are represented by graphic patterns such as flags, triangles and rectangles. Note that if the price does not reach higher highs and lower lows, or higher highs and lower lows, it is not trending.

Similarly, when the price is not trending, the consolidation period can be more easily appreciated in a low time frame. However, if you practice enough, you will be able to see the consolidation without changing timeframes. This is an important aspect of using a Forex price action strategy correctly. When price is in a tight consolidation pattern, it is usually said to be moving horizontally. On the other hand, when the consolidation pattern is wide, the market is said to be range bound. In this case, there is no definite trend.

“Trading with the trend” can be a confusing concept for beginners who do not yet know an effective strategy to do so. However, you just have to look for a profitable price action strategy to determine the trend on the daily timeframe.

Regarding consolidations, it is most convenient to operate in markets with a wide range. However, it is also possible to find trading opportunities on tight consolidations. If you decide to go with the latter approach, you need to use short timeframes and master the 1-day timeframe first.

VI. conclusion

Knowing the basics of price action and its strategies is crucial to success in Forex. There are many trading theories and methods available in this field that can be really helpful.

Now, your main goal is to find the best price action strategy that suits your needs. Do not forget that there are many professional traders who use this method and can share their strategies and knowledge with you.


Sources & references
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James Knight
Editor of Education
James is a lead content editor for Invezz. He's an avid trader and golfer, who spends an inordinate amount of time watching Leicester City and the… read more.

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