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What Is Price Action? Before I begin discussing various price action strategies, methods and tools for reading and trading price action, I must begin with a working definition of 'what is price action'. From this broad working definition of price action, I will then talk about how it relates to order flow and the relationship between price action and order flow. By explaining these basic premises which form the root of my approach to trading price action, I will be able to further explore price action trading in my follow up articles. A Broad Definition of Price Action The broadest working definition of price action would be to define it as 'Price's movement over time'. Unfortunately, this is vague by itself, so I will expand this definition by saying 'on any timeframe'. Technically, this means that on a tick chart, if the price of the AUD/USD moves from 1.1000 to 1.1001, this one pip adjustment in price is a working example of price action. So in its’ rawest form, price action = price's movements over time on any time frame. These various price fluctuations will look different based on what time compression (time frame) you are using when looking at price action on any instrument. What Is Order Flow? Order flow is a general term which refers to the transactions (buying or selling) that cause the price of an instrument to fluctuate. Any transaction, whether it be a market order, a buy limit order, buy stop order, etc., is an order or transaction. All of these transactions on a daily basis refer to the order flow in the market, or the flow of orders, so this is what I am referring to when I talk about order flow on a basic level. Price Action and Relationship to Order Flow The bottom line is price does not move unless there are transactions or orders in the market to buy/sell the pair at whatever price the institution or trader wants to. Thus, all price movements and price action are the result of order flow. It does not matter if a participant bought or sold the EUR/USD because of a fundamental event, such as Ben Bernanke telling the market he is keeping interest rates on hold till 2014. None of that is why price moves. Price moves simply because of the transactions that are executed in the market. Because of this - price action is really the offspring of order flow. Many things can affect price action and how it manifests, such as; -The total liquidity available in the market for that instrument -The total number of buying and selling orders executed in the market -The volume (size of the position) of each buying and selling order executed in the market But ultimately, when there is a balance between the buyers and sellers in terms of orders, the market will have no directional bias. This creates a range-bound environment for price action. However, when there is an imbalance in the order flow between the buyers and sellers, this will create a directional bias in the price action, and it is this balance or imbalance we should be learning to read in the price action because it will communicate to us the directional bias, along with where the institutional players are likely getting in and out of the market. Thus, trading price action is not about trading simple patterns, like pin bars, inside bars, and just responding to the pattern. That leaves you totally un-empowered because there will be times when trading pin bars are optimal, and where they will fail miserably. Your success as a trader to use price action patterns successfully will be in your ability to read the price action and understand what it is communicating. Just some basics of what can be gleaned from learning to read price action are; -Speed of buying and selling -When a trend is likely to continue or reverse -Key locations institutions are entering and exiting the market -Optimal places to put your entries, stops and limits -Whether your price action signal is likely to succeed or fail and more... Thus, it is critical to learn how to read the price action and order flow behind it.
In my Opinion, learning to trade forex with candlestick patterns is the key to long term success. Follow just the price, and riches will follow For today’s article, I will be introducing traders to ‘price action signals for Foreign Exchange (FOREX) Today I am presenting an introduction to what price action is, and will provide a basic price action pattern for traders to use in their trading. What is price action? Price action can be simply defined as trading from a naked price chart, with no other inputs. We display a bar or candle chart on time frames such as daily, weekly or hourly etc. The term price action signal will be given to any pre determined pattern/trigger which develops from a single price bar or series of price bars. Most traders will remember my core philosophy is to KISS,’ keep is simple stupid’. Price action is trading from a first tier piece of information. Our decisions are based on 1 input i.e.: price. Conversely, when we trade from indicators and fancy patterns etc, there is subjectivity and multiple inputs. Trading price action is trading the here and now, with no lag or delay. Price action allows the trader to trade what he is seeing first hand, without subjectivity. How can a trader make life easier? When a trader has to make fewer decisions in regards to every trade, his life becomes livable and stress free. Contrary to what most so called experts say, it is very possible to trade with fewer inputs. Inputs would be areas like financial, economic news, world news etc etc. Another input might also include the number of indicators and charting tools that are used for discovering and managing trades. Another input that could be avoided is listening to friends opinions about what or when to make a trade (except us of course) Whenever you listen to the news and the opinions of others, you then have to filter that data through your thinking process. You actually have to make some kind of decision concerning all those bits of information you come across. Attempting to understand how all those various inputs will affect the markets is usually difficult to manage. Predicting how traders will react to the plethora of news items is often a haphazard and illogical process to go through. It is really a guessing game that most so called experts are unable to consistently figure out. The best alternative is trading price action! In a nutshell, great forex traders, always go back to the very foundation of a price chart, (a raw blank candle or bar chart), and make decisions based on the truest information available. Observe the price behavior. Without any indicators, a market can be seen as trending, hitting resistance or support, congesting sideways, etc etc. No computer or indicator, or news item will provide this information perfectly, except the human brain. Brining it together to trade. This article was not designed to teach a complete method of price action entries, but merely introduce you to the concept of trading from raw price charts and to remove all other variables. The remainder of the article will help you discover one pattern which has a statistical edge in trading. Example of a price action entry in 3 steps Refer to the daily AUDJPY currency chart below. 1. We have observed price behavior as trending UP. We can see over the last 30 days prices had been moving higher and higher,. There was clearly, low volatility and no trading congestion, the market was in a runaway trend. Step 2. With our assumption that the trend is up , we naturally would be happy to go long (buy), if a price action signal developed. We are now on the look our for a trigger bar, or series of bars. Step 3 Find an entry trigger - Introducing the “The pin bar reversal” entry trigger A pin bar reversal is a key reversal candle or price bar on a chart which shows an obvious change in sentiment during that period. The candle typically has an obvious shadow (long tail), with the close near or above the open. A logical example is when a market opens, moves down 1 percent and then rallies hard to close above the open. The bar looks like a “Pinocchio Nose”, thus the term “Pin Bar”. See below AUDJPY daily Where to trade a pin bar The pin bar is traded best from support or resistance, trendline or from a key moving average , potentially even a 55% retracement of some form. Keep a look out for the obvious pin bars, and trade in the opposite direction of the tail. If the price moves up to recent highs and prints a pin bar with tall upper shadow, then the signal is to short. The opposite is true for longs. Pin bars are often created near extremes in price swing, and often occur at false breaks, but thats another article in itself. See below EURUSD examples of very obvious signals Below, the EURUSD charts has 2 examples. 1. A very large bearish pin bar after prices broke to a new false high. Subsequent behavior was negative. False break outs to new recent highs or lows often result in pin bars. 2. Trading a very large pin bar from the 50% retracement zone, subsequent behavior was bullish. 3. Pin bar within trend In summary, Price action is a golden tool, because we can combine very simple multiple price inputs together. I.e.: Support and Resistance in conjunction with a pin bar. A trend retracement level with a pin bar. Or simply, follow a short term trend with pin bar entry. Try to back test past occurrences of these pin bar reversal patterns on your daily and weekly charts at first, do research on them and begin master them.