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Intraday Forex Strategy -Forex Price Action

Introduction to Forex Price Action

Price Action refers to a simple trading practice that allows traders to analyze any financial market without using indicators.

Introduction to Forex Price Action

Understanding price action is a key issue when trading Forex Intraday. There is a great variety of methods and tools available for traders seeking to interpret the daily price action. These tools include the Elliot waves, candlesticks, pattern recognition (trend lines, major support and resistance levels) and etc.

Definition -What is Forex Price Action?

Price Action is a trading method that reflects the flow of executed orders within a specific time frame. You may evaluate Price Action via empirical methods but the most reliable way is the use of technical analysis. What really distinguishes trading using Price Action compared to other intraday strategies is the use of naked charts with candlesticks and without any indicators or oscillators.

Price Action and The Simple Use of Candlesticks

A candle is formed by (i) a closing price, (ii) an opening price, and (iii) two price wicks.

  • The two price wicks reflect high and low prices within the selected time frame (for example 1 minute chart).
  • The body of its candle is determined by the distance between the closing and opening prices and therefore a candle may be bullish or bearish.

Price action should be interpreted according to the current trading conditions of each Forex market.

 

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Let’s distinguish the two main types of Forex Markets.

The Two Different Forex Markets

One of the key issues when trading online using a Price Action Strategy is to be able to identify and to distinguish a Trending Forex Market from a Ranging Forex Market.

(1) Trending Markets

Trending Markets are financial markets that follow a particular trend (uptrend or downtrend) within a certain timeframe.

Trending Markets are finnacial markets that follow a particular trend (uptrend or downtrend) within a certain timeframe

How can you identify a trend? There are many ways but this is the easiest way to determine the trend:

Higher-High/Lower-Low

1.1 Down-Trending Markets

A market is down-trending when the latest high is lower than the previous high and the latest low is lower than the previous low.

1.2 Up-Trending Markets

A market is up-trending on exactly the opposite conditions. That means that the latest high is higher than the previous high and the latest low is higher than the previous low (check chart above).

Trend Lines

Identifying the correct trend lines is more difficult than identifying any other support/resistance levels. The reason is that trend lines are completely dynamic lines changing over time. Important trend lines can lead to trend reversals, or on the contrary, can signal strong ongoing trends that you should follow.

Price Channels

Two parallel trendlines create a price channel. A price channel is a continuation pattern (Bullish/Bearish). The upper trend line indicates resistance and the lower trend line indicates support.

In the above chart, we can see a strong price channel in a Bullish Market.

(2) Ranging Markets

Ranging markets are markets trading within a specific range. That means that the price action is limited to a certain price area. At the upper limit of this price area, there is a strong supply that whenever it is reached it is able to push prices downwards. At the lower limit of this area, there is a strong demand that whenever it is reached it is able to push the prices upwards.

Ranging markets are a common phenomenon when trading Forex Intraday and may provide easy set-ups for our Profit-Taking and Stop-Loss orders.

Ranging markets are markets trading within a specific range

Support & Resistance Levels

The evaluation of Support & Resistance price levels is incredibly important no matter the financial market/asset you are trading. Support & Resistance price levels are applicable to any market no matter if it is Ranging or Trending.

(i) The reach of Strong Support & Resistance Levels on Trending Markets is the usual cause for trend termination/reversal

(ii) Support & Resistance Levels in Ranging Markets most commonly are defining the range itself

(iii) In order to evaluate the strength and the importance of each Support & Resistance Level, professional traders are using historical charts

(iv) Important Support & Resistance Levels also commonly define the take-profit and stop-loss orders of Swing / Long Forex Traders

(v) Finally the evaluation of Support & Resistance Levels is linked to the optimal timing to enter or to exit a market. If the price action overpasses a strong support/resistance level in a Trending Market then it is a clear alert for a strong ongoing trend. In Ranging Markets that may signal the end of trading within the range

Support & Resistance price levels are applicable to any market no matter if it is Ranging or Trending

 

Counting Candles Within Charts

Counting candles is a common method used for pattern recognition. The number of bullish and bearish candles within a certain period may indicate the likelihood that a certain trade may prove successful. The number of candles is also reflecting time. The counting candles method is usually used along with other price action methods.

 

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Pattern Recognition

Price Action has the characteristic of repeating itself. The process of identifying repeating patterns is called Pattern Recognition. There are tens of patterns, here are the most important patterns:

(1) CONTINUATION PATTERN RECOGNITION

1.1 Cup & Handle Patterns

1.2 Triangle Chart Patterns

1.3 Flag & Pennant Patterns

(2) REVERSAL PATTERN RECOGNITION

2.2 Head & Shoulders Patterns

2.2 Double and Triple Tops & Bottoms Patterns

2.3 Rounding Top & Bottom Patterns

In one of my other trading sites (TradingCenter.org), I have published a complete Pattern Recognition Tutorial including detailed charts, here it is: Price Recognition Tutorial

 

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 Forex Price Action

George Protonotarios, Financial Analyst