Traders who trade based on price action alone are intimately familiar with the Dow Theory concept. In short, the Dow Theory defines a trend as any price cycle that results in higher highs and higher lows. Prices never move in a straight line up or down. Rather, they move in waves. When those waves take prices to a new high, and the subsequent pullback fails to create a lower low than the previous pullback, it is said that the price is in a trend. Purchase a position in the charted currency during the decline from the new high. If the trend remains intact, the price action will push to a new high, generating a profit.
Price action in relation to forex and binary options trading is the pattern of movement of the price of a security over time. In essence, Price action is the closest relative to order flow in FX and across all markets. It is the direct result of order flow hence it has the fingerprints of bias, speed of buying/selling, where buying and selling is occurring (support/resistance) when a breakout is genuine and where a likely reversal is occurring
The art and skill of “price action analysis” involves using the trail of raw price data on a price chart (with no indicators) to make predictions about the future direction of the particular forex currency pair or security you are analyzing. Price action trading is a simplistic approach to trading the financial markets that is free from the clutter and confusion of overly complicated indicator based systems. When you learn how to read this price trail you will have the power to see clearly and understand what is happening in any forex currency pair or stock at any given time.
In fundamental analysis(?), price action analysis is the visual depiction of the supply and demand situation of the given forex currency pair or other trading instrument for the specific period of time you are analyzing. It is much easier and also more efficient to learn how to analyze the supply and demand situation of a specific security by learning to read its price action trail on a simple price chart rather than trying to interpret and make use of the hundreds or thousands of other economic variables that one could analyze.
When people talk about price action they talk about the analysis of pure characteristics of a price chart. For example analysis of candlestick (?) lengths and shadow to body ratios (meaning candlestick pattern recognition) and price pattern recognition form the basis of what people would unequivocally call “price action” (PA). We could then interpret PA as the analysis of price considering all the elements that form each candle and indicator based trading as the reduction of this representation to some mathematically simplified form taking into account only a limited number of the pieces of information
Forex price action – An analogy
A simple analogy for a forex price action is based on comparing a person driving your car with the headlights off on a foggy night compared to driving down a country road on a bright sunny day (price action). Most traders put too much emphasis on the technical side of trading and not enough on the more important money management and psychological aspects of trading. Technically speaking, forex trading success only requires a simple strategy like price action analysis, from a mental standpoint forex trading success requires self-discipline and realistic goals.
All the various economic variables that occur each day ultimately pass through the filter of the human brain, market participants than exercise their beliefs about these economic variables by trading or not trading the market. These beliefs take the form of price action, and as forex traders we can learn to take advantage of this trail of beliefs by learning to analyze and trade off of simple price action in forex and binary options trading.