Price Action: Not Just Pretty Patterns

Filed under: Learn Forex Trading |

 

Many people who trade the forex markets (including myself) use price action signals as their final confirmation before making a trade – but price action signals are not just pretty patterns. They are so much more than that. Today, I would like to take you through some of the psychological implications of price action signals, and what they tell us about the market.

 

To begin with, let’s take a pin bar. This is one of the most popular of the price action signals. A pin bar moves one way in the market, and then reverses back to where it started, all in the space of one session (whether this is a daily chart, a 4-hour chart, or a 1-hour chart). What this means is one of two things. Either market participants have had a quick change of mind, and a level in the market has been rejected. Or, the big players in the market (i.e. the institutional traders) are trying to hit the stop losses of the individual traders, and trying to ‘fake’ a move. Either way, this is very valuable information.

 

Another price action signal is what we call an inside bar. This is a two bar formation, with the second bar being enshrouded by the first, with a lower high and a higher low. What this tells us is that the market is unsure about what to do next; that it is consolidating, and that it might break out in either direction very soon. It shows that the market participants are a little indecisive and taking a breather. Again, this is very valuable information for a trader to have.

 

So price action signals are not just pretty patterns, and there are many more which tell us something about the market, just as the pin bar and inside bars do. So use price action signals and do not neglect them. They just might be the market edge that you need.

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