I think if I give you regular answers like swing high/low , support/resistance or similar dry expression. It will not help you in trading anyway. So,let us get into details and know what this “price action” trading is all about!
Before we get into price’s action first let us see what is price in first place. What changes price?
1.Any news which gets most of the market by surprise ie different from what market expected. in forex economic announcements,macro-economic news, politics
2.Change in bias in the mindset of people due to fading of memory or looking for fresh perspective at the new price. It is like bargain hunting. You thought potato (Pound) is overpriced at 30 so you did not buy but when price reaches 10 you start buying feeling it is cheap
3.Manipulation by big market participants in thin market (possible in forex in Asian/pre-Asian session, quite common thing in gold/silver market).I will share some trick on how to avoid the manipulation later.
4. Unwinding of big position in thin market/ market close.
1 and 2 are major factors. 3 and 4 are minor ones .
Analysis of such events and their effect on prices is called Fundamental analysis.
Let us take an example Potatao is trading at 2 $/kg in market.You got a news from a villager that due to lack of rain potato harvest has been spoiled.So, there will be lack of supply so prices will go up.This news will go around and people will start buying potato (expecting price will go up) like crazy.Suppose after 3 days prices reach 4 $/Kg. Then a big potato dealer will asses the situation.As per his calculation, there is shortfall of X tons of potato and price should have reached P Rs rather than 18 (from calculation assuming some X). He further knows that a neighbor state will export potato and it will hit market within Y days. So, price will fall after y days mostly. Now, the question is how will he estimate the value of X ,Y, and P. He will use the estimated data from the field,people and experts.———————Fundamental analysis
He will ask his father about his experience when such kind of situation occurred in past to reach value of Y and P. Finally use his own judgment——–Technical analysis
Relationship between fundamental and technical
The key is not what is fundamental/technical analysis is.Everyone knows it. Key is to understand the relationship between two.As we saw in the above potato example even if he knew price will go up when he heard the news of drought he is not sure how much it will go up.Apart from his analysis of present data he looked for past data to estimate the future. The bold part is the premise of technical analysis
There are 2 ways to look into past of price ie technical analysis.
1.Look into the past price/chart to predict the future– Art of charting/ Naked trading
2. Use derivatives of price like stochastics,EMA,bollinger band known as indicators to predict price.
As most people do, I began with 2 and used various methods and had some kind of success then I was introduced to price action trading which is a kind of chart reading. Initially I tended to use combination of 1 and 2. Then I realized I can almost know where the indicator is by just looking at price. There is no use to have an indicator box. So, I deleted all indicators.
To have a trade, you need to make some kind of prediction .
What Indicators are saying same as blank chart but sometimes indicators are late/lagging. So, I dropped them from my chart.
Till that time I was making some money and losing some. Hardly consistent. It took almost close to 8months to 1 yr to realize me that magic is not in method but the maths, probability and my mind.
Then there was a peace and consistency which I cherish and thankful to the person who made me realize that. I will go step by step explaining each part. I know some of you are bored to hell since I am not talking about Support/Res,trendline, breakout. candle and all . I will do but I just want to make sure I can show you the right direction for trading rather than looking for shortcuts that does not work like
Because, you can get all those stuff by googling ” price action trading” but most likely that will not take you anywhere !!!!
The key lies in having patience and learn the nuances of price movement in market having holistic view of both fundamental and technical trading. I will go into depth of all these topics in further edit of this posts.
Check out this cartoon on forex price trading
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