The most humble and the most powerful tool of trading is the price of the assets you deal in, which in our case are currencies and their exchange. The fluctuation of this price is the source of income and the reason trading is done. Without this fluctuation, the forex market would not exist as such.
But quite often, the price of currency pairs is viewed as a technical detail in the larger picture of trends and instruments. Moving averages, support and resistance, price ceiling breaks, and dips are taken seriously while the price at a given moment is disregarded as less informative. Yet traders who practice this approach miss a great chunk of opportunities and profits that can be derived from trading based on isolated price indices.
What Is Price Action?
Those who can read price movement accurately make significant money on it, and this trading approach is called price action trading. Price action is the momentous price movement, whether up or down, and on charts, it is depicted by color-coded bars (usually). These bars are called candlesticks, and they show conveniently how the price fluctuates and where it may be heading.
Types Of Candlesticks
Since the price can go essentially in two directions only – it can rise or fall – two types of candles are differentiated. They are bullish and bearish candlesticks, which corresponds to names of trading trends. Bullish candlesticks show the growth of the price when the opening rate is lower than the closing rate. The bar ‘grows’ itself, and on charts, it is usually red or white. Bearish candlesticks, as you can guess, show the fall of the price, when the opening rates are higher than the closing rates. The bar ‘grows’ downwards, and it is usually colored in red or black.
The shape of isolated bars and more prolonged patterns can prompt the direction in which the price will move. Skilled and experienced traders can earn good money off this knowledge.
Patterns And Strategies Of Price Action
When you try to base your strategy on price indices, you can look at the price bars alone or you can read the short-term trend indicated by these bars (do not confuse it with averages and long-term trends, though).
A Hammer Pattern
A hammer pattern is the shape of a candlestick that predicts certain price changes to come. The bar is called a hammer when it has a very short length in comparison to width and the bar body looks like a brick. This brick has a long thin line, or tail, heading downward. Put together, these elements create a schematic image of a hammer.
When you watch these hammers appear in the chart, you can predict that the price will grow, because the current rate cannot be brought down and bounces back to its value.
Strategy to use: when the next bar breaks the ceiling value of the hammer bar you accept as a benchmark, open the position. When to exit? When you have made some money or when the growth trend has hit the resilience level. Do not forget about the stop-loss, though.
A Cup And Handle Pattern
When the price bars align to create a picture resembling a cup with a small handle, you can assume that the prices will go up. What is a cup and handle pattern? It is a shallow ‘U’ shape with a small appendix to the right. This appendix stems from the brim of the ‘cup’ and moves slightly downwards.
There are several opportunities to earn off this trend, but you need to explore the details to know how to avoid pitfalls and false alarms. This pattern is long known and used, and there is plenty of information about it. So investigate it carefully before you bet on it.
All in all, the candlesticks on the chart can provide you with valuable trading information. So sharpen your observation and analytical skills, look closely on the screen during your day trading and use this opportunity wisely.