What is Price Action – Forex Price Action Definition… and how price action differs from indicators.
Price action as it relates to the forex market and other financial markets is the pattern of movement of the price of a security over time. The art and skill of “price action analysis” involves using the trail of raw price data on a price chart (with no indicators) to make predictions about the future direction of the particular forex currency pair or security you are analyzing. Price action trading is a simplistic approach to trade the forex markets that is free from the clutter and confusion of overly complicated indicator based systems. When you learn how to read this price trail you will have the power to see clearly and understand what is happening in any forex currency pair at any given time.
In fundamental economic terms, price action analysis is the visual depiction of the supply and demand situation of the given forex currency pair or other trading instrument for the specific period of time you are analyzing. It is much easier and also more efficient to learn how to analyze the supply and demand situation of a specific security by learning to read its price action trail on a simple price chart rather than trying to interpret and make use of the hundreds or thousands of other economic variables that one could analyze.
The reason why it is much easier to simply analyze the price action on a “naked” price chart instead of trying to keep track of possibly thousands of pieces of economic data is because price movement is simply a reflection of the aggregate beliefs of all players involved in a market, and price action analysis gives you the power to interpret and use these beliefs to make trading decisions. All the various economic variables that occur each day ultimately pass through the filter of the human brain, market participants than exercise their beliefs about these economic variables by trading or not trading the market. These beliefs take the form of price action, and as forex traders we can learn to take advantage of this trail of beliefs by learning to analyze and trade off of simple price action setups. There are different ways to implement price action trading into your trading routine as essentially all technical and chart pattern analysis requires having some back ground in price action analysis. However, we are mainly concerned here with the application of “raw” price action, meaning learning to analyze and trade off a price chart with NO lagging indicators.
Forex Price Action VS. Lagging Indicators…
A simple analogy to start off a comparison between trading off pure price action and trying to trade by interpreting numerous lagging indicators would be driving your car with the headlights off on a foggy night (using lagging indicators) compared to driving down a country road on a bright sunny day (using price action). Essentially, lagging indicators add an unnecessary step to trading forex by displaying price movement in an often confusing and mysterious manner. To put it simply, there is no need to force yourself to learn how numerous lagging indicators work or work together to make trading decisions when you can simply learn to analyze a raw price chart and take advantage of the predictive capacity it contains. The real reason why so many traders get caught up using lagging indicators is a psychological issue; humans naturally want to over-complicate forex trading because trading off a naked price chart seems too easy to most people. As a result, most traders put too much emphasis on the technical side of trading and not enough on the more important money management and psychological aspects of trading. Technically speaking, forex trading success only requires a simple strategy like price action analysis, from a mental standpoint forex trading success requires self-discipline and realistic goals.
For more information on price action trading click here: Why Trade Price Action ?
