Intraday Trading Strategies -Forex Price Action

Understanding the dynamics of Forex price action is essential when trading Forex Intraday. There is a great variety of methods and tools available for traders seeking to interpret the daily price action. These tools include candlesticks, chart patterns, harmonic patters, the Elliott waves, etc.

 

What is Forex Price Action?

 

Price Action in Forex trading reflects the flow of executed orders within a specific time frame. You may evaluate Price Action via empirical methods but the most reliable way is the use of technical analysis. What distinguishes trading using Price Action compared to other intraday strategies is the use of naked charts with candlesticks and without any indicators or oscillators.

 

Price Action and Candlesticks

 

A candle is formed by a closing price, an opening price, and two wicks. The two wicks reflect high and low prices within the selected time frame (for example 1 minute chart). The body of its candle is determined by the distance between the closing and opening prices and therefore a candle may be bullish or bearish. Price action should be interpreted according to the current trading conditions of each Forex market. Let’s distinguish between the two main types of Forex Markets.

 

 

The Two Different Forex Markets

 

One of the key issues when trading online using a Price Action Strategy is to be able to identify and distinguish a Trending Forex Market from a Ranging Forex Market.

 

(1) Trending Markets

 

Trending Forex Markets are those markets that within a certain timeframe are following a particular trend (uptrend or downtrend). How can you identify a trend?

1.1 Down-Trending Markets A market is down-trending when the latest high is lower than the previous high and the latest low is lower than the previous low.

1.2 Up-Trending Markets A market is up-trending on exactly the opposite conditions. That means that the latest high is higher than the previous high and the latest low is higher than the previous low (check the following chart).

 

(2) Ranging Markets

 

A ranging market is a market that trades within a specific range. That means that the price action is limited to a certain price area. At the upper limit of this price area, there is a strong supply that whenever it is reached can push prices downwards. At the lower limit of this area, there is a strong demand that whenever it is reached can push the prices upwards. Ranging markets are a common phenomenon when trading Forex Intraday and may provide easy set-ups for our Profit-Taking and Stop-Loss orders. 

 

Support & Resistance Levels

 

The evaluation of Support & Resistance price levels is incredibly important no matter the financial market/asset you are trading. Support & Resistance price levels apply to any market no matter if it is Ranging or Trending.

(i) The reach of Strong Support & Resistance Levels on Trending Markets is the usual cause for trend termination/reversal.

(ii) Support & Resistance Levels in Ranging Markets most commonly define the range itself.

■ To evaluate the strength and the importance of each Support & Resistance Level, professional traders are using historical charts.

■ Important Support & Resistance Levels also commonly define the take-profit and stop-loss orders of Swing / Long Forex Traders.

■ Finally, the evaluation of Support & Resistance Levels is linked to the optimal timing to enter or exit a market. If the price action overpasses a strong support/resistance level in a Trending Market then it is a clear alert for a strong ongoing trend. In Ranging Markets that may signal the end of trading within the range.

 

Trending Lines

 

Identifying the correct Trending Lines is more difficult than identifying support and resistance levels. The reason is that trend lines are completely dynamic lines changing over time. Important Trend Lines can lead to trend reversals or on the contrary, can signal strong ongoing trends that you should follow.

 

Counting Candles Within Charts

 

Counting candles are commonly used for pattern recognition. The number of bullish and bearish candles within a certain period may indicate the likelihood that a certain trade may prove successful. The number of candles also reflects time. The counting candles method is usually used along with other price action methods.

 

 

Pattern Recognition

 

Price Action has the characteristic of repeating itself. The process of identifying repeating patterns is called Pattern Recognition. There are many patterns, here are the most important ones:

 

(1) CONTINUATION PATTERN RECOGNITION

1.1 Cup & Handle Patterns

1.2 Triangle Chart Patterns

1.3 Flag & Pennant Patterns

 

(2) REVERSAL PATTERN RECOGNITION

2.1 Head & Shoulders Patterns

2.2 Double and Triple Tops & Bottoms Patterns

2.3 Rounding Top & Bottom Patterns

 

On one of my other trading websites (TradingCenter.org), I have published a complete Pattern Recognition Tutorial. 

 

■ Intraday Trading Strategies -Price Action Strategy

G.P. for Forex-Investors.com (c)