Price action refers to the price movements of security. Traders analyse these movements compared to the security’s historical price changes to make financial decisions in what is known as ‘price action trading’. This form of trading is highly technical, relying on chart-based analysis rather than fundamental economic factors.
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Price Action Trading Strategies
As with most forex trading, there are many different strategies traders can employ. What strategy one uses comes down to preference and style. Different forms of trading will have varying levels of sophistication and subjectiveness, but all have historically shown success.
Price Bar Analysis
The most common strategy of price action trading is direct analysis of price bars. This strategy is popular among newer traders and is simple enough in practice that many employ it without realizing it.
Through analyzing the highs and lows of security over time, traders gain insight into what other market participants are doing. This can give an inference on market trends, with many traders seeking bullish bars and selling security based on the inferred information.
Commodity Channel Breakouts
False breakouts are a concept beginner traders often struggle with. The CCI indicator, an excellent momentum measurement, is a tool that helps identify false breakouts. It is used in the Commodity Channel Breakouts strategy.
The strategy employs a set of rules for buying and selling. Essentially, the rules use the daily or 1H chart using a CCI standard of 20 and look for when the trend breaks above +100 or -100. This gives traders indicators of when they should next buy or sell.
Turn Trade
The turn trade strategy is a mechanical trend trading strategy that seeks to trade in the direction of dominant trends. By employing a mechanical system to remove subjective analysis, traders can hyperfocus on buying low and selling high in the dominant direction of market trends.
Using moving averages, Bollinger Bands, and multiple time frame analysis, traders can produce a chart showing the price action. They can then make a more informed decision about when to buy or sell.
Fade-a-Move
The fade-a-move strategy employs the unorthodox method of selling security when momentum is expected to fade away during an uptrend and buying when the expectation that the move will fade away and the reverse while the market is in a downtrend. While this method of trading is riskier, an experienced trader knows under what conditions this can be profitable.
There are two main components to this strategy: Avoid fading strong trends, and instead fade sudden and explosive spikes. This strategy is best as a day trading strategy, given how these spikes occur on an intraday basis.
Conclusion
Forex trading is difficult to break into, and there are hundreds of different strategies to employ at any point. At any given moment, thousands of variables are thrown at traders, and they have to make informed decisions based on those variables.
Price action strategies are but one set of strategies that can grant traders better insight into market trends through direct analysis of price movement.