In this article, some price action trading secrets will be highlighted and revealed real quick.
Before getting to these secrets;
What is Price Action?
Simply put, price action is the observation of price movement of a currency pair/commodity, etc. without the aid of indicators or news to determine its next direction (bias) purely through recognizable patterns, and sequences the market makes.
Indicators for an instance take data that price gives, processes it with a set of given formulas then display it as information.
This means that indicators display previous price activity/activities. This is called “lagging”. Although; there are a few indicators that do not lag and an example is the “Ichimoku cloud”.
With price action, you get to analyze the data price gives as it is occurring.
I will discuss six price action trading secrets below-
- Understanding market structure
- Trade with the trend
- Multi-time frame analysis
- When to look for entries
- Have a trading plan/ journal
- Avoid the influence of fundamentals
#1. Price Action Trading Secrets – Understanding Market Structure
This is the most important price action trading secret because a complete understanding of market structure will enable a trader to understand price movement. A lot of traders focus on how to enter a market instead of understanding the overall direction first before doing the former.
What is market structure?
Market structure can be described as the framework which enables prices to move from one point to another.
Entry techniques come second but establishing overall market structure enables a trader to know the current market cycle( a retrace or a continuation).
This will be explained in detail later on in the next price action trading secrets.
The first thing to be understood is a high and a low.
A high is a “peak” in the market while a low on the other hand is a defined base point in the market.
When a new high is above a previous high that was made, it is a higher high.
A high placed below a lower to a previously formed one is a lower high.
A low formed higher than the previous one, it is a higher low.
If a low is formed below a previous low, it is a lower low.
#2. Price Action Trading Secrets – Trade With the Trend
A trend is a clear and definitive direction price HAS been heading for a particular amount of time.
There are two types of trends namely; an uptrend (bullish trend) and a downtrend(bearish trend).
In a trend, there are two components; the continuation and the retrace.
In a bearish scenario, for instance, momentum is to the downside so price tends to go lower with ease but struggles to go upwards as you can see in the picture above.
The better trades to be taken momentum-wise or in terms of pips would be to the downside because price willingly wants to go lower.
There are definitely ways to counter-trend the market. In the example above, that is a daily chart, a macro-timeframe (higher time frame). So, key levels where we’re expecting the market to continue its bearish run can be marked.
Then, we will wait for a definitive uptrend to form on the intra-day timeframes; 1hr, 45mins, and 30mins. We can then look to enter a buy order to these key levels where continuation to the downside is expected.
But for a trader who is just beginning their journey, strictly trend trading is advised.
#3. Multi-Time Frame Analysis
A lot of traders wonder what the best time frame is for price action is but in reality there is none. All time frames are important and should be used because it enables you to see price action from different perspectives.
Multi-time frame analysis is best described as the joint analysis derived from two or more time frames.
For a beginner, too many time frames may be overwhelming. Before determining which time frames would be suitable for you, decide on the kind of trader you want to be.
A position trader who holds trades for months so therefore would only need higher time frames.
A swing trader holds trades between days-weeks.
And lastly, an intra-day trader executes and closes trades within a trading day.
The graphic below will shed light on the set time frames you need depending on the type of trader you are.
#4. When To Look For Entries
As a price action trader, you study price behavior and then execute a trade based on your observations or analysis.
It’s important to know when price delivers the most desirable movements to profit off of.
This occurs during the New York and London session.
During the New York and London sessions, a large chunk of foreign-exchange transactions takes place on a global scale. So there is high volume and liquidity in the market-leading to definitive and clear movements and large candlesticks.
But pairs with “JPY” as their counter currency tend to move pretty well during the Asian session as well.
#5. Price action Trading Secrets – Have a Trading Journal
What is a Trading journal? A trading journal is documentation either digitally or written down of your analysis of the market, reasons why you entered a trade and the outcome of the trade.
So “journaling” will involve you stating the pair you analyzed, your entry, stop loss, the outcome of the trade, and your comments on a mistake you made in order to curb it early or a good decision.
Price is “fractal”. This means that the market repeats specific patterns over and over so journaling your trades will broaden your understanding of the forex market.
This is one of the most important price action secrets because journaling consistently for a while enables you to develop a set of rules and criteria that helps you differentiate between high-quality set-ups and whatnot.
#6. Avoid The Influence Of Fundamentals
“Fundamentals” are economic updates, outcomes of conferences (e.g. the EU conferences), or even natural disasters that influence the forex market. An instance is when covid-19 deaths were alarming in the United States of America, economic activities stalled so the US dollar weakened.
A forex trader who uses fundamentals alone will use these reports alone to predict the likely direction of the market in order to make profits.
But as a price action trader, it is important to trust your analysis and while keeping these news reports at the back of your mind, they should not influence your overall decision making.
Summary Price Action Trading Secrets
Over the years, there have been many variations of using price action from classical chart patterns like double tops, double bottoms, etc. to various concepts like “Smart money”, “Wyckoff” and the list goes on and on but the one thing peculiar to every method is the observation of price.
Hence, these price action secrets or tips discussed above will always be applicable.