How to Trade Forex With Price Action Strategies
Every day more people are made aware of the Foreign Exchange market and the potential for a second income. It’s understandable why everyone wants to learn how to trade Forex for themselves.
Brokers are now popping up all over the globe and bragging about the dreamy gains one can get from learning how to trade Forex. While this is somewhat true it really is only half of the story. Retail traders are getting drawn into the trading industry with the ‘get rich quick’ tunnel vision and dive in with no Forex trading strategies in place.
We all get suckered into their promises of easy gains at breakneck speeds.
Sad to say, you need fox cunning and persistence to even make a scratch. We can teach you to be more witty than a fox and more persistent than marathon runner.
In this article we are going to discuss how to trade Forex using price action based strategies. It’s important to have a solid trading strategy and go over some of the simple low risk, high reward Forex trading strategies that we apply to the markets every day.
Every trader needs a Forex trading strategy
Retail traders are signing up to brokers absent of a trading plan at alarming rates. Most of the time they will enter a forex trade by buying and selling currency pairs when they ‘feel like it’. Or when the market moves, they ‘chase price’ throwing random orders into their trading terminal.
Any seasoned trader knows this is suicide to enter the markets without knowing how to trade Forex in the first place. Being a trader requires you to have some sort of trading plan or strategy to guide you in the market. This kind of business structure will stop you from becoming a Forex trading failure .
We can compare this to driving into an unfamiliar area without a GPS or map. The trading system is the GPS and the map.
Let’s keep it simple
Its possible to learn how to trade Forex with complex strategies or more simplified approaches to the market. Complicated systems generally use mathematical algorithms or concepts from lost alien technology. These ‘advanced’ kind of strategies seem impressive but are impractical in the real trading world. They are the perfect recipe for turning a normal, happy, sane person into a stressed out zombie trader.
It’s those who learn how to trade Forex with the simple approach who generally are the trader’s who taste Forex trading success. They use NO indicators, or robotic algorithms. Indicators lag too much behind the real market price and that alone is an issue which causes an array of problems.
There will be a time where you just hit your threshold with indicators and desire to learn how to trade Forex without them. Do the biggest favour you’ve ever done for yourself in regards to your trading. Remove all the Indicators and start working with a clean chart template. Utilize the crystal clear raw price action data and transform the way you view the markets. Take a look at our chart template vs. the typical indicator stained chart.
By using our price action chart template, we can ‘read the market’ more effectively and quickly. We can make confident trading decisions and keep away the unnecessary chart baggage like lagging indicators and over hyped trading robots. The clarity of a simple price chart should be enough drive to make you want to learn how to trade Forex using price action strategies.
Trading with price action from key support and resistance
If there is anything I want you to take with you after reading article it is, ‘Simplicity’ is the key that unlocks the door to successful trading.
The basis for a profitable trading strategy can be as simple as trading price action signals from significant support and resistance levels. Combining price action trading with support and resistance is such a simple concept it almost seems silly. Learning how to trade Forex price action form support and resistance can produce highly rewarding / low risk trades. It is the basic core principle of how we trade in the markets every day.
To learn more about mapping the key levels, see our article on how to draw support and resistance levels .
The chart below demonstrates the power of a price action signal that formed at a key resistance level on the chart…
Once the Indecision Candle lows were broken this market went for a skydive. The setup produced a very profitable trade for price action traders. This is just one the examples of how we trade “SIMPLICITY”. If a trading method seems too complicated, or it’s too hard to understand what’s going on, then it’s not worth it. Thrive to learn how to trade Forex with a simple strategy. Most traders don’t start to see any trading success until they learn the art of price action trading.
The best time frame to trade from
We trade mostly from the Daily time frame and sometimes dropping down to the 4 hour. They produce the highest probability trading signals. Price action trading does work on the lower time frames, but it becomes less reliable with each time frame you step down.
The lower one goes the more noise we see. Finding a good trade signal on the 5 min chart would be challenging. There are many ‘fake’ signals forming on the minute by minute basis. You also need to invest a lot of time with these lower timeframes and put yourself at risk of becoming mentally fatigued.
When you look at low time frames like the 5 min chart you really are just looking at the market noise. when you look at the daily chart you can really start to see the ‘price action story’. Start reading the market with higher accuracy, making more confident trading decisions.
You will probably notice those who continue to trade on low timeframes generally ‘wash out’ of the markets.
“The trend is your friend” and believe it. It saved more trades than stop loss himself. You never swim upstream just like the surfers ride a wave rather than fight against it. There are special conditions where you can go against the herd, but the majority of the time it’s in your best interest to work with the core market movement.
Trends can be seen in life itself and around us in everything we see and do. Trends produce the most opportunities for making money in trading. Just like the surfer, waiting for that perfect wave to ride. We as traders must wait for that trend momentum to develop.
Instead of jumping in head first without thinking about it, we like to target key areas within trends that allow us to nail better entry prices to improve our overall trade reward potential. Learning how to trade Forex trends can be a simple thing that many traders believe they understand but seem to miss the mark on.
Support and resistance levels behave as the trend swing points. These are the key area where we can identify the ideal locations for going long or short.
Swing levels in trending environments are the ideal locations for a price action signals to form. They provide confirmation that we need to pull the trigger that will slot us into the trend at the right time.
On the chart above, a bullish pin bar reversal formed at a trend swing level which
we used as a signal to buy into this trend. Further into the trend a ‘breakout trap & reverse’ signal formed that gave us a second chance for trend entry.
In bearish conditions the swing points are in fact older support levels that now becomes a new resistance level. The example below shows an outside day signal that formed at the swing level in a bearish environment.
Price action trades, like this one are easily identified and only take about 5 minutes of your time to execute the order. There is no need to sit around staring at the trading screen all day, you simply go and live your life and let the market take care of the rest.
Unfortunately, the markets only trend approx. 30% of the time. The remaining 70% are generally ranging or consolidating markets. Fortunately we can utilise ranging markets to our benefit.
The key areas to watch inside a ranging market are the upper resistance and the lower support levels for price action signals.
Price bounces between the bottom range support and the top range resistance. We capitalize on this by waiting for a clear entry signal on the top range and the bottom range.
The chart above shows an example of a rejection candle on the range top which is one of our price action signals. We already know that the range top is the key turning point in the market. When this event is coupled with a bearish signal we get a low risk, high probability trade setup.
A breakout is an event that occurs when price breaks out of a containment area. This containment line could be support or resistance, ranging conditions, or even some of the candlestick formations like the price squeeze pattern.
Breakouts can produce price explosions that generate rapid returns. There is however a flaw with more traders approach to breakout trading. Traders generally try to anticipate breakouts before they happen. They become the da Vinci predictors of Forex trading and enter ‘ALL IN’. Trying to be one step ahead of the market like this only ends up with the trader crying tears of regret.
Many don’t time the entry correct and end up losing the trade. There are two strategies which we use to increase the chances of identifying a profitable breakout trade.
Use Price Action Signals
We use price action signals as a means to help identify breakout trades that have the increased chances of working out in our favour and to add that extra confluence to the overall trade setup. We use the Inside bar & Indecision Candle signals as a ‘heads up signal’ that a breakout may occur. If a breakout event is triggered then we use these candlestick signals as the framework for entry and stop placements.
Inside Day. Is a candle that has a range which fits completely within the previous candles range.
Indecision Candle. Is a candlestick sometimes referred to as a ‘Doji’. The Indecision Candle has a small centred candle body, with tails protruding out each side of the body.
The Inside day and Indecision signals communicate that the market was in a period of consolidation/indecision for the period of that candle and are the catalysts for powerful breakout moves in the market.
The simple, straightforward way to trade indecision/ inside day signal breakouts is to buy when the market breaks above the candle high, or sell the breakdown of the candle low.
Learn how to Trade Forex with an existing trend
The second way to increase your chances of entering a profitable breakout trade is to trade with the core trend momentum. You are going to exponentially increase your trading results by trading within a trend and taking breakouts with the trend momentum. One strategy is to identify an established trend, then wait for an indecision or an inside day signal to form.
Only take breakouts in the direction of the core trend pressure. For example, in bullish trends only take breaks of the highs of breakout signals, and only take breakouts of the lows in bearish trends.
Breakout Traps – Friend or foe?
Breakouts can really go two ways here, you catch a breakout and your trade quickly hits its profit target, great! Or, you could be triggered into a breakout trade, everything looks good so you walk away and go have some lunch. When you return you notice your trade is falling into the negative after the market turned around on itself and is driving price in the opposite direction. Ouch!
The market tricked you into entering a breakout trap and this is a common everyday occurrence, especially with scalpers and day traders.
How to avoid being caught in a breakout traps
Once again, trade with an existing trend! The breakouts that usually work out are the ones that occur with the trend momentum. Trading breakouts against the trend is a sure way to get yourself caught up in a breakout trap!
Second, don’t trade down into support or up into resistance. False breaks are not uncommon. There are more fake outs than breakouts around the significant levels in the market. Always try to trade breakouts that drive price away from important support or resistance levels.
Using Breakout Traps to our Advantage
One of my favourite strategies is to wait for a breakout trap to occur and use it to my advantage. Breakout traps are magnets for weak traders. They provide false signals which trap, then wash out these unsuspecting traders as the market goes on a rampage for their stop losses.
There is now less resistance left for the market to move in the opposite direction due to an influx of closing trades. This produces a very powerful aftershock where prices move great distances on the chart afterwards. This creates an opportunity for us to catch some pips.
We wait for a breakout trap to occur, whether it’s through a support /resistance level or even the previous candle high/low. Once the breakout fails we enter breaks in the opposite direction and ride the aftershock wave from the initial break like surfers on a mission.
Putting it all in perspective.
There is no doubt learning how to trade Forex with price action trading is the most simple and effective way to approach the markets. It’s something that’s been used for centuries and will still be around for many years to come. Just by applying some simple but powerful price action to your trading plan, you are really going to see the charts through a completely new set of eyes.
Price action trading allows you to divorce indicators for good and lift that mental trading fog, build confidence and make more decisive trading decisions.
The strategies mentioned in this article are just the tip of the iceberg when it comes to learning how to trade Forex with price action. To learn more about our price action signals, trading methods or money management plans, feel free check out our Advanced Price Action Trading Course .
I hope you have enjoyed this article and decide to make the switch to price action trading or at least incorporate price action into your Forex trading strategy in some way.