DailyFX Tips & Picks: The trend is your friend if you understand price action

TRADERS are constantly searching for the “best” tools available. New indicators, systems and strategies often yield even newer indicators, systems and strategies.

But what if I told you that everything you need to analyse and trade in a market is already available on the chart? This is called price action, and it’s the use of technical analysis to analyse price and price alone.

There are two primary benefits to the trader from technical analysis, and price action can help with both. The first is the diagnosis of a trend. When prices begin trending higher, there will usually be a series of “higher-highs” and “higher-lows.” This is somewhat like the p­rocess of “two steps forward, one step back.” And a down-trend is just the opposite, seeing the chart make “lower-lows” and “lower-highs”.

This can be a very powerful tool for the trader. But we can take price action a step further to look at entering positions as well. When prices are making the “one-step-back” move, this can be an ideal time to buy low, as prices are supported. The trader can place his or her stop under this support level, so that at least losses can be minimised if the trend doesn’t come back.

But if the trend continues, the trader may be able to reap a far bigger reward than the position’s initial risk implied.

To learn more about price action, visit http://bit.ly/PriceActionPrimer and for more information on using price action to catch FX swings, see http://bit.ly/MarchPriceAction

James Stanley is a senior instructor of trading at DailyFX.
Twitter: @JStanleyFX