In direct opposition to those traders who want to use complex algorithmic trading systems are another group of traders whose advice is to ignore indicators and simply ‘trade price action’. So is price action trading in Forex something you should consider and is this simplistic method of trading better than more complex forms of trading? Let's take a look at how this method works, how effective it is and look at some price action trading systems.

A Simplistic Form of Trading Based on Price Only

In terms of its true definition, the trader will ignore all the fundamentals, news, indicators and execute trading signals based on the current market price so all you are doing is comparing the current market price to the previous market price and this form of trading, has been around for as long as Forex markets have.

The systems fall into two general areas they are either range trading systems or following long term trends . range trading systems work by establishing support and resistance levels (the range) and then looking to sell into resistance and buy into support to make money. Trend following systems simply try to work out if a currency is trending up or down and enter trading signals, in the direction of the trend.

Range trading systems with Support and Resistance

Range trading systems work by trying to buy low and sell high which is often touted as common investment wisdom and its a common strategy used by in experienced traders. What constitutes a high or a low price is determined by looking back at the past price of course and they will look for what they consider a support or resistance level and when prices approach this level they buy or sell but the problem with doing this is its trying to predict the market and this can lead to losses as markets are not predictable.

Other traders trading price action, will look at the relationship of the price within a day to determine price patterns and if you look at Japanese candlestick charting, it does this with numerous patterns which are designed to help the trader get an edge by giving him a bullish or bearish view on each candle. Is candlestick charting an indicator? I don't class it as one if its used on its own, its just used to see bullishness and bearishness in a visual way, nothing more.

Buying low and selling high, within a range just using price action however is not the best way to trade in my view. The best way to trade is with a trend following system and if you base it on breakouts, you will have a timeless trading strategy for profits.

Trend Following Systems

Breakout Trading

There are two main ways that price based trend following systems detect entry opportunities and they are based on price momentum or breakouts.

Breakouts where the price makes a higher high or lower low in a specified time period and a breakout is seen as an very effective way to trade markets because - people don't want to buy them! This is because they want to wait for a pull back but on good breakouts, you will see a quick acceleration of price away from the breakout point.

While they are hard to buy for people because they think they have missed the start of the move, this method of trading can be very effective, because the odds on valid breakouts are good in terms of the trend continuing and always remember the majority of traders lose money and they never buy breakouts. ALL big trends start and continue from breakouts and our Free Forex Trading System is a very effective way of taking advantage of this timeless way to make profits.

In the 1980s to prove how effective this method was Richard Dennis devised the turtle trading rules which are now available in the Turtle Trading System. These rules made hundreds of millions of dollars using this method and still work today. As long as markets trend, breakout trading will always be a trading strategy which can make money.

Momentum Trading

Breakout trading is not the only way of getting in on long term trends and you can enter on momentum. If momentum is up in a specified time period, you can buy a currency or on dips back to levels of support you can also enter. Which ever method you choose, following the long term trends in Forex is a great way to make money. The big trends last for weeks or months and you can afford to be right, just 30% of the time with your trading signals ( providing you have good money management parameters) and still make a lot of money.

Final Words

Trading price action can be very effective and it is very simple to do. Personally, I think that using a few indicators to check the momentum and volatility of price can help to filter trading signals and allow better market timing but 2 or 3 is plenty. Trading should be simple and I like trading price action but adding a few indicators is in my view, a good idea but as with any Forex trading strategy you need to test and decide which is best for you.