Price Action Is Not a System

07/30/2014 9:00 am EST

Focus: FOREX

According to the staff at FXTM, rather than just looking at patterns that form over the short-term, price action traders place these patterns in the context of longer-term market conditions and sentiment, which, in turn, gives price action trading its edge.

Many forex traders like well-defined guidelines when they trade. This is a key characteristic of many trading systems, which provide a rigidly defined set of rules and leave traders with very little room for applying their own insights and instincts to the market.

While it is an attractive idea to have a trading system that lets you push a button and walk away—in the most extreme case—the truth is that this is not the most effective way to trade. If there was one system that always worked, everyone would use it and then nobody would make any profits since the forex market is a zero-sum game.

Price action is a different approach to trading the forex market. It isn’t a system—in that—it doesn’t have narrowly defined rules that you need to follow without thinking. Instead of looking at complicated indicators, price action traders look at what the raw market data is telling them and then trade accordingly.

They are still looking for high-probability trading opportunities, but there are many different setups that can lead to these. Even more important, they are not looking just at patterns that form over short periods of time, they are placing these in the context of longer-term market conditions and sentiment. Because of this, it is important for price action traders to take a step back, look at long-term charts and decide what the market is telling them. Placing short-term setups in this long-term context is one of the things that gives price action trading its edge.

Of course, no approach to trading is perfect, and when novices hit losing streaks with price action trading, they often wonder if they should abandon the system and look for another one. However, this is a mistake. The conditions in the market change over time and successful traders adapt to them. This is what price action trading is all about; it allows traders to respond to changes in the market and modify their behaviors accordingly. While all this freedom can seem overwhelming initially—and even lead to mistakes—as traders become more experienced, they know how to exercise this freedom responsibly and make logical, unemotional decisions.

Finally, remember that trading using price action is the most natural way to trade. This is not to say that you will win on every trade. In fact, it’s entirely possible that you will lose on half of your trades. However, if you know how to manage risk effectively and time your market entry, you will end up making larger profits on individual winning trades, along with a series of small losses. This is the way to make serious money and that is what forex trading is all about.

By the Staff at FXTM