Price Action is a form of technical analysis that focuses solely on past prices that have traded in the market
This article contains a simple, and complex method for new traders to begin learning price action
This study can be furthered in the live sessions on DailyFX in which Analysts and Instructors explain price action in real market conditions.
And this is true; albeit maybe a little ‘opaque’ for new traders, or even experienced traders that haven’t yet found the study of price action. The study of price action entails reading past prices, to build an approach or plan for the future.
Surely, most traders that end up ‘making it’ as a trader will find this specific study of technical analysis eventually; but it’s usually only after multiple disappointments and failed attempts at building indicator-based strategies that zig when the market actually ‘zags.’ So, please allow me to elaborate on my earlier statement.
Price action will never lie to us, as traders, because it never purports to tell us what WILL happen; but rather it only tells us what HAS happened.
There is a chasm of disconnect between these two premises.
As a trader, you will NEVER truly know what will happen in the future. Any indicator or indication of what MAY happen in the future is just a possibility. And even then, it could be a remote possibility at best because that indicator you’re using – well, it’s really just a fancy way of looking at previous price action.
So, regardless of the strategy – those same boring concepts of risk, trade, and money management are of the upmost importance to the trader.
But after that – traders can focus on getting the probabilities on their side as much as possible through analysis, and this is where price action can really shine.
Because, once again – this is a ‘clean’ way of looking at past prices, without the obfuscation of a mathematical formula that may be obscuring what’s happened in the recent past.
Below are four simple ways that traders can become better at reading, reacting, and analyzing price action.
Method 1 – The Price Action Primer
If you’ve been to DailyFX over the past couple of years, you may have encountered a previous article on price action. We talk about this A LOT because of all the aforementioned reasons, and quite simply – it works. Not that it works in telling us the future, but it works in allowing us to see the past as efficiently and honestly as possible.
Method 2: Grade Trends by Focusing on Swings
One of the first pillars of technical analysis centers on that age-old saying of ‘the trend is your friend.’
And the reason for this goes right back to one of those very first things we touched on at the beginning of this article: The future really is unpredictable.
But trends take place for reasons, right? Maybe it was a QE announcement, or a Debt Crisis – whatever the reason, trends exist much like the tide of the ocean exists.
And just like swimmers in the ocean, traders are often best served by going with the flow.
Because, if we look at trading as pessimistically as we can, and we assume that any individual trade is akin to flipping a coin, then we have a 50/50 chance of price moving up or down, right?
Well, if that bias continues, and further – if we are trading in the direction of that bias, it stands to reason that we can begin moving our chances or probabilities of success slightly better than a 50/50 split.
Perhaps it’s small, perhaps as small as 51/49 in our favor, or 52/48 – but the logic is the same.
If what has happened continues happening, I may stand a better-than-fair chance at success.
If we add in strong money management, well – now we have an entire strategy!
Traders can read and gauge trends using solely price action. We expand on this topic in our Introduction to Price Action; but we can simply look to the chart to point out the trend.