Forex Strategy Trading with Price Action: Could it be?
In technical analysis, there are many methods for doing analysis. One of them uses the forex trading strategy method with price action .Maybe someday you accidentally see a forex trader doing the analysis without using any technical indicators. It only uses horizontal, diagonal or maybe even vertical lines. There really isn’t any technical indicator on the chart that he noticed.
What is your reaction when you see it? Amazed? Wonder? Or do you think it’s weird?
If you feel surprised or consider it strange, maybe it’s because you are familiar with the analysis model that uses many colorful technical indicators. But you need to know, that in fact there is an analysis method that does not utilize technical indicators at all which is commonly called naked trading .
The naked trading adherents only use price movement charts ( candlesticks or bar charts ) as a reference for their analysis, or what is commonly called price action . Well, this article tries to introduce naked trading using price action , as one method that is (actually) quite popular among forex traders.
We start from the definition of price action trading itself.
With simplified language (at least I try to simplify it), price action trading is a trading technique that allows you to “read” the potential of market movements and make decisions based on price movements only. So do not rely on technical indicators.
This “flow” develops because it assumes that (mostly) technical indicators are lagging , aka late. That’s because the output of the majority of technical indicators is the “product” of the calculation based on the price movements that have occurred. In other words, technical indicators provide information based on price movements “in the past”.
Now, there may be a question: why do information-based analysis “from the past”, while the most important factor in trading is what the market is doing right now and what are they likely to do in the near future?
The answer is that by using certain strategies , information on price movements “from the past” can be used to estimate the possible direction of future price movements in the near future. However, the price action method does not use technical indicators that are considered lagging .
This method only utilizes price movement charts , usually by studying candlestick patterns or patterns formed from a set of candlesticks or bar charts.
The above mentioned that candlestick pattern is one of the implementation of price action trading . Well, now I try to give an example of using candlestick pattern as a trading strategy .
We take the example of using the morning star pattern as a buy strategy.
Morning star is a candlestick pattern ( candlestick pattern ) formed by three candlestick charts.
You can recognize Morning Star with the following characteristics:
- The first candlestick is a bearish candlestick, which is part of a downtrend.
- The second candlestick is a candlestick that has a smaller body, it can be a bullish or bearish candlestick. This shows that there is starting to be “doubt” on the market.
- The third candlestick is a bullish candlestick that is longer than the second candlestick. The length does not need to be the same as the first candlestick, but the position of the close price must exceed half of the first candlestick body. This is the confirmation of the formation of a morning star pattern.
The pattern is more or less like the following:
Examples of strategies that can be applied are “aggressive” and “conservative” strategies. How do you apply it?
- Aggressive strategyYou can open a buy position immediately after the 3rd candlestick is finished ( closed ). Stop loss is placed below the low price of the 2nd candlestick .
Conservative strategyLong positions are opened only if the price movement has broken above the highest price formed by the pattern. Stop loss can be placed below the price of the 3rd or 2nd low candlestick.
This method is just one of the many analytical methods that you can learn and use. Of course there is no perfect analysis method or forex trading strategy . Likewise with the price action method. There is still room for error, or the possibility of the market not moving according to estimates. Therefore, keep using risk management and good capital management and make sure the method you choose is truly in accordance with your character as a trader.