Price action trading has been picking up in terms of its popularity these recent years, but did you know this trading style is the most conventional way of trading?
This trading concept is based off of how price moves in the market, without the use of any indicators.
As this method does not make use of any indicators, it may feel a little difficult to comprehend. However, don't worry, the Urban Forex team is here to make it easy for you!
1. Criteria Needed From The Market
2. Activity In The Market
4. Flow And Territory
5. Putting The Steps Together
For price action trading, there are 3 main criteria we need:
Without activity, it's extremely difficult to read what the buyers and sellers are actually doing. Think about it, if price is just tightly ranging, you won't really know what price is trying to do, or what it's trying to tell you.
For instance, have a look at this. You wouldn't want to trade in an environment like this:
So we need to see some activity.
Momentum has a lot to do with activity actually. We generally want to use activity and momentum together to interpret what price is trying to tell us.
A very simple example of this would be, having a pullback with slow momentum to join the main push. Being able to read the momentum is absolutely key to timing good entries.
Here's an example of a strong momentum push with a slow momentum pullback that would be ideal for a trend trade:
If you know us, we are a big fan of understanding who's flow/territory a certain move belongs to.
By understanding the flow/territory, we are able to position ourselves on the right side of the market. This most definitely increases the probability of a trade performing in our favor.
Here's an example of a flow/territory for the buy side:
All forms of trading require activity. It doesn't matter if you are trading with an indicator or purely with price action. If there's no activity, there's no way we are able to read and profit from the market (unless you are scalping for a 0.5 pip/tick move)... But lets not get into that.
Generally, (depending on the timeframe you are trading) you want to have activity from the prior market session to show you that price is interested in moving in a certain way/direction.
Say you are trading the 60 minute timeframe, you would want to see some activity from the prior day:
At Urban Forex, we like to use the Rubber Band Man concept. It's basically an analogy we use to measure momentum. Understanding the momentum of the market is extremely important in price action trading.
Reading the momentum is key in the pullback phase. We have to make sure that the pullback we are trying to fade is slowly dying out.
Here's an example:
Besides the momentum on the pullback phase, we want to make sure the main push we are trying to resume still has steam to push further. This is extremely important, because otherwise we do not end up at the turning point of the market.
Here's where the momentum of the main trend is clearly slowing down, and the pullback that comes into it doesn't really perform:
The students at Urban Forex generally refer to this as territories. As you've guessed, this basically means knowing if the market is overall in a buyer's or seller's territory (flow).
Here's an example of a seller's territory:
Before going any further, let me ask you this, have you come across situations where prior support and resistance doesn't hold the market and you end up switching sides only to see a little later that the original flow resumes?
Trust me, I know how this feels...
Here's what you need to remember, this push, belongs to this guy. It's where the entire move started from:
So as long as we are still within this boundary, we only want to look out for potential buys, and never switch to the sell side.
Understanding whose territory we are in is absolutely crucial in price action trading!
Now, let's put these 3 criteria together and I'll show you a step-by-step process on how to apply them.
We need some activity, showing that the market is alive. This could be accompanied by a news release, (but it's not necessary all the time):
The next thing we need to do would be to identify whose territory we are in, and where the flow begin from.
Now, as long as we do not cross the Guy Who Started (circle), we only want to wait for a sell to setup.
Now for the final piece, we need to check the momentum of the push that was just made and compare that to the momentum of the pullback. We always want the pullback momentum to be much weaker.
As it's pulling back, it's okay that the conventional support/resistance doesn't hold, we want to see the momentum fading and look for sells as long as our guy who started is still not taken out.
And there it goes...
All the way to the moon!
There you have it. a complete guide to trade with only price action. Yes, it may sound complicated, but it's actually not. it's all about understanding what price is doing in the market and act accordingly.
Remember, flow/territory, momentum and activity. Yes, keep repeating them until you become a pro at price action trading :)
Lucas at Urban Forex
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