Price action with context is a process to predict a currency pair’s movement by reading the chart. The key price driver of a currency pair is fundamental events, but we can predict the future movement based on the present and past activity of the chart.
Central banks and financial institutes drive the forex market. Therefore, when they make the price move, they left some signs of their activity. As a price action trader, we will read their activity and anticipate what they might do in the future.
What is Price Action?
Price action is a process to inquiry about a currency pair’s price development. The main aim of the price action trading is to understand buyers’ and sellers’ sentiment in the price and predict future movement based on these. The price action trading is based on the combination of several trading indicators and price behaviors. Therefore, you might have to use multiple trading tools as a price action weapon.
The price of a currency pair moves based on the sentiment of buyers’ and sellers’. Therefore, using price action is logical that can provide accurate trading signals. In the price action with context trading strategy, we will identify a market direction by reading the chart and then enter a trade from the correction to get the maximum return with a minimum risk.
What are Price Action Weapons?
There are many parts in the price action trading that a trader should know, like- candlestick, support and resistance, trend, market flow, event level, key Level, and market context.
Candlestick represents the price movement of a currency pair for a specific timeframe. The four major parts of candlestick trading are- opening price, closing price, high price, and low price. Candlestick represents both continuation and reversal price direction based on the opening, closing, high and low. There are many candlestick patterns in the market, but in this trading strategy, we will focus on reversal candlesticks only.
Example of reversal candlestick – Pinbar, Engulfing Bar, and Two Bar, etc.
Support & Resistance
Support and resistance are a price zone from where the price is likely to change the direction. When the price is moving up, it will reverse as soon as it finds resistance. On the other hand, the price will stop moving down as soon as it finds a support level. There is more to know about the support and resistance in this trading strategy-
Event Level – Event level is a price zone that works as both support and resistance. It is the most important Level as both buyers and sellers put attention to it.
Key Level – key levels are a significant level in the daily or weekly timeframe to understand the price’s top and bottom.
Dynamic Level – Dynamic levels move with the price rather than a specific horizontal zone. In this trading strategy, we will use 20 Exponential Moving Average as the dynamic Level.
Market context is a process to identify the nature of a trend. It has four elements:
Impulsive – When the price aggressively creates new highs and lows, it is considered as an impulsive trend. It indicates that the price will continue the current trend.
Corrective – In a corrective market structure, price barely creates new higher highs or lower lows. It is an indication of market reversal.
Volatile Trend – In volatile trends, the market follows the corrective structure and indicates a market reversal.
Non Volatile Trend – Non-volatile trend appears with the impulsive market momentum when the price tries to continue the current movement.
Bullish Price Action Trade Setups
Find the market in an impulsive bullish pressure in H4 or daily timeframe. Identify the Key support level and consider buy trades only as soon as the price is trading above it.
To enter the trade, you have to wait until the price comes down towards an event level with a corrective structure in 1 Hour timeframe. Enter the trade as soon as the price rejects and closes above the event level with a reversal candlestick.
Put the stop loss below the recent swing low with 10-15 pips buffer. Here the buffer means you should put the stop loss 15 pips below the swing low.
The primary target of the take profit would be the next event level. However, if the bullish trend remains impulsive, you can extend the take profit. On the other hand, you can close earlier if the price barely creates new higher highs.
In the example below, we can see a visual representation of how to take the entry with stop loss and take profit level.
Bearish Price Action Trade Setups
Find the market in an impulsive bearish pressure in H4 or daily timeframe. Identify the key resistance level and consider sell trades only as soon as the price is trading below it.
To enter the trade, you have to wait until the price comes down towards an event level with a corrective structure in 1 Hour timeframe. Enter the trade as soon as the price rejects and closes below the event level with a bullish reversal candlestick.
Stop Loss & Take Profit
Put the stop loss above the recent swing high with 10-15 pips buffer. Here the buffer means you should put the stop loss 15 pips above the swing high.
The primary target of the take profit would be the next event level. However, if the bearish trend remains impulsive, you extend the take profit. On the other hand, you can close earlier if the price barely creates new Lower lows.
In the example below, we can see a visual representation of how to take the sell entry with stop loss and take profit level.
Final Thoughts – Trade Management Idea
In the above section, we have seen how to trade using the price action with context. In this trading strategy, buy and sell trades come after filtering out unusual market movements from the volatile market conditions.
However, no forex trading strategy in the world can guarantee a 100% profit, so your trades might go wrong even if you strictly followed all rules. If you want to grow your account with a consistent profit, you should follow strong trade management tools, as mentioned below:
- Ensure that you are not taking over a 2% risk per trade of your trading balance.
- Move your stop loss at breakeven as soon as the price creates a new higher high or lower low.
- If you face a 3 or 4 consecutive losses, take a break and observe the market until it follows the trend accurately.
- Make sure to keep your mind free from any bias while you are analyzing the market.
Overall, price action is the core element of trading that every trader should know. There are many trading strategies combining price action and other trading tools. The strategy we have seen above has a good history of providing profitable trades. Therefore, if you can implement it properly, you can consistently grow your trading account.