An Introduction to Price Action Trading

What is Price Action?

This is the art of making your trading decisions based off of reading the price movement on the chart. This is done without any indicators, the only thing that really should be on the chart should be your Support and Resistance areas.

Now remember by 'Action' in Price Action, we are referring to the movement of price on any given chart. Remember, every single chart tells the story of a battle between the Bulls (the Buyers) and the Bears (the Sellers). This is what every single chart shows (Forex or otherwise). What influences the movement of price is traders making trading decisions (manual or automatic).

Price Action shows you the most up to date market sentiment, because it's happening right there in front of your eyes! Using indicators are often lagging, which is why sometimes you will enter a trade based off an indicator hoping that it will go well, only to have price turn against you! (Never go in to a trade 'hoping' it will go well, we are looking for high probability - low risk trades, in other words it makes sense to execute!).

Price Action = Trading the CAUSE

Once I understood this, it was a real penny drop moment. I had been trading the EFFECT of price movement, which is why I had been inconsistent. Trading this way meant that I could trade the cause of price movement and get in on the potential move very early on.

How to trade Price Action

There are four main elements to trading Price Action:

(1) Fundamental Analysis

(2) Technical Analysis

(3) Support and Resistance

(4) Candlestick Analysis

On the surface this may seem incredibly overwhelming, but once you have a clear understanding of these elements, you will see that they are very simple to do.

Let us now look at each of these four elements in more detail:

(1) Fundamental Analysis

This is extremely important, always keep an eye on the global economic news, remember we are trading Forex, Foreign Exchange. We are trading currency pairs, there are going to be certain global economic news events that will have an effect on the movement of price.

(2) Technical Analysis

Technical Analysis in Price Action Trading, is recognizing certain patterns on the chart that may give an indication for a potential trade. Remember, the charts are subjective, the reason they move in the way that they do is because of traders making trading decisions.

Traders will look at a chart and see that in the past price moved sharply down from a certain area, price is now reaching the same area and so they look for the same thing to happen. As Human Beings we are always looking for patterns and similarities.

So, Technical Analysis is immensely important in understanding and identifying potential trades. We look for those potential trades at areas of Support and Resistance.

(3) Support and Resistance

Support and Resistance are those areas on the chart where we believe there are heavy influxes of Buyers (at Support) and Sellers (at Resistance). These are our areas of trade opportunities, as they offer the highest probability - lowest risk trades.

This leads us to the final piece of the puzzle, Candlestick Analysis.

(4) Candlestick Analysis

Candlestick Analysis, as the name suggests is analyzing the candlesticks. We do this candle by candle in order to ensure we are aware of the latest, the most up to date and therefore the most accurate market sentiment. This is why trading the higher time frames, is key because it shows us Price Action that spans a larger amount of time. If you had two candles, a 5 min candle and a 12 hour candle, the one that would be of more importance would be the 12 hour candle, because it represents a longer period of Price Action.

So, there you have it a brief introduction to Price Action. Study it, master it and become consistently profitable.

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The Fascination With Fibonacci - Trader's Advantage

Fibonacci, not so much the man but the math, is pretty fascinating on its own apart from trading.

To see how each number in the Fibonacci Sequence relates to each other in some set ratio (ie..618, 1.382, etc.) and then connect these ratios to objects of nature is absolutely fascinating. Within minutes of starting to learn about Fibonacci numbers, you are drawn into a world of plant proportions and architecture of pyramids and other monuments.

The connection of the Fibonacci numbers and all things nature is also found in the world of trading itself.

When I started trading the markets back in the mid-80's, my focus was like that of many new traders. The analysis of choice was fundamentals. Listen to the news, recommendations from friends and talking heads, or glace at the supply/demand numbers. But then something wonderful happened at the start of the 1990's. I discovered (for myself) Fibonacci and its basic application to price and time analysis. From then on I focused on Technical Analysis and never listened to another talking head (or friend) on what to buy or sell ever again.

The applications of Fibonacci to trading are many. Most traders who use Technical Analysis are familiar with the basic use of Fibonacci in chart analysis. Here are some basic examples:

Solving for Support or Resistance - After prices have trended for a number of days/weeks/months in a certain direction, from either a significant bottom to a top, or from a significant top to a bottom, it is called a "range". The trader identifies the range, then multiplies that range by the Fibonacci ratios of .382 and 618 for example. The results are deducted from the top price (if the range is from bottom to top) or added to the bottom price (if the range is from top to bottom) in order to get support or resistance price levels, respectively. Often additional ratios are included in this calculation.

Solving for time - A basic but fascinating approach to using Fibonacci is to count the days/weeks/months between previous market tops and bottoms and multiply the count by the Fibonacci ratios. The result is counted from the last top or bottom forward in time where another top or bottom is then expected likely to occur.

Moving from the basics of Fibonacci and chart analysis are more advanced (or mostly unknown) applications for the ratios.

There are the use of Fibonacci spirals, for example, which produce both time and price results.

There are the combined use of Fibonacci ratios along with time/price squaring results.

The techniques and methods one can use to exploit the markets using Fibonacci are numerous!

Within my charting software I often use what are called Fibonacci Fan Lines. The application here is somewhat like that mentioned above under "Solving for Support or Resistance", with the major difference being that the Fan Lines produce DYNAMIC support and resistance levels (the values change for each time interval on the chart, higher for ascending lines and lower for descending lines). They also require locating patterns two ranges (top to bottom to top, or bottom to top to bottom). You simply label the extreme of range as A, B and C. For example, ranges of top to bottom and back to top would be labeled "A" for the first top, "B" for the following bottom, and "C" for the final top. The range of "B to C" is divided by the Fibonacci ratios and then lines are drawn from "A" through the divisions of the range of "B to C" out into the future. These become your support/resistance levels.

Another fascinating approach to using Fibonacci for chart analysis is to simply add the Fibonacci series numbers to any significant top or bottom to get possible future tops and bottoms.

For example, the series starting at 3 would be 3, 5, 8, 13, 21, 34, 55, etc. Add any two consecutive numbers in the series to get the next number in the series. Now locate a top or bottom on your price chart and count from there 3 bars, 5 bars, 8 bars, etc. These are time periods to watch for possible market tops and bottoms.

These are just some of the many examples and applications you can do with Fibonacci and your chart analysis. Try them yourself and I'm sure you also will be fascinated with Fibonacci!

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