What is Price Action (PA)?
The simplest definition of Price Action tells us that it is “price movement over time,” which is in line with the direct translation from English.
Price Action is one of the simplest and most widely used trading strategies that are used to play the Forex market. It is popular primarily because of its ability to observe only one indicator. Because of this it is very often called Naked Trading.
That indicator is – and how could it be otherwise – the price.
PA can be applied to any currency pair.
Why should you be interested in Price Action strategy?
First, it is simple and clear, even for a beginner. Secondly, it allows you to understand the behavior of the market. This is important because lack of understanding of the rules of the market is the reason for most traders’ failures.
What is Price Action based on?
PA is based on three pillars:
- Candlestick formations (one or more candles) – this is primarily about candlestick formations that are characterized by high effectiveness, such as Inside Bar or Pin Bar. They are relatively simple to understand and apply. Their high effectiveness is ensured by scaled market behavior, ultimately leading to a specific market behavior in the future.
- Support and resistance levels – the wise setting of support and resistance levels is an art, the mastery of which can bring tangible benefits to the trader. Despite this, it is an element of technical analysis greatly neglected by many traders. This is caused in many cases by trusting everything other than the basic aspect – the price.
- Markettrend – is the basic element of technical analysis. By playing according to the trend, we can significantly reduce the risk of a failed investment.
What are set-ups in Price Action?
A basic assumption about the market tells us that certain movements of investors in the market leave traces. In many cases, these are the Price Action traces, that is, the price movements visible on the chart. This can be a clue as to which way the market will go in the next steps.
These are expertly called signals, layouts or Price Action setups.
The key aspect is to recognize which signals provide a clear moment to enter the market.
Convergence, and Price Action
Convergence is a point, or arrangement in the market where two or more levels overlap to form an important place. According to the dictionary, this creates a convergence, or a place where two or more distinct levels or signals overlap.
How to use Price Action to follow a trend?
One strategy recommended by traders is to find a Price Action signal on a chart with a time frame of one day that will give a high chance of success. Optimally, the signal should coincide with the trend on the chart, thus creating a convergence.
In the case of a market that is in consolidation, it is advisable to pursue it when it has visible ranges, limits from which the price bounces, that is, it is better when it is a larger consolidation than a sideways price movement.
A period of so-called narrow consolidation can also be used to make money, and then charts with a smaller time frame prove most helpful. However, it is recommended to first gain the necessary experience in using Price Action strategies.
