Price Action: Trading Forex Without Indicators

Trading forex is not easy,  the market constantly changes due to the news, external factors and actions of other traders.

You have to constantly keep an eye on the political events, economic news and even the general mood of the market.

However, there is another solution — Price Action trading. Also known, as “trading without the indicators”.

Introduction

Price Action is a theory of market behavior based on the psychology of the traders, market makers, and the market itself. It attempts to explain the volatility of the market without news, indicators  and other external factors.

The main tool of Price Action are the charts of the currency pairs and the patterns on them.

The Price Action traders analyze those charts to gain insight into the market and predict future events.

There is one indicator that is somewhat useful in Price Action — Moving Average. Technically, you can do without it but it helps with calculating the market levels and determining trends.

Price Action Advantages

  • You don’t need derivative indicators, expert advisors and other paid tools.
  • You can easily grasp the basics and analyze the state of any currency pair without lengthy preparation.
  • You don’t need to trust the indicators and other unreliable sources of information.
  • You trade almost always with delayed orders, which means there’s no risk of slippage.

Finally, the knowledge and skills gained with Price Action are useful on stock exchanges and other security markets.

Price Action Disadvantages

  • You need to understand how the market works;
  • You do not have precise instructions on when to open or close the positions.
  • You have to predict the actions of the other market participants and hope that the majority of them are at least adequate traders.

Price Action trading requires strategic thinking and understanding of the situation.

There are no rules like “The indicators are 50 pips apart, so you should sell. Start buying when they are closer than 15.”

Instead, there are some universal guidelines and it’s up to you on how exactly you will follow them.

How to Read Candlesticks

Candlesticks are the core element of any financial chart. Each candlestick consists of two parts — a body and a shadow.

Shadows are sometimes called “wicks”, but while it does make a lot more sense, this naming scheme is less popular.

  • The body of the candlestick shows the open and closing pricing at the time of its existence. The color of the candlestick indicates the direction the price has moved.
  • The shadow indicates the maximum and minimum price during the candlestick’s existence.

A candlestick can have three moods — bullish, neutral and bearish.

 

Bullish candlesticks close above the opening price, neutral close around the same level and bearish close below it.

 

Some traders also consider the closing segment, which indicates in what part of the shadow the candlestick closes — lower, middle or upper.

Traditional charts present bullish candlesticks as white and bearish as black. However, modern software tends to use different colors — for example, green and red.

What is a delayed order and why price action depends on them

A Forex order determines how much currency you want to buy or sell. The orders can be market or delayed.

  • Market orders are executed at the current market price. If it changes between the order creation and its processing, the order will be processed at the new price.
  • Delayed orders are executed at the previously determined price and are ignored until the market price is the same.

While delayed orders require some planning, they also carry less inherent risk.

For example, if the market seems bullish, you can create a delayed purchase order above the local extremum.

If the price rises — you will purchase the currency and not lose anything. But if the price turns around and starts falling, you won’t lose anything.

The extremum is a maximum or minimum value of the graph.

Delayed order types

  • BuyStop. A delayed purchase order for a price higher than the current one.
  • BuyLimit. A delayed purchase order for a price lower than the current one.
  • SellStop. A delayed sale order for a price lower than the current one.
  • SellLimit. A delayed sale order for a price higher than the current one.

Delayed orders also can have StopLoss and TakeProfit modifiers.

  • StopLoss. Allows setting the limit on the order loss. If the loss exceeds the limit, the order will automatically close.
  • TakeProfit. Allows setting the limit on the order profits. Once the profit reaches the limit, the order will automatically close.

What is a Trend and How to Determine One

A trend is the direction of the market movement on the timeframe. A trend can be ascending and descending.

  • An ascending trend is a series of increasing minimums and maximums.
  • A descending trend is a series of decreasing minimums and maximums.

In an ascending trend, a price below the previous minimum is a signal towards an upcoming change of trend.

Vice versa, in a descending trend a price above the previous maximum can change the trend into an ascending one. This effect is known as a “trend breakout”.

If you are using MetaTrader 4, you can mark minimums and maximums right on the chart. The best way to do so is with rectangles. To do so, click Insert > Shapes > Rectangle and draw a shape on the chart.

The best time to enter a trend is during a correction — a movement against the trend. You can also enter during a consolidation — a flat movement of the price. Entering on the peak is not as recommended since it brings fewer profits.

WARNING: If you can not determine a trend clearly — do not do anything at all. Just stand aside and watch the situation unfold. You might lose some possible profits, but it’s better than losing your own deposit.

Minimums and maximums should be clearly seen on the chart. A single bullish candlestick surrounded by a dozen bearish ones is not a maximum.

Support and Resistance Levels

The levels are the zones where the trend tends to change. Just like many other market characteristics, the levels are determined by the collective consciousness of the traders.

What is a support level and how to find it

A support level is formed under the pressure of the bulls — the buying traders. It shows the minimal possible (according to the market) price of the currency pair.

The bulls start buying at this level, which causes the price to rise and reach the resistance level, where the bulls start to sell.

A support level prevents the price from going below it.

On the chart, a support level looks like an imaginary line that the minimums can’t break through. Beginners are advised to mark that line for real. To do so in MetaTrader 4, click Insert > Lines > Horizontal Line.

Beginners usually think that the support and the resistance line should be marked with different colors, in order to prevent confusion.

Unfortunately, due to the market volatility, the confusion only intensifies. Stick to one color that is visually distinct from your candlesticks and other indicators.

What is a resistance level and how it works

A resistance level is formed under the pressure of the bears — the selling traders. It indicates the maximum possible (according to the market) price of the currency pair.

On the resistance level, the bears start opening the short positions, which causes the price to fall towards the support level, where the bears close the positions.

A resistance level prevents the price from going above it.

On the chart, the resistance levels look like an imaginary line that the maximums can’t break through. Once you find a resistance level, you should mark it with an actual line.

Short positions are the way to make money in a descending market. When a trader opens a position, they borrow some currency from the broker and immediately sell it.

Once the position closes, they buy the same amount of currency and pay it back. If the price of the currency pair has fallen during that time, the trader has some profit left afterward.

What happens if there are too many levels

You don’t need all the levels on the chart. Usually, you only need the ones from the last couple of days, one week at the most. If you are trading on the different timeframes, use the levels from the last 200 candlesticks. Everything else is pretty much useless.

If there are still too many levels, start removing the ones that mean the least. A level loses meaning, if:

  • It is not the lowest minimum or the highest maximum on the chart.
  • It creates trend changes that do not cause a lot of movement on the market, i.e. new minimums or maximums.
  • It can’t be clearly seen on the chart.

What is a trend breakout

A trend breakout can be determined as two consecutive candlesticks that close outside of the trend. After a breakout, a resistance level becomes a support level and vice versa.

What are the Fibonacci levels

The Fibonacci levels are the additional levels that are based on the idea of the Golden Ratio. To put the math aside, these levels from at 38.2%, 50%, 61.8% and 78% of the previous impulse on the market. There is also a 23.6% level, but most traders ignore it.

  • An impulse is the initial movement of the market. To put it simply, it is a trend. An impulse is created once either the bulls or the bears gain dominance on the market.
  • A correction is a movement against the impulse. It begins once enough “in-trend” traders close their positions as they achieve their goals.

Due to the peculiarities of the human mind, the impulses and corrections often correspond with one of the Fibonacci levels. So while they do not have any “legitimate” weight, you should consider them when you determine StopLoss and TakeProfit.

How to determine the strength of the level

The strength of the level depends on how many traders believe in it. To determine how strong a level is, combine the different characteristics it has and see how they stack up.

For example, 1.13000 is the resistance level. Two days ago it was a support level. It is also a local maximum and a round number.

All this puts 1.13000 ahead of the new support level of 1.12750, which does not have any other characteristics. Breaking through the 1.13000 resistance will be harder than breaking through 1.12750 support. This means that the bears will have a much easier time gaining dominance on the market.

How to determine the trends in the market

The trend is useless outside of its timeframe. What you consider an ascending trend on the 5-minute timeframe becomes a meaningless correction on the 24-hour one. All the trends on the market are subjective and useless if the timeframe is not mentioned.

There are two ways of determining a trend — with trend lines and with a moving average.

What is a moving average

A moving average is an indicator that shows the long-term activity on the market and indicates its direction.

Moving averages are named with a number of candlesticks that they count. Traditionally, four moving averages are used:

  • 20 МА — used to determine short-term trends;
  • 50 and 100 МА — used to determine intermediary trends;
  • 200 МА — used to determine long-term trends.

Sometimes one moving average has a different direction than the others. That’s alright, especially during the changing of the trends, when the more long-term ones have not updated yet.

However, the moving average has a flaw. It provides only the averaged data, which is not that useful for predictions. If you want not only to determine the previous trends but to predict the new ones, you will have to build the trend lines.

How to draw the trend lines

Imagine that during the last couple of days the support and resistance levels have grown.

If we draw a line through the minimum and maximum values of such a chart, we will have some ideas about the further development of the trend.

Of course, we can’t guarantee that the prices will follow those trends. They can bounce from an unexpected level or break out, which will destroy all out predictions. Which means that you should update the trends often and do not design your strategy around the data from them alone.

The trend lines are not really reliable. However, you need them to make predictions, because that’s the only way to determine the chart patterns.

What are the chart patterns and how do they work

There are way too many chart patterns to describe all of them here. But to begin using them, you should remember just two: a triangle and a flag.

Triangle

A triangle is formed when the support and the resistance line cross over. There are four kinds of triangles:

  • An ascending triangle forms when a support line rises towards a relatively stable resistance line. It signals an upcoming breakout, most likely through the resistance line.
  • A descending triangle forms when a resistance line descends towards a relatively stable support line. It signals an upcoming breakout, most likely through the support line.

Most of the time you can’t guarantee the direction of a breakout from the triangle. So if you can afford to wait — do so until you see the first two consecutive candlesticks that move in a single direction.

If you don’t want to wait, check the previous trends — if they correspond with the direction of the triangle, they will most likely return.

  • A symmetrical triangle forms when both the support and the resistance lines converge at the middle point. It indicates a temporary consolidation before a break-out.
  • A ranging triangle forms when the support and the resistance line move away from one another. It signals an increase in volatility and the instability of the market.

A symmetrical triangle shows that the market prepares for the breakout, but the direction is yet not known. In most cases, it breaks out in the direction of the previous trend but there is a risk that it will not.

A ranging triangle is a signal for an immediate exit out of the market. The risks during its existence are too high and you’d better quit until the situation becomes clearer.

Flag

A flag forms when the support and the resistance lines are parallel to each other. A flag can be ascending, rectangle or descending.

A flag pattern is a classic trap for the newbie Forex traders. While it does appear to move in a single direction, it is a correction pattern. Which means that it is bound to break out in an opposite direction.

A rectangle flag is a signal of market instability. If you don’t want to risk, wait until the new trend is established.

An ascending and descending flags are good market entry points.

The chart patterns can be built on any timeframes. However, the patterns on the larger timeframes have more influence than the patterns on the smaller ones.

Aside from the support and the resistance lines, patterns can also be formed by the candlesticks themselves. They allow to determine the trend at its very beginning with and join it with the minimal risk.

What are the candlestick patterns and how do they work?

The patterns are the combinations of the candlesticks that allow predicting the state of the market. They can consist of a single or several candlesticks.

Pin Bar

A pin bar is a candlestick with a little to nobody and a large shadow on one side. It shows a strong level of resistance to the current trend and serves as a signal for the change of trends.

However, a pin bar can be wrong — which is why you should take a look on the other signals, like the support and resistance levels, as well as the chart patterns.

For example, if a pin bar is located on the resistance level, the price will most likely go down. However, if it is in the middle of a trend, you might want to wait and watch the situation some more.

There needs to be at least some movement before a pin bar. If the market is mostly flat, you can safely ignore any pin bar you find.

Market Entry Strategy. Set up a delayed order in the direction of the new trend, next to the short shadow of the pin bar.

StopLoss. Automatically close the order if the price gets behind the long shadow of the pin bar. This would mean the breakout is fake and losing more money is ill-advised.

TakeProfit. Quit one the price reaches the opposite level or right before it. If you can’t find a level, take the difference between the Market Entry Price and StopLoss, then multiply it by 2 or 3.

Internal Bar

An internal bar (inside bar) looks like a large candlestick without any shadows, followed by a smaller opposite candlestick. This pattern shows a temporary resistance to the current trend and serves as a good market entry point.

Ideally, the first candlestick should be at least twice the size of the second one.

Similarly to pin bar, an internal bar should be based on some sort of a level. When it happens in the middle of a trend, it is much less reliable and should not be acted upon.

Market Entry Strategy. Set up a delayed order in the direction of the first candlestick, as close to its closing price as you can.

StopLoss. Automatically close the order if the price gets behind the short candlestick. This would mean the reversal of a trend, which is a slight possibility with the internal bars.

TakeProfit. Quit one the price reaches the opposite level or right before it. If you can’t find a level, take the difference between the Market Entry Price and StopLoss, then multiply it by 2 or 3.

Outside Bar

An outside bar is the opposite for an internal bar. It forms when a smaller candle is followed by a larger opposite one. In most cases, it leads to a change of trends.

There must be some movement on the market before an outside bar. Also, the second bar should close in its lower quarter — otherwise the bar is fake and you should not trade on it.

Market Entry Strategy. Set up a delayed order in the direction of the second candlestick, as close to its closing price as you can.

StopLoss. Automatically close the order if the price gets behind the longer candlestick. This would mean the reversal of a trend, which is a slight possibility with the internal bars.

TakeProfit. Quit one the price reaches the opposite level or right before it. If you can’t find a level, take the difference between the Market Entry Price and StopLoss, then multiply it by 2 or 3.

Fake Breakout

A fake breakout happens when a candlestick breaks the level with its shadow but closes in a different direction.

This means that the trade has turned around and the traders that believed in the breakout have lost. In some way, a fake breakout is similar to a pin bar.

Market Entry Strategy. Wait until the new trend establishes itself, then join in. At the very least, wait for two consecutive candlesticks moving in the same direction.

StopLoss. Automatically close the order if the price gets behind the level of the fake breakout.

TakeProfit. Quit one the price reaches the opposite level or right before it. If you can’t find a level, take the difference between the Market Entry Price and StopLoss, then multiply it by 2 or 3.

Double High/Double Low

DHDL looks like two close candlesticks that can’t break through some level. This means that the level has some strong resistance and serves as a good market entry point. The best DHDL patterns can be found on the H4 and larger timeframes.

If the DHDL candlesticks are breaking through the level with their shadows, the pattern is much weaker and you should not act on it.

You also should not enter the market against the trend established on a larger timeframe — even the strongest players can’t hold against the whole market for long.

Market Entry Strategy. Place a limit order right before the DHDL level. It will trigger once the price bounces.

StopLoss. Automatically close the order if the price gets over the level. This would mean that the players at this level have quit the market.

TakeProfit. Quit one the price reaches the opposite level or right before it. If you can’t find a level, take the difference between the Market Entry Price and StopLoss, then multiply it by 2 or 3.

How to Manage Your Risks

Forex is not a casino but you should still remember how to correlate the risks with the possible profits and calculate your losses.

To begin, take a look at this table:

Loss of the starting deposit, % Profits necessary to reach the starting point
25% 33%
50% 100%
75% 400%
90% 1 000%

As you can see, the more you lose, the harder it is to get back. You should be aware of it from the start to know how much you can afford to lose.

The best way to trade is by limiting each order as 2% of your current capital. It’s not the safest way — 10 unfortunate deals will halve your balance — but it maximizes your chances of a comeback.

This is the reason why your potential profits should always exceed your potential losses at least by the factor of 2. Otherwise, you’d be lucky to get back to where you started.

If your starting capital is too small, consider trading on a Cent account. Leverage is also an option, but it requires some strategy adjustment and is not recommended for beginners.

Conclusion

Price Action trading is a universal form of trading without the indicators. It teaches you to analyze the market via the price charts and candlestick patterns.

However, it is not exclusive — you can use Price Action to confirm or adjust the results of the technical indicators or other methods of analysis. This would improve your trading system and make it more stable in the long-term.

However, Price Action is not infallible and highly depends on the traders’ hivemind. If the market is inadequate or simply unstable, Price Action can fail.

You should be ready that some deals will not close in your favor. You should know when to quit and how to manage your risks. Then, as long as your strategy is mathematically sound, you will make a profit on Forex.