Generally, Traders consider the technical as well as fundamental analysis to determine the entry and exit points of a currency pair. However, this is not the same with price action as in this case trading is done only by analyzing the movement of the price which is displayed on a price chart. A price chart shows the market sentiments in the form of lines and bars. Traders can easily see if the price of a currency pair is acting bullish or bearish in a specific period. Along with analyzing the market trends, it is an excellent way to determine the resistance and support areas. The pattern of price change on a chart is known as ‘Price Action.’
As only the movement of price is analyzed in the PA, there are various strategies that the traders use to determine the way the market is moving and the way it will move in the near future. And on top of that, they get a high-probability strategy as the degree of accuracy is quite high.
While analyzing the price action, you may come across two types of charts:
- Clean charts
- Messy charts
A clean chart is a simple PA chart with no forex indicators. On the other hand, a messy chart has different forex tools such as Bollinger Bands, ADX, Stochastics, and MACD. Here are the two charts demonstrating a clean and a messy one:
Notice that the clean chart has the price action shown in the form of candlestick bars without any extra tools or indicators. The messy chart has a lot of indicators which creates a mess on the price action.
In a messy PA chart, the actual chart gets a little space as the other indicators cover up space. This diverts the attention of the traders from the chart towards the indicators which means your focus is not totally on the chart, but on the indicators also.
So, which chart is better to analyze the price action? If somebody asks me, my answer would be both.
Now, you must be thinking that I am a fool wasting my time in analyzing the chart by searching the support and resistance, and creating the trend lines on my own when the tools draw everything in a messy chart. No, I am not a fool…
Firstly, the data that the indicators are showing is all derived from the PA in the clean chart. Secondly, the traders activate all the tools to get maximum accuracy, which is not true. In fact, so many tools confuse the trader, especially the beginners, as it is possible that one tool is showing an indicator which is quite different from the result of another.
It is recommended that instead of using just one chart, you should do your analysis on a clean chart to determine the support, resistance levels, and trends and then match it with the messy chart. Develop a strategy that works best for you and use minimum indicators on a messy chart to avoid confusion. Experiment with the tools on a demo account and analyze which tools fit your strategy.
Identify a Market Trend
To trade using price action, it is very important to learn to identify the trend in the market. It is the first step to learn for making good profits in the future.
Following chart shows how to use the price action to determine the trend in the market. One can call it a bearish or downward trend when the bars are making lower highs and lower lows. On the other hand, when the markets are making higher highs and higher lows, a bullish or upward trend comes into play.
Difference between Trending and Consolidating Market
The movement of a price happens in three directions: Upward, downward and sideways. A trending market is the one that is moving in either upward or downward direction. On the other hand, a consolidating market moves sideways, which means it is not making any higher high and higher low or lower high and lower low. The support and resistance levels in a consolidation market are horizontal. The following chart shows the difference between the trending and consolidating market:
Notice that the graph of a consolidating price movement is going sideways.