Forex price action trading can be defined as trade decision making based upon chart price patterns, the patterns being created by traders simultaneous reactions, to news and world events. Price action trading, is then, a study of human emotion depicted in the Forex price charts and presented to the trader in the form of price patterns, which repeat over and over again across all time frames and all currency pairs.
Before I discuss in detail why trading using price is the way you should trade Forex, I would like to discuss technical indicators. The Forex trader must understand that technical indicators are derived from price itself and as such lag the price action. This means that if you are a technical trader using exclusively indicator based strategies, then unfortunately you are more than likely to fail at your endeavor of trading the markets for profit. Notably, you will be entering the market too late and closing your trades too late when you trade using indicators.
When you derive a technical indicator from price you typically smooth out some of the troughs and peaks of price itself, but more importantly you build inherent delays into the indicator when compared to price, this is vitally important to understand and relates to the point I made above – technical indicators lag and this will cost you money.
If you look on the internet search engines, you will find a plethora of indicator based systems, for sale or for rent, along with volumes of articles, trading robots and other sure fire systems informing you of how can make money using an indicator based system. This is all well and good, however, do these methods and systems really make money?
If we accept that over 90% of traders eventually lose money trading or wipe their accounts clean trading Forex trading and if we accept that the vast majority of those people use indicator based methods to trade the market, I think that tells us something about the indicator based systems themselves.
Indicator systems at best will help you to break even in the markets, whereas price action methods will help you to get nicely profitable.
The study of price is then, the observation of traders activity in the market place, this can be seen and portrayed in the market via the price action pattern. The patterns express the traders emotions.
In my next article I will go into some depth concerning price and start the discussion and explanation of the various types of price action trading methodology that I look at on a day to day basis. Methods that work well in the Forex markets and which are easily seen on the charts during live trading.
Paul Langham runs http://www.exacttrading.com, a Forex resource, news and information site. You can find regular updates, comments and views relating to the Forex markets with an emphasis on price action trading.
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