Is there any one single factor more important than price action in the world of foreign exchange trading? Almost certainly not. Price is THE definitive leading indicator. Price action is what traders need to get a grip on if they’re to identify trends, ranges and consolidations. Price also provides the foundation upon which most of the technical analysis indicators we rely upon use to spit out their results. In this article we look at how a foreign exchange trader can go about analysing and predicting price action.
Predicting Foreign Exchange Price Action – Key Tips
1. Always Analyse A Trade Set-Up With Price Action In Mind. A good trader will always analyse any trade with the probabilities of price action in focus. By using efficient technical analysis methods, a trader is better able to determine the most likely movement in price – including direction and voracity.
2. Determine Key Market Levels To Put Price Action In Context. At any single point in time, there will be a few epic price levels within any currency pair. When a trader is able to identify these levels, they are better able to determine areas on the chart where price is most likely to reverse. The most important of these price levels are the support and resistance. These are high probability turning points for price action – while there is no such thing as 100% in the foreign exchange trading world, when traders see price action approach support/resistance they can expect price to reverse assuming the level holds.
3. How Price Action Is Impacted By Sentiment And Momentum. Foreign exchange traders who understand price action will also understand the roles of volume, momentum and sentiment in wielding it. The foreign exchange is one of the biggest examples of the forces of supply and demand in action. When a currency pair sees more demand than supply, there will be a propensity for it to strengthen. The reverse is true when a currency pair sees more supply than demand. This sentiment is primarily what provides the momentum (or lack thereof) for price action. When new price trends are born, it’s very much a big bang effect – price action will tend to hurtle in the direction of the new trend in an aggressive and seemingly insatiable fashion. This is exactly why it’s so important to hop aboard new trends quickly – the price action is at its most rewarding during this earliest part of the trend.
4. Price Action & Potent Trading Indicators. There are a colourful variety of foreign exchange trading indicators that can help traders get a better handle on price action. For example, trend indicators in the mould of moving averages and the MACD can help a trader understand how well price action is bounding within a trend. Momentum indicators such as the Stochastic and the Relative Strength Index (RSI) can provide the trader with an indication of how strongly any trend may be developing (or indeed reversing). Other indicators such as the Bollinger Bands and Acceleration Bands can help foreign exchange traders get to grips with volatility and volume respectively. The key when using currency trading indicators to interpret price action is to understand each one eloquently, and use the right combination to reveal the many different faces of the market.