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The “Price Action” method of trading refers to the practice of buying and selling securities based on the fluctuations, or “action,” of their prices; typically the data of these price changes is represented in easily-readable candlestick or bar charts, which are the bread and butter of the price action trader.
Traditionally, price action traders rely on a “naked” chart; they reject the inclusion of indicators with the conviction that, since all supplemental indicators are necessarily lagging interpretations of the basic data available on the price chart, the action of price is itself the most reliable and accurate indicator. The patterns of price movements reveal in real time the balance between the supply for sale and the buying demand of any given security or currency pair. Any price change implies a shift in the relationship between buyers and sellers; an increase in supply will push price down, whereas an increase in buying demand will send price higher.
The price action trader bases their trades on predictions of whether buying demand is greater than the supply of sellers, and therefore price is poised to head higher (or vice versa). In the Forex market, this means that a trader will endeavor to buy (or “go long on”) a currency pair when the base currency, the one quoted first, is likely to appreciate against the counter currency, the one listed second; conversely, they will sell (or “go short on”) a currency pair wherein they expect the counter currency to appreciate relative to the base currency. In order to make these predictions, price action traders interpret the confluence of many factors, particularly trends, candlestick patterns, and price levels known as “support and resistance.”
This guide is intended to provide an introduction to these interpretive factors, to the risk management practices essential to profitable trading, and lastly, some examples of real trades that demonstrate these ideas in action.
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