There are many different types of technical
analysis that investors have used over time to try to successfully predict the
fluctuation of currencies worldwide. One form of technical analysis that employs
the study of basic price movement as a means of further financial speculation
is the concept of price action trading. Price action is simply how the price
changes over time. This type of trading can be observed in markets where
liquidity is at its highest. Being that the foreign exchange market is the
largest of its kind in terms of volume and liquidity, there is no wonder why
price action trading has been used to develop trading strategies by investors
of all experience levels. Nearly anything brought into the market experiences
some level of fluctuation in price.
must understand how to use historical information to their
advantage. Historical information will include major upswings, downswings,
trend lines, support levels, and resistance levels. From the analysis of this
information, other trends and insights can be found, including moving averages,
seasonal factors, and trading ranges.
A price action trader may start with some
sort of technical analysis, including trend lines, moving averages, and pullbacks.
The observed price action gives traders clues about the current and likely
future behaviour of other market participants. A trader can explain why a
pattern is predictive; however, the market does not always react in a
predictable manner. Experienced price action traders look for setup points
which indicate good times to enter or exit the market, each with their own
criteria based on experience. A single setup is rarely enough to trigger a
trade on its own. An advanced price action trader can recognize patterns and
wait for trends to develop before investing. Investors that enter early are
considered to be at higher risk since the possibility of a downswing still
exists. Of course, the possibility always exists that the market will not
behave as predicted, but the idea is to make the most informed investment
decisions based on the available data.
Placing stops can be a strategic way to
minimize losses, mitigate risk, and maximize profits over time. An experienced
price action trader might place stops one bar below their setup signal. This would
help protect the currency from dropping too far below their entry point. If the
investor is correct with their prediction, the price will rise and the stop
will not come into play.
Price action trading is a valuable analytical
technique that can be used to help increase the success of a potential
profitable trade in the foreign exchange market. The use of price action
trading does not mean excluding other forms of technical analysis; in fact,
multiple technical analyses are often used in conjunction with one another.
Conversely, a trader can rely on a minimalist price action trading strategy and
still turn a profit. Analysing price shifts over time gives investors insight
into how both the currency and investors behaved in the past, with hopes that
if it exhibits similar characteristics, the trend can be recognized and turned
into a profit.