The forex price action trader will use no indicators but just a study of the price in his trading charts to decide on the next line of action. In that sense, the forex price action trading has been described as the no-frills, plain vanilla type of trading, as there are no technical indicators such as bollinger bands, Relative strength index, moving average convergence divergence (macd) and other related indicators on his price charts that he uses to trade.
In price action analysis, the forex price action trader can use a single vertical price bar or a cluster of price bars in his analysis.
In the single price bar analysis, for a bearish condition, the price action trader will be looking for a close that has closed below the open or the midrange of that particular bar. Once that has been determined, the forex price action trader has a good understanding that the next vertical price bar will more than likely take out the low, or at least test the low of the bearish vertical price bar under analysis. This bearishness is reinforced if the bearish vertical price bar has a close that has closed in the lower quarter of the vertical price bar under analysis.
The forex price action trader can also use dual price bars in his analysis. In the dual price bar analysis, the reliability of the bearish formation can be further reinforced if the vertical price bar can make a lower high and a lower low while closing below the open, the midrange and is also able to close below the previous vertical bar’s close.
When this configuration occurs, we know that the bears have won the trading day and that the likelihood of the next day’s trading action to be down is increased. In other words, the chances of the next day going lower or at least test it, is very probable.
How can this knowledge benefit the forex day trader?
For example, if the market opens up the next day and give you a few pips, the forex day trader can sell the market, as long as everything remains normal. The trader can then expect the market to fall back down or at least fill the opening gap and then back to the previous vertical bar’s close and to test the low of the vertical price bar as well.
Vertical bar analysis has been used in trading systems with further refined techniques such that a complete price action trading methodology that returns consistent profits is the end result. Where the trader cannot afford the luxury of time to consider too many trading indicators during trading, it is price action analysis that is a powerful tool to help him earn consistent profits in forex trading.
Paper trade the bearish and the bullish price action configurations, and you will be able to gain the confidence to actually trade them in real time and to reap fast profits.