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Business : Trading The Price Action
Forex trading, although lucrative in the right circumstances, is a complex art to execute correctly. What appears to make forex trading seemingly simply is the binary choice between “buy” and “sell”. In order to come to a decision on whether to take a “long” (buy) or a “short” (sell) position on a trade you must obtain the correct signals from your trading chart. This is where the complexity comes in.
Indicators are often based on complex mathematical algorithms which are programmed to tell you what the price has done and what it may do in the near future. In other words, they are either lagging or leading indicators. Unfortunately, there are serious drawbacks with indicators otherwise every trader would be using them with 100% success rate.
With lagging indicators such as Moving Average Convergence Divergence (MACD), the problem is just that, lagging! They will produce signals that are late and will certainly miss any reversals in the market. These indicators are also known as momentum indicators since they tell you accurately the price impetus i.e. where the price is heading.
With the so called leading indicators this serious drawback with the lagging indicators has been programmed out. Examples of leading indicators, also known as oscillators, includes the popular Stochastic indicator. The drawback here is that in a trending market it will give you premature signals such as “overbought” and “oversold” even though there is some way to go before a turning point arrives in the price.
With price action trading, in price action trading, the trader looks at the chart carefully and draws support and resistance lines. Support lines are where the price ostensibly bounce off and keeps on moving in the direction of the main trend, up or down. The resistance is an imaginary line where the price apparently finds resistance to its direction of travel.
Learning to draw these lines properly is an essential skill to have when trading on price action.
Catching a price reversal in time can mean the difference between a profitable and a losing trade. In some cases this difference could even be between a profitable and a really profitable trade. When trading price action, clues to price reversal i.e. change in direction of the trend can be gauged from observing candlestick patterns. These also tend to occur at lines of resistance, especially where strong resistance lines could be drawn that extend back over some time.
Summary
When looking for clues on trend reversals, a particular candlestick shape provides the best information. Forex trading formation gives a very powerful clue to an imminent price reversal. With practice and experience, it becomes easier to see where support and resistance could be. Once you grasp this, the rest will fall into place.