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How to Be a Better Price Action Trader
06/27/2013 9:00 am EST
Forex price-action trading is based on the tenet that the charts reflect the underlying beliefs of all market participants, trading a specified market, at a given time, but Johnathon Fox of DailyForex.com cautions that traders should look at the overall story.
Quite often when we see traders referring to “price action” we see them talking about one facet of a chart or one singular part of a price. For example; traders will quite often point out and focus in on the support and resistance zone or an entry candlestick signal such as the pin bar reversal.
The best price-action traders will look at the overall price-action story. Whilst the best traders will have a firm grasp and be able to use all the same points of confluence such as support, resistance, and candlesticks signals, they will use these not just by themselves, but rather as one piece of the puzzle.
The Price Action Story
Support and resistance levels make up a very large part of the price-action story. These levels determine where price has been in the past and more importantly where it will be able to go in the future. Price-action traders reading their charts can plot and learn a lot from marking previous levels.
Another key element of the price-action story is the current market structure i.e. are there any current trends or are we currently in a range or boxing situation. This may be the most important factor of them all. The biggest edge a trader can have on their side and also the one they most often don’t is the trend!
The biggest mistake with the trend is traders think that every market must be always in a trend, and the truth is that more often than not, most pairs are NOT in trends. More often than not, price spends time on consolidations and in ranges and in what we call boxing situations. This is where price makes a large move and then moves sideways in a box. This is important to know because if you enter when price is in a box, you need to be prepared to sit and wait for price to move sideways.
Price Action Entry Candle
There are many price-action entry candles a price-action trader can use to enter the market. One entry signal example price-action traders can use is the engulfing bar. If a trader was to enter the engulfing bar in the forex market randomly, they are going to be a losing trader. If however, that same trader enters the engulfing bar and matches it up with the price-action story, then their chances of success are far higher. It is all about the price-action story and not the entry signal.
A lot of price-action educators and mentors get wrapped up about the last candle and teaching only the last entry candle. The major problem with this is the entry candle is only the last candle on the whole chart that is made up of many candles. The price-action trader needs to be able to read the whole price-action story, which means evaluating and assessing the information and the whole chart.
When you are assessing your next price-action chart, remember this article and remember about looking at the whole price action story. Get rid of all your indicators and learn to read the raw price and exactly what story price is trying to tell you and where it is telling you it is heading.
By Johnathon Fox, Contributor, DailyForex.com
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