Trading CFDs carries considerable risk of capital loss. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you can afford to take the high risk of losing your money.
Are you looking to make some money on the Forex markets? Then you need to take an active step towards learning how to trade. When you are just starting out on this platform, you will find that you face a whole range of challenges, many of which you may not understand. To begin with, you could have a wide number of variables to contend with all at the same time, so that you are able to make a trading decision.
As a new trader, there are typically more than 10 setups you need to trade with, each with a range of indicators on their charts. You will need to observe every time frame available in the different markets they are trading in. Just thinking about it is sure to overwhelm you, and when you are in this state of mind, trading can be ineffective. You may start with the best intentions, but with a focus that is too broad to manage, you may succumb to confusion, frustration and even possible failure. It is at this point that price action trading comes in.
Price Action Trading is typically the art of basing all your trading choices on the movement of prices on the price chart. You do not need any indicators to help you identify your go-ahead in the form of support and resistance areas and trends in order to trade this way. The reason for this is because your resistance and support areas will already be on the chart. This discipline to making trading decisions is based on the fact that over a certain period of time, financial markets generate data about the changes in the price of a market. This comprehensive data is then displayed on price charts. In the end, price charts are used to display the actions and beliefs of trading participants, which are eventually represented on a market price chart in the form of a price action. Every price chart has something different to tell about the struggles that the buyers and the sellers have gone through in the past, and the current traders make decisions based on these results to determine the price.
On the basis of the definition, there are some clear advantages to using this method to trade, the main one being convenience. Here are additional advantages you get to enjoy:
It's a simple way to trade
The stand out advantage is that price action is also very simple. The benefit of this is that trading becomes very clear as there are no indicators creating clutter. You do not need to include so many technical indicators to make a buying or a selling decision. If you were to consider all the available indicators, then you will be so stressed in the end as you shall suffer from an 'information overload'. A lot of people end up trading emotionally because they have wasted so much time thinking of other possibilities and get to a point where they just make any decision to move along. With price action, all you focus on are the candlestick charts and you will be able to see what is happening in the market.
Easy to understand signals
Price action signals are also very easy to understand. You do not need to be a professional trader with a lot of experience to understand the signals to make a good trading decision in the end. With price action, you are able to identify the trends in the market, which make it possible for you to trade with the market, rather than against it.
A candlestick is a financial chart style that describes the movement of price for securities, derivatives or currencies. One candlestick shows financial information of a particular day. Therefore in an entire monthly chart, you will have several candlesticks carrying information about all the trading days in that month.
Basically, candlesticks pack data for several timeframes into just one single price bar for easier retrieval. There are several candlestick patterns traders should learn about, some of which are:
This pattern looks like a cross and it represents the same opening and closing prices. In this candlestick, the price remains the same and this symbolizes a market indecision
This is an individual candlestick pattern known for its long wick and small bodies. The wicks in this type of pattern should be longer than the body. When they appear, they offer unique clues to the unfolding price action.
This patterns looks as if the second candle is engulfing the body of the first one. This represents a strong reversal signal in the market.
This one has two strong bars that close in opposite directions. The bull variant is made up of a very strong beggar that is followed by a bull bar. The bear variant is just the opposite.
This one means that it must remain within the range of the bar that is immediately before it. This means that the second bar will have a lower high and a higher low.
Support and resistance levels are the horizontal price levels that naturally connect price bar highs with other price bar highs, or price bar lows to other lows. These eventually form horizontal levels on a price chart. This level is created when the price turns around and changes its direction. Support and resistance levels are very important to a price action trader because once a resistance or support level is attained; this is the best time to make an entry. The levels are the major turning points in the market; therefore, the risk reward ratio is always high at this point.
It is important to note that trade signals which occur when the price is reacting to important support and resistance levels are likely to be a success compared to those signals which occur anywhere else during the trading period.
In order to find an entry signal, you need to go through the charts in detail. Determine the best Forex pairs to trade, and then make a point of scanning through the charts the same time every trading day. The main things to lookout for when you are scanning the charts are the trends, the levels and the price action.
Making a successful trade is not always easy because a lot of things have to be considered for one to make the right decision. Trying to be a genius and have all this information at hand will harm you much more than it will help. The mistake many people make is to trade emotionally and others find it hard to be flexible in their decisions. If you want to make a good living trading in the Forex markets, you have to be wise and one sure way to achieve this is through price action trading.