The Holy Grail of Forex Trading

01/21/2014 9:00 am EST

Focus: FOREX

Price is the single most important piece of data on your chart, it allows you to get into the mind of the market to anticipate what’s going to happen next on the charts, writes Graham of The Forex Guy.

Trading can be one of the most frustrating things a trader will experience in their life. Despite what most people think, a person’s chances of success in the market does not come down to their IQ level, in fact studies have shown some of the biggest losers in the market are doctors, dentists, engineers, mathematicians etc.

The reason is simple, the markets require a different mindset from everyday life. Logic that we’ve learned from our upbringing has the opposite effect in the markets. For example; “the more advanced, or complicated something is, the better it will work.” Or, “the harder I work, the more results I will get.” These are common logic paradoxes that trap a lot of new traders and have them spiraling out of control from day one.

What you need to realize is the simple approach works better in the market. There are all these traders out there loading up their charts with indicators or “magic” chart analysis tools, and all that’s doing is bringing in unnecessary variables into the traders system. Quite often all these extra variables will conflict with one another. It’s time to stop the pain, remove these indicators, clean up your charts and start trading with the raw price action.

Make the Switch to Price Action
Once upon a time, fundamental analysis ruled the markets. Traders would only take trades based off economic data like interest rates, GDP data and job reports. Technical analysis was considered “voodoo” and any trader who took part in it was considered crazy.

Today, the tables have turned. Technical analysis dominates the industry, and it’s hard pressed to find traders who are die-hard fundamental analysts. Even if you do find one, you will likely find they also use technical analysis mixed in with their trading as well.

The reason for this is simple, technical analysis works. It is far superior, it allows you focus what the market is doing “NOW” in relation to its past rather than what you “THINK” the market should be doing based on economic data.

Many systems are created from technical analysis, which opens up the opportunity for traders to turn the market into an endless stream of opportunities. This leads to frustrated traders who keep jumping from system to system looking for that miracle indicator or trading robot. All they do is continuously bleed out their money to these exotic systems when the real answer has been staring them in the face all along—price action.

What is Price Action?
Price action is the “language” of the market, learning this language is the best approach to understanding market movements. Price action is one of the best trading methodologies out there, and is often regarded as the “king” of all trading systems.

NEXT PAGE: Benefits of Trading with Price Action Strategies

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Price is the single most important piece of data on your chart, it allows you to get into the “mind” of the market to anticipate what’s going to happen next on the charts. You see, the market is full of people who are built just like you and me. Some are millionaires, some are just ordinary people. But we are all doing the same things over and over to generate income from the markets. What this does is create re-occurring patterns in the market which present themselves time and time again.

As a price action trader you can capitalize on these trading opportunities by looking for the individual candles that signal these moves before they happen. It’s easy to do this without the need to use external variables like indicators or economic data.

So price action is the art or skill of reading plain price charts to identify patterns, which have continuously worked in the past that you can use to anticipate future price movements. Price action trading is the edge in the markets.

Benefits of Trading with Price Action Strategies
For a start, you don’t ever have to worry about complicated indicators again. Indicators make a chart looks too busy and in some cases make the chart look like the control panel for the next NASA space mission.

Indicators lag behind price anyway, providing you with second-hand information and usually won’t signal you into a move until it’s over. The whole idea is to keep your trading simple, logical and stress free. The best way to do this is trade with price action on a clean chart to provide you with better clarity in the markets.

Because price action is the simple approach to the market, it’s very easy to learn. The high school dropout could learn to trade with price action and have just as good of a chance as everyone else to do well.

Simple strategies are the most effective in the market and the simplicity of price action makes it one of the most powerful ways to approach the market.

The Pin Bar
The pin bar is the most common price action signal used by traders today. They are powerful reversal indicators, which also are diverse with the way they can be traded. Pin bar reversal signals can be used to enter in with a trend, signal a complete market reversal and even used to identify breakout traps.

The pin bar has a small body and a long upper, or lower wick producing from the body, making them very easy to spot on the charts. It demonstrates the market has moved to a certain area on the chart where the move has terminated and been rejected. This signals a shift in the balance of power between the bulls and bears.

chart
Click to Enlarge

When pin bars are approached correctly they can produce very high return trades. It’s best to trade pin bars with the core market pressure, or trend momentum. The pin bar reversal is one of my favorite price action trading strategies, and I know once you discover it’s potential, you will fall in love with it too.

Conclusion
If you’re looking for a trading system that is logical, effective and a stress free way to trade the market, look no further. I consider price action trading to be the ‘holy grail’ of trading strategies in today’s markets.

Nearly every trading system will benefit from a good foundation of price action knowledge, and to be honest, once you start trading with it, you will wonder how you ever managed without it.

By Graham of The Forex Guy

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