News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
EUR/USD
Bearish
Oil - US Crude
Mixed
Wall Street
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Bearish
USD/JPY
Mixed
More View more
Real Time News
  • Did you know a Doji candlestick signals market indecision and the potential for a change in direction. What are the top five types of Doji candlesticks? Find out: https://t.co/td5WA4hCZC https://t.co/lFLqQtNpNB
  • 🇯🇵 Housing Starts YoY (SEP) Actual: -9.9% Expected: -8.6% Previous: -9.1% https://www.dailyfx.com/economic-calendar#2020-10-30
  • Heads Up:🇯🇵 Housing Starts YoY (SEP) due at 05:00 GMT (15min) Expected: -8.6% Previous: -9.1% https://www.dailyfx.com/economic-calendar#2020-10-30
  • NZD/USD appears to have reversed course ahead of the September high (0.6798) as the wave of lockdowns across Europe drags on risk appetite. Get your $NZDUSD market update from @DavidJSong here: https://t.co/xQ7sqsF0w6 https://t.co/j3glkif7tq
  • IG Client Sentiment Update: Our data shows the vast majority of traders in Ripple are long at 97.20%, while traders in NZD/USD are at opposite extremes with 65.44%. See the summary chart below and full details and charts on DailyFX: https://www.dailyfx.com/sentiment https://t.co/pw6qIORHUJ
  • Forex Update: As of 04:00, these are your best and worst performers based on the London trading schedule: 🇦🇺AUD: 0.30% 🇯🇵JPY: 0.20% 🇨🇦CAD: 0.19% 🇨🇭CHF: 0.11% 🇳🇿NZD: 0.07% 🇬🇧GBP: 0.00% View the performance of all markets via https://www.dailyfx.com/forex-rates#currencies https://t.co/BTP4ksGwly
  • Indices Update: As of 04:00, these are your best and worst performers based on the London trading schedule: FTSE 100: 0.42% Germany 30: 0.08% France 40: 0.04% Wall Street: -0.60% US 500: -0.73% View the performance of all markets via https://www.dailyfx.com/forex-rates#indices https://t.co/m2KKGAYVla
  • Heads Up:🇸🇬 Unemployment Rate Prel (Q3) due at 04:00 GMT (15min) Previous: 2.8% https://www.dailyfx.com/economic-calendar#2020-10-30
  • Forex sentiment analysis can be a useful tool to help traders understand and act on price behavior. Learn how to get the most out of understanding trader sentiment here: https://t.co/LjEjTexrCg https://t.co/lELbFbVAAO
  • Market Snapshot $USD and $JPY drifting lower against their major counterparts $AUDUSD and $EURUSD pushing to fresh session-highs #Gold and #crudeoil prices moving higher #ASX200 and #SP500 futures drifting to session-lows
Becoming a Better Trader: 3 Principles of Price Action Analysis

Becoming a Better Trader: 3 Principles of Price Action Analysis

2017-12-07 16:11:00
Paul Robinson, Strategist
Share:

Price action lies at the heart of technical analysis and is a simple, yet powerful way to identify trading opportunities. We examined in depth with examples the three main tenets of price action; trend, support & resistance, and market reaction.

Highlights:

  • Price action analysis is a powerful way to isolate potential trading opportunities
  • We look at how to identify the trend, support & resistance, and reaction signals for validation
  • Tying it all together and arriving at trading decisions

Enjoy the video? DailyFX analysts hold live events daily, for details please see the Webinar Calendar

Technical analysis is comprised of numerous disciplines, but at the foundation of it lies price action. There are three key components – trend, price levels (support/resistance), and the reaction of the market which provide ‘actionable’ signals.

Trend

There are many indicators which identify the trend and its strength, but what really defines a trend from a simple price standpoint is whether the market is making higher-highs and higher-lows (uptrend), lower-lows and lower-highs (downtrend), or neither (range). Which way is the chart ‘tilted’; Up, down, or sideways? We looked a few examples of trends along with when the market could be undergoing a trend-change. When taking trends into consideration, they occur on all time-frames, but the general rule to follow is that the higher time-frame takes precedence over the short-term periodicity. For example, in FX using the daily and 4-hr is a solid combination, and so while a strong trend may be developing on the daily there may be an uptrend visible on the 4-hr. In this case, more respect should be paid to the trend of the daily chart.

USDJPY: 4-hr Chart (Clear downtrend marked by lower-lows & lower-highs)

Becoming a Better Trader: 3 Principles of Price Action Analysis

Confidence is crucial to success, check out this guide for ideas on how to Build Confidence in Trading.

Support and Resistance

The next important aspect to price action trading are price levels, support and resistance. Support is simply a point where demand (buyers) have stepped in and kept price supported, while resistance is a form of supply (sellers), a point where the market has failed to continue moving higher. There are numerous ways to identify these levels such as Fibonacci levels and moving averages, but the focus here was primarily on actual price levels and trend-lines, or slopes. Looking for confluence of varying angles of support or resistance makes for a stronger, more reliable level. For example, if you have a horizontal price level coupled with a trend-line it strengthens the validation of that particular price level or price zone.

USDJPY: 4-hr Chart (Building on the prior chart – Prior lows become resistance & trend-line)

Becoming a Better Trader: 3 Principles of Price Action Analysis

Market Reaction (Validation, Invalidation)

The third aspect to price action trading we discussed, is how the market reacts to price levels and within the context of the trend. Is the market displaying behavior which confirms or invalidates what we have on our chart? This is where the rubber meets the road, and a trading decision can be made.

A simple way to identify if the market is adhering to a particular level, is by using candlestick analysis. Those candlestick types which demonstrate a clear reaction such as key-reversal bar (aka ‘pin’ bars, ‘shooting stars’, ‘bullish hammers’), ‘engulfing bars’, etc. With these we are looking for a rejection away from the price level in question, a change in momentum which shows the markets willingness to reverse from our identified levels. It doesn’t necessarily need to be a swift turn, but is more ideal in showing the presence of buyers and sellers.

From here we can use the swing-low (for longs) and swing-high (for shorts) to determine where to place stops. By placing the stop-loss beyond the low or high by a sufficient amount we are allowing for ‘wiggle room’ to let the trade work itself out, and if the market moves beyond those levels the market is effectively invalidating the trade. Targets should allow for ample reward relative to the risk taken (as a general rule of thumb, a 1:2 risk/reward ratio or better). Targets are best based on the distance to the next technical level (resistance for longs, support for shorts).

USDJPY: 4-hr Chart (Building onto chart #1 & #2, validation through change in momentum)

Becoming a Better Trader: 3 Principles of Price Action Analysis

For the full conversation and set of examples, please see the video above…

Past ‘Becoming a Better Trader” webinars you may also be interested in: Classic Chart Patterns, Part I, Classic Chart Patterns, Part II,Analysis, keeping it simple; Using a Checklist; Risk Management; Handling Drawdowns; 6 Mistakes Traders Make; Focusing on the Process; Creating a Trading Plan

---Written by Paul Robinson, Market Analyst

To receive Paul’s analysis directly via email – SIGN UP HERE

You can follow Paul on Twitter at @PaulRobinsonFX.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES