What is Price Action Analysis?
My definition of Price Action Analysis: Price action analysis is the analysis of the price movement of a market over time. By learning to read the price action
of a market, we can determine a market’s directional bias as well as
trade from reoccurring price action patterns or price action setups that
reflect changes or continuations in market sentiment.
In simpler terms: Price action analysis is the use
of the natural or “raw” price movement of a market to analyze and trade
it. This means, you are making all of your trading decisions based
purely on the price bars on a “naked” or indicator-free price chart.
All economic variables create price movement which can be easily seen
on a market’s price chart. Whether an economic variable is filtered
down through a human trader or a computer trader, the movement that it
creates in the market will be easily visible on a price chart.
Therefore, instead of trying to analyze a million economic variables
each day (this is impossible obviously), you can simply learn to trade
from price action analysis
because this style of trading allows you to easily analyze and make use
of all market variables by simply reading and trading off of the price
action created by said market variables.
• How do you apply price action analysis to the Forex market?
First, I want to say that price action analysis can be used to trade
any financial market, since it simply makes use of the “core” price data
of the market. However, my personal favorite market to trade is the
Forex market, mainly due to its deep liquidity which makes it easy to
enter and exit the market, and also because the Forex market tends to
have better trending conditions as well as more volatility which makes
for better directional trading and allows price action trading to really shine.
My own personal approach to trading and teaching price action trading is that you can trade effectively from a few time-tested price action setups.
There really is no need to try and trade from 25 different price
patterns, the Forex market moves in a relatively predictable fashion
most of the time, so all we need is a handful of effective price action
entry setups to give us a good chance at finding and entering
The first thing you need to do to apply price action to the Forex
market, is to strip your charts of all indicators and get a “clean”
price chart with only the price bars in a color you like. I choose
simple black and white or blue and red for my colors, but you can pick
whichever colors you like (Part 7 will cover an introduction to
charting). Here’s an example of my daily chart setup on the EURUSD:
Now, let’s look at an example of a clean and simple price
chart next to a price chart covered with some of the most popular
indicators that many traders use. I want you to look at these two charts
and think about which one seems easier and more logical to trade off
From looking at the two charts above, you will probably agree that it
seems a little silly to hide the natural price action of a market with
messy and confusing indicators. All indicators are derived from price
movement anyways, so if we have a solid method to trade based only on
price movement (price action analysis), it only makes sense that we
would use that instead of trying to analyze messy secondary data.