Forex trading using pure price action, without the use of any technical indicators, can be an extremely effective yet straightforward way to analyze the markets. Price action focuses purely on the raw price data of a currency pair to detect patterns and make trading decisions. Mastering even simple price action strategies can give traders an edge, allowing them to profit consistently.
This comprehensive guide will provide forex traders with all the essential information needed to trade forex using only price action. From key concepts and candlestick patterns to effective strategies, risk management, and more, readers will learn the core components of pure price action analysis. With the insights from this guide, both beginner and experienced traders alike can refine their technical trading skills.
Understanding Pure Price Action Concepts
Before diving into specific price action strategies, traders first need to understand some of the key concepts that form the foundation of pure price action analysis:
Price Discounts Everything
The underlying principle of pure price action is that the price already factors in all available market information and sentiment. The price reflects the fair value of the asset as agreed upon between buyers and sellers in an efficient market. Therefore, analyzing just the raw price chart can provide sufficient information to make informed trading decisions.
Support and Resistance
Key levels of support and resistance play a major role in price action analysis. Support levels represent price zones where buying interest is strong enough to prevent the price from falling below a certain level. Resistance levels are zones where selling pressure prevents the price from going higher. Watching how the price behaves around support and resistance provides traders with high probability trading opportunities.
Trends and Range Bound Markets
Identifying the trend or range-bound state of the market is critical. In trending markets, the key is to trade in the direction of the trend. In range-bound markets, traders look to buy near support and sell near resistance. Determining the type of market simply from the price action helps traders formulate an overall trading plan.
Candlestick charts are essential for price action trading. The different candlestick patterns that form, such as pin bars, engulfing or outside bars, and doji candles, give key insights into order flow and the shifting momentum between buyers and sellers. Recognizing high-probability candlestick signals is a core price action skill.
Support and Resistance Levels Act as Magnets
An important concept is that support and resistance levels act as magnets or gravity areas that pull or repel the price. As the price nears key support or resistance zones, buyers and sellers tend to enter into the market, driving the price toward these levels. Trading off this “magnetic” effect of support and resistance is a hallmark of price action.
Now that we’ve covered the key foundational concepts, let’s move on to…
Powerful Pure Price Action Strategies and Setups
While price action analysis can get quite complex, even just using simple strategies can lead to success. Here are some of the most effective yet straightforward pure price action forex trading strategies:
Pin Bar Reversal
One of the most popular pure price action setups is trading the pin bar reversal at key support and resistance levels. The pin bar, also known as the “hammer candle”, has a large tail and small body, representing a sharp rejection of a price level. Trading pin bars off support and resistance provide high-probability setups in the direction of the trend.
Inside Bar Breakout
Inside bars form when the high and low of the current candle fits “inside” the range of the previous candle, representing consolidation. Traders can buy and sell the breakout when the market moves outside the range of the inside bar, especially at previous support and resistance levels.
A two bar reversal pattern is a powerful price action setup. It consists of a wide-range candle, followed by a candle gapping in the opposite direction and exceeding the range of the previous candle. This signals an abrupt shift in momentum and provides a low-risk entry aligned with the new emerging trend.
In range-bound markets, a false breakout occurs when the price breaks above or below key support/resistance, but quickly rejects and moves back inside the range. False breakouts represent failed moves and provide great short opportunities at resistance and longs at support back into the range.
MA Squeeze Exits
The MA squeeze signals the end of a trending move. As a long-term and short term moving average begin to converge, it indicates the market is losing momentum. Traders can watch for an MA squeeze and use it as an exit signal before the trend ends and a potential reversal begins.
The beauty of price action is that even these simple, classic setups above can provide all that is needed to consistently profit from the markets. Next, let’s cover some…
Effective Price Action Trading Strategies
The strategies below require a deeper understanding of price action analysis, but provide extremely effective approaches to trading the forex markets:
Trend Line Breaks
Drawing trend lines connecting swing highs and swing lows helps isolate uptrends and downtrends. Traders can buy breakouts of downward sloping trendlines in uptrends and short the breakdown of upward sloping trendlines in downtrends. This captures big moves as trends accelerate.
Wyckoff Spring and Upthrust
Wyckoff theory teaches that markets move in waves of accumulation, markup, distribution and markdown phases. Using Wyckoff principles, traders can identify “springs” and “upthrusts” to capitalize on high-probability reversals at key support and resistance zones.
Close Below Bullish Pin Bar
A close of the current candle below the low of a preceding bullish pin bar at support signals potential rejection and reversal off that support level. This breakdown of the pin bar and support provides shorting opportunities aligned with the new emerging downtrend.
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In strong trends, the market often fakes-out and breaks previous support/resistance intraday before reversing back in the direction of the trend. Waiting for the daily close and fading these intraday breakout fakeouts offers low-risk entries in line with the overall trend.
Order Block Breaks
Order blocks represent volumes of orders or “blocks” executed at a specific price level. As the price returns to “break” a previous order block, this signals volume is likely to emerge again at that price. Traders can anticipate entries with order block breaks in the direction of the prevailing trend.
Analyzing volume surges, spikes, and climaxes provides additional confirmation for price action trading signals. Increasing volume on breakouts and decreasing volume into support/resistance improves the odds of a sustained move. Using volume analysis ensures traders focus on high conviction moves.
The strategies above integrate the core concepts of price action with key market dynamics like trends, ranges, volume, and order flow. Now let’s move on to…
Incorporating Other Forms of Market Analysis
While traders can become profitable using pure price action alone, combining other forms of market analysis often enhances performance. Common methods to incorporate include:
Volume profile visually represents volumes traded at different price levels. Seeing where high or low volume nodes exist improves accuracy of support and resistance. Volume profile combined with price action provides extremely high probability setups.
Analyzing the structure of swings, pivots, higher highs/lows, lower highs/lows, reveals the bias of the market. Trading in the direction of the prevailing market structure puts the odds in the trader’s favor.
Smart money likes to hunt liquidity. Zones where large orders were filled represent concentrations of liquidity. Monitoring this on a footprint chart can signal when the big players are entering or exiting positions.
Observing the sequences of orders placed in the market provides clues on the intent of large traders. Abnormally large buy or sell orders suggest shifting sentiment. Analyzing order flow confirms high probability price action setups.
Price divergence occurs when the price makes higher highs/lows, while an oscillator like RSI makes lower highs/lows. Divergence signals waning momentum and can precede trend reversals. Combining divergence with price action offers extremely powerful trade signals.
The tips above demonstrate how blending other advanced forms of analysis with pure price action can take traders to an elite level. Now that we’ve covered various strategies, let’s discuss…
Proper Risk Management When Price Action Trading
Having solid risk management is critical no matter what strategy is used. Here are guidelines to properly manage risk when price action trading:
- Use a minimum 1:2 risk-reward ratio for all trades
- Risk only 1-2% of account per trade
- Implement stop losses based on structure – place them below key swing lows in uptrends, above key swing highs in downtrends
- Move stop losses to breakeven once trade reaches 1R in profit
- Close partial profits at key resistance levels in uptrends or support in downtrends
- Trail stops or use a trailing stop EA to lock in profits as the trend extends
- If a stop loss is hit, close all positions and sit out until next setup
- Avoid overtrading – focus only on highest probability price action signals
With effective risk management, traders can survive their losing trades and let their winners capture significant gains.
Next, we’ll explore…
Price Action Trading FAQs
Let’s examine some frequently asked questions about trading forex using pure price action:
What timeframes work best for price action trading?
Price action strategies can work on any timeframe – 1 minute, 5 minute, 1 hour, 4 hour and daily. Generally, beginners should start on the 4 hour or daily chart. More experienced traders often use the 1 hour or 15 minute timeframes.
What currency pairs are optimal for price action?
Major pairs like EUR/USD, GBP/USD and USD/JPY work well, as they have stable trends and clean price action. Minor pairs are choppier but also tradable. Exotic pairs with low liquidity tend to have more erratic price action and are harder to trade.
Is price action trading profitable for forex?
Absolutely. Many successful professional traders use pure price action as the basis for their trading. Even just simple price action strategies can lead to consistency. The caveat is that it requires extensive screen time to deeply understand price action principles.
What trading sessions are best for price action?
The London/New York overlaps and the first few hours of the US session tend to have the best price action. Volatility dies down in the Asian session. Traders should focus their efforts on the most active sessions for any market they are trading.
Should price action traders use technical indicators?
It depends. Indicators like moving averages can help visualize dynamic support/resistance and trends. Momentum oscillators like RSI allow you to trade divergences. Volume indicators confirm price signals. But too many indicators can overcomplicate analysis.
How can I learn price action trading fast?
Immerse yourself watching price charts on a daily basis. Study classics books like Naked Forex and Trading Price Action. Learn from mentors. Refine your skills over hundreds of trades, reviewing both winners and losses. Expect the learning process to take years, not months.
Conclusion – Simple Yet Profitable Path to Forex Trading Success
Trading forex successfully using pure price action may seem daunting initially, but can provide extremely effective, relatively straightforward strategies for traders. Even beginners can quickly grasp the principles of price action analysis to make informed trading decisions.
The key is focusing only on the raw price chart to make assessments of trends, ranges, candlestick patterns, order flow, and key support/resistance levels. By mastering these core price action concepts, traders can profit in the forex markets while avoiding the complexities of indicators and algorithms.
While price action can provide all the inputs needed, integrating principles of volume, market structure and liquidity analysis takes analysis to an elite level. Wrapping these techniques into a rule-based trading plan, with proper risk management, offers traders a profitable yet simple path to forex trading success.
Following the insights in this comprehensive price action trading guide can provide aspiring forex traders with an essentialeducation. Learning to implement and refine the strategies outlined here will enable traders to make consistent returns. The information in this guide aims to accelerate the learning curve for developing expertise in price action analysis.
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