17 March, 2020, | AtoZ Markets – The forex market is the world’s biggest financial market, and most of the market movers in the forex market are central banks, big financial institutes, insurance companies, etc. Therefore, it is a duty of retail traders to follow their footsteps to make a profit from here.
The price action in the forex market is the signs of big players’ movement in the forex market. A trader can anticipate the future price direction based on the previous price action. It is a method of predicting the price of a currency pair based on the movement of price.
Price Action in Forex Trading
Price action is a powerful tool for technical analysis that is used by most of the professional traders. The main difference in price action trading with other trading methods is that it ignores the amounts of indicators from the charts.
As we know, indicators are very laggy, which indicates the price when the movement has already happens. Therefore, traders use price actions to predict the market with the highest accuracy. However, there are no fixed rules of price action trading that a trader can follow.
Moreover, there are many price action trading strategies available on the planet to choose a reliable one by a trader.
In this picture, we can see a simple chart with a mark of support and resistance levels only. A price action trader usually predicts the market using the movement of the price only. In that case, traders consider the speed of movement, the characteristics of trend, support & resistance levels, market structure, and market context.
However, there are several points that most Forex traders ignore. Many price action traders rely on the candlestick patterns and support and resistance levels only when the process is not simple like this.
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Dynamic Levels vs Static Levels
Most of the support and resistance levels are horizontal. However, there are some evolving support and resistance levels, which means they are ‘dynamic‘.
Static levels mean the horizontal support and resistance levels or zones from where price may bounce back. The reason behind this is that a lot of institutional traders care about those levels. The market movement on those is creating panic or joy to them that they set to their memory. Therefore, when the price reaches that level again, they find it important.
On the other hand, dynamic levels in forex trading, or areas can pull back the price and find support or resistance towards a horizontal zone.
The dynamic levels are important because:
- The market is ever-changing. Therefore, the interest in buying and selling changes with time and market sentiment.
- Market momentum is dynamic, with the order flow.
There are some other reasons behind this. However, the key point is that you have got the underlying idea. Therefore, you can integrate this knowledge into your trading.
In summary, we can consider dynamic levels like these:
- Static support or resistance levels are horizontal levels. It is fixed zones or levels that do not move.
- Dynamic support or resistance levels are not like horizontal levels or zone. Therefore, it can move with the price.
In the next section, we will see how we can find dynamic levels in the price action chart and how we can use it in price action trading.
How to Find Dynamic Levels in the Forex Market?
There are many methods to find dynamic levels in the forex market. However, we will discuss methods that are used by institutional traders.
Some traders use Ichimoku clouds to identify the dynamic level, and some traders use 20 EMA. However, using 20 EMA as a dynamic level is much easier and effective compared to other methods.
If you are new in the forex market and you know the basics of market context, you can make a decent profit by using dynamic levels in your trading.
Under the market context, traders should have extensive knowledge about the below-mentioned points:
- Impulse: A strong move towards the direction of the trend that indicates that the current direction of the price will continue.
- Correction: A slow move towards the direction of the trend that indicates that the opposite party may enter the market to reverse the current direction.
- Volatility: Both buyers and sellers try to drag the price towards their direction. Therefore, big bullish and bearish candles form without any specific direction.
- None- Volatility: In non-volatile conditions, prices are usually dominated by a single party. Therefore it is easy to predict that the price may continue towards a specific direction.
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Dynamic Levels of 20 EMA
You may wonder to see an indicator to use as dynamic levels. We all know that indicators are laggy that provide results after the event. However, the reason for using 20 EMA as a dynamic level is that most of the institutional traders use it.
So the 20 EMA or exponential moving average tracks the latest closing price of a candle for the last 20 periods. As it is an exponential moving average, it gives more weight to the most recent closes compared to the series of 20 candles.
EMA’s or exponential moving averages are balanced as they work well to detect the more recent momentum and changes of the price action. At the same time, we should consider some of the longer-term movements in the price action to understand the overall context.
Below is a 1hr chart of EURUSD that shows how price bounced back when it came below the 20 EMA.
Notice how the price action rejected the 20 EMA several times. This could offer you great trade setups to get into the market with the trend.
So to take an entry, you can follow these steps:
- Understand the market context and determine the nature of the trend.
- Ignore market volatility and consolidation as it works well towards the trend only.
- Identify market direction based on market context using the daily time frame.
- Move on to the Hourly chart and wait for a correction towards the 20 EMA.
- Enter the trade as soon as the market rejected the 20 EMA towards the direction we measured in the daily candles.
- For stop-loss use the near term horizontal support and resistance levels and for taking profit use next levels as well. However, for trade management, you should move your stop loss at breakeven based on your trade management method.
After the above discussion, we can come to the conclusion that dynamic levels work with an effective price action tool in the forex market. However, the forex market is a leveraged market. Therefore, there is a risk that you can lose a lot of money without having a proper system. Therefore before implementing a system, you should do enough practice with demo or with small amounts to get familiar with the strategy. Overall, follow these rules to make a sustained growth from dynamic levels
- Understand the market context and do not take any trade in a consolidation period.
- Use appropriate risk: reward per trade (with minimum 1:2)
- Always manage your trade well as we trade on probabilities.
- There is no system that can guarantee you a 100% profit. Therefore, you should know when to use a system and when not.
- Never take more than 2% risk per trade.
Should you start using dynamic levels on your own at all?
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