Hello and welcome to another edition of the bulls vs the bears. So we started our price action trading journey by discovering What Price Action Trading Is. Then we Learnt How to Ace Price Action Trading. And finally we were told in no uncertain terms Why Price Action Trading Still Rocks. After pouring my heart out about the virtues of price action, guess what? I hear someone asking”Why Should I Learn How To Read Price Action Charts At All?”
Well I have a simple response to your question: BECAUSE YOU HAVE TO! For the life of me I don’t understand why anybody would fall on a zillion indicators and a bunch of websites to uncover the trading edge for that person. You make the whole price action process look like looking for needle in a haystack when you fall back on those toys. Look, the trading edge is right in front you. You need to use price action analysis to fish out the trading edge. Now I may sound simplistic when I say Price action analysis is simple. It truly is. It’s just you and the raw data on your screen. Just uncover the trading edge and you will reap the benefits. Still not convinced? Hopefully the following reasons will unfurl your doubts.
Price Action is Squeaky Clean
Yes Price action is squeaky clean. It was not made to be cluttered with a bunch of indicators to make life complicated for you. Look, you have enough issues with a litany of confusing systems and approaches enough to make you pull your hair out.
All you have to do remove all that chaos and deal strictly with the raw data in front of you. The trick here is making the process is simple instead of making it look like rocket science. Let’s look at a few analysis scenarios to illustrate price action’s squeaky cleanliness. Starting with:
Now here is what the uptrend and downtrend look like. Now if you know the make of an uptrend it starts with a higher Low(HL) and expands to a higher high(HH) as price increases. You don’t need an indicator to tell you to put in your take profit when a bullish situation forms. A similar situation develops as the bears take over during the downward(bearish)trend. The bearish trend starts with a lower low(LL) due to a huge surplus of sellers and then picks up to lower high(LH) as more buyers lose interest because sellers are dominating the trend. Again you don’t need an indicator to tell you to put in your sell bid.
You see how clean the price action looks in these two scenarios? Indicators would have crowded out the price action to the point of taking over all the real estate on the screen. Even worse, they’d definitely drive your urge to pull your hair out right through the roof.Who will want to put himself through all that? Next piece of analysis is
Drawing Support and Resistance Levels
Now as you well know support and resistance levels are key points on the charts where price has previously reacted to an event. Support and resistance levels also act as points of confluence points with so many price signals happening at the same time. As you can see, price has broken through the support levels
This means the profits will start rolling. Whereas the resistance levels rejected price’s advances. Now how do we draw the support/resist levels? just look for the next support and resistance levels immediately below and above the current price. Next take a look at previous price action and see of the levels makes sense or not. Repeat the process for the next support and resistance levels. And if the process makes sense you make your trade entry.
Price signals are the currency of forex trading. they reflect the presence of a price action setup on the charts. As you can see the breakout of the bulls at the line of support is a classic example of a price signal. This tells you right away that a bullish pattern has been established so it’s time to put in a trade. However, not all price signals are positive. So the best thing to do is to wait for confirmation below the price of support before you put in your trade. Now that we’re done with the illustrations, let’s move on to the next reason for learning price action analysis which is:
Price Action Is The Lingua Franca of Forex Trading
Believe it or not, price action is the lingua franca of forex trading. By that I mean price action is the language common to all forex trading. And through price action trading you get a peek into the trading mindset of forex traders. These trading mindsets are then played out on the price charts through the various candlestick patterns. When one person thinks now is the best time to buy, another trader believes it’s a good time to sell.
So when more people believe it’s time to sell, the price goes up. If more traders believe it’s time to sell, the price goes down. T he phrase “One man’s meat is another man’s poison” becomes very prominent here. Basically data representing the mindset of the trades is staring at you in the face on the price chart. You do not need an indicator to interpret it for you. Let’s look at a classic illustration of price action on a pin bar set up at the level of resistances The shaded area represents the bearish pin bar. This came about a result of the bears(sellers) pushing the price lower at the expense of the bulls(buyers). The bulls initially go on the attack resulting in the long-tailed wick. But the bears eventually get the upper hand. And when you see such a scenario you don’t need an indicator to tell you that that’s a signal to sell. And speaking of price signals
Price Action Lets You Identify Obvious Trading Signals and Persistent Trading Patterns
The neat thing about price action is that it allows you to identify clear trading signals and persistent candlestick patterns. By persistent candlestick patterns I mean trading patterns that are so prevalent over a specific time frame. These factors are so clear that with a solid trading plan, you should be able to identify these two factors. Not to mention the fact that your trading edge will also help identify these two factors.
Let’s say you get an obvious pin bar signal at a key chart level within a clear trend. Lined up for on this level are the factors of confluence – trend, level, confluence(Popularly known as T.L.S.). Assuming you have a risk management policy in place, you should put your put your stop loss at the tip of the pin bar and surrounding key levels. Based on your stop loss placement you set your position size and take profit targets. Now let’s take look at T.L.S. in action
This is a classic example of T.L.S in action.(Trend Level Action) We see three buy signals along the line of support. You then place your stop loss partially at the tip of the bearish pin bar along the line of support. And based on the stop loss you set your set take profit. As you may have noticed support all of a sudden turns into resistance. This is where the bulls run out of steam and the bears take over, creating a downtrend and surge downhill. You then use the same strategy you applied at the support level -except this time you place your stop loss along the resistance level.
You see how straight forward price action analysis is? Once you get the hang of studying price action charts, you’ll find that price patterns and price signals keep repeating themselves. Once you are able to identify these signals and are able to use your intuition, these patterns will be calling you a lot often. It will feel like instant telepathy.- something indicators wont be able to give you. For more information on how to trade with indicators, look How to Trade Price Action Without The Indicators I and II.
That’s a wrap for “Why Should I Learn How To Read Price Action Charts At All?? ” You can study every indicator known to man and end up coming back to straight up price action trading. IT’s the only analysis that makes sense. The irritating part about these indicators they take up so much real estate they end up crowding out the price action.
That’s enough to make you pull your hair out. Price action analysis is fairly straightforward and stress free. Why? because traders trading mentality is reflected in the price movement on the charts. You certainly don’t indicators to do this analysis for you. Everything is right there in front of you on the charts. Til next take care.
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