24 May, AtoZForex – One of the great benefits and uses of price action is its ability to help traders read market sentiment. It plays a significant role in identifying major support and resistance levels in the market. Consequently, it prevents traders from buying at resistance and selling at support levels. Price action aids us in staying on the path of least resistance by simply trading with the trend.
Summing up these benefits, traders know the value of price action. Yet, many of them still struggle to use price action effectively. Hence, it is no wonder that traders are asking: "How to correctly use and interpret price action?"
"How to correctly use and interpret price action?"
To better understand how to use price action is to firstly explain how not to use price action. There is a misconception that price action trading focuses solely on analyzing candlestick formations like Pin Bars, Long and short legged Doji’s, Hammers, Shooting stars and a plethora of other patterns. Another fallacy is that when we trade price action we should avoid using any indicators on our charts.
Now that you understand the misconceptions of Price Action, the video training below on the 5 Price Action Trading Tips will provide you the insights on how to utilise price action correctly.
5 price action trading tips
1. Use Moving averages correctly
It is wise to avoid trading a specific asset class or currency pair while its price is too far away from the Moving Averages. During a strong trending market, we should wait for the price to retrace and retest the 20 Period Moving average before considering a new position. In case the market is trending hesitantly we could alternatively use the 100 Period Moving Average to realize the same goal. When we wait for the price to retrace closer to these Moving Averages it ensures that we get into the market at a more desirable price. And thus, we avoid buying high and selling low.
2. Avoid a market that has been range-bound for more than two consecutive months
When the market seems in doubt, …. Stay out! It's that simple.
3. Hunt the intraday corridors
We can trade ranges profitably by waiting for the inevitable breakout. When a price is confined within a tight, narrow range and forms. For example, a flag or triangle pattern, the price will eventually break out to the long or to the short side. Once we have identified a range we can strategically place our pending orders on either side of the market and simply wait for the break. When we are mindful of the overall trend direction and we are attentive to where price is trading in relation to the 20MA and 100MA on the hourly time frame, our probabilities for a successful trade is vastly increased.
4. Long candles may act as future support and resistance levels
When we spot an unusually big bearish or bullish candle, not unlike those candles that are formed when large market players like Hedge Funds or Banks enters into the arena. we need to ensure that these candles are clearly bigger than the average size of the candles on the chart we are studying. We can use these candles as clues where to draw our future support and resistance levels. The identified support and resistance levels can be used as optimal points from which to re-enter the market or more suitable zones to place a stop loss orders.
5. Trade with the trend
Everyone is saying it. “The trend is your friend.” But Why? The logic is that when we trade with a trend we are aiming to take more from the market. The market will offer a trader more Points or Pips while he/she is following the trend. On average when a market is trending for 100 pips the retracement or correction at its best is only expected to be worth 50 pips. Additionally, if we take into consideration that the market generally has 3 rallies and 3 corrections per movement we can make considerably more profits by just simply following the trend.
“I am in, but when do I get out?” When the markets are trending we could use Fibonacci waves to help us define an exit strategy to help us ride the trend for as long as possible.
For additional information, you can watch the complete 5 Price Action Trading Tips training in the video above. Just don’t forget to like the video and sign up for AtoZ Forex’s YouTube channel.