How to Read and Trade Forex Price Action
Last Update: February 4th, 2025
Forex trading can be as difficult or as easy as you want it to be. Indicators and strategies can make trading much easier. Understanding the forex market and its price action is one of the most useful ways to trade currencies.
Price action analysis was first introduced by Charles Dow, who laid the foundations for modern technical analysis. Since inception, it has been developed and advanced remarkably. Understanding price action gives you that extra edge you need to get over the profit line. That’s one reason more and more currency traders are interested in using a forex price action strategy as one of their main tools for crafting trading decisions.
Since price action trading doesn´t predict the future like many other indicators, it never lies; it will tell you how the market will behave during different time frames and periods of volatility.
The Price Is Always Right – It Never Lies
What Is Price Action?
Price action refers to the movement of a financial instrument’s price, whether it’s stocks, commodities, or currencies. By observing these fluctuations over time, traders can identify patterns and make predictions about future price movements. This process is key to understanding how price reacts to economic events, technical levels, and market sentiment, with economic data often reflected directly in price behavior.
To the untrained eye, forex price action may seem chaotic and unpredictable. However, with the right tools and experience, traders can decode these fluctuations to create effective strategies. Many consider finding a productive forex price action strategy challenging, but it becomes more approachable through the application of technical analysis tools.
Key Components of Price Action
- Candlestick Formations: Identify bullish or bearish sentiment.
- Retrace Strength: Measures how far price pulls back before resuming its trend.
- Wide Range Candles: Indicate strong momentum in one direction.
- Engulfing Patterns: Signal potential reversals when a candle fully engulfs the previous one.
- Doji Candles: Represent indecision in the market, often signaling a potential reversal.
- Pin Bars: Highlight rejection of certain price levels, indicating possible trend reversals.
- Narrow Range Candles: Suggest low volatility, often preceding significant price moves.
What Is Price Action Trading?
Price action trading involves analyzing historical or current price behavior to develop a trading plan. Unlike strategies reliant on complex indicators, price action focuses on raw price data to make trading decisions.
Types of Price Action Strategies
- Real-Time Observation Strategies:
- Continuously monitor price fluctuations to identify potential entry and exit points.
- Ideal for day traders or scalpers who react quickly to market changes.
- Historical Analysis Strategies:
- Analyze past price movements on charts to set pending orders based on identified patterns.
- Suitable for swing traders and position traders who rely on historical trends.
Why Use Price Action?
- Direct Market Insights: Focuses purely on price movements without the lag of indicators.
- Adaptable: Effective across various markets—forex, stocks, commodities, and more.
- Simple Yet Powerful: Relies on visual patterns that are easy to identify with practice.
Constructing A Forex Price Action Strategy: Finding Swing Levels
In forex trading, identifying swing levels is a key part of any price action strategy. When a currency pair follows a clear trend, it rarely moves in a straight line. Instead, price action forms legs—moving higher in an uptrend or lower in a downtrend—followed by retracements before continuing the trend.
By pinpointing these retracement (swing) levels, traders can identify ideal entry points to place pending orders, improving their trade timing and risk management.
Why Identifying Swing Levels Matters
- Enhances Trend Trading: Helps traders buy the dip in an uptrend or sell the rally in a downtrend.
- Improves Entry Timing: Identifies price points where the retrace is likely to end.
- Supports Risk Management: Defines clear support and resistance zones for better stop-loss placement.
Steps to Find Swing/ Retracement Levels
- Identify the Trend Indicator:
- Determine what the current trend is leaning on:
- Trend Lines: Drawing diagonal lines connecting swing highs/lows.
- Moving Averages: Popular choices include the 50-period or 200-period MA.
- Fibonacci Levels: Based on the Fibonacci sequence, these act as natural support/resistance levels.
- Determine what the current trend is leaning on:
- Analyze Price Action:
- Look for higher highs and higher lows in an uptrend, or lower highs and lower lows in a downtrend.
- Mark significant swing highs and swing lows to spot potential reversal areas.
- Apply Fibonacci Retracement Tool:
- If price is following a Fibonacci pattern, plot retracement levels to identify potential support/resistance zones.
- Key Fibonacci levels to watch: 38.2%, 50%, 61.8%—these often act as pivot points for price reversals.
GBP/USD Weekly Chart Insights
- The Fibonacci retracement tool highlighted three buying opportunities aligned with the uptrend.
- It also identified two countertrend opportunities where price temporarily pulled back before resuming its trend.
- This demonstrates how powerful swing level identification can be when combined with price action analysis.
Swing Levels Based On The Fibonacci Golden Ratio Numbers
When the forex price action is leaning against a trend line or a moving average, these indicators reject price when it touches them, acting as swing low levels in an uptrend or vice-versa in a downtrend.
The strength of the trend may not always be the same throughout the course. When the trend is weaker, you should use bigger periodic moving averages or less inclined trend lines to craft a forex price action strategy. When the trend gains pace, you should use the smaller period MAs or the more inclined trend lines as swing low/high levels.
As you can see in the picture below, when the trend is stronger, the 20-MA acts as resistance for the price, and when the trend loses strength, the 50 MA becomes the price rejection line.
Swing Levels Based On The 20 and 50 MAs
Swing Level Analysis
After identifying swing levels, you have to make a risk/reward analysis of the current retrace. You never know how long a trend will last, so when buying the retraces/swings you should place the take profit near the top of the last high swing. But if the trend is based on a trend line or a moving average (MA) then you should check how far the last swing high went. Is it far enough to give you a good risk/reward ratio, thus justifying a possible trade?
Price action signals, such as breakouts and reversals, are essential for making informed trading decisions based on market behavior.
There’s also a higher probability that your trade will be successful if there are a few candles at the top of the last swing. However, if there are many candles at the top it means that the resistance is very strong because it tried many times to break above that level but failed. Therefore, it is safer to enter when there are fewer candles at the top.
On the chart below, we can see that the price easily broke above the top of the last swing which was made of only two candles. We can also see that on the second occasion, where the top is made of several candles, the forex price action couldn’t break above it.
Forex Price Action Strategy: The More Candles At The Top, The Stronger The Resistance
Retrace Strength
Once you have identified swing levels in a trend, you should find out how strong the retraces are. If we are planning to buy the retrace in an uptrend we want it to be weak because a strong retrace might take price deeper, triggering the stop loss. In fact, strong retraces often turn into trend reversals because the bulls get scared, closing their long positions after price breaks several support areas. That’s why we should see how price respects the indicator that the trend is based on.
Understanding the behaviors of market participants can provide insights into market dynamics and help in making informed trading decisions.
If price has often pierced the trend line or the MA in the past, it means that the retraces are quite strong. In this case, it is better to stay away because a reversal might take place at any time. We should also see how quickly the price has reversed in the past. If during the past retraces price has reversed quickly without sticking to the trend line or MA, then the bulls have an appetite for risk and the retraces are weak. Therefore, it’s safe to buy in on the retraces.
The chart below shows two phases down trending forex price action: in the first phase, the price respects the 50 MA on which the trend is leaning against. The price reverses down whenever it touches or gets close to the MA.
The retraces are weak, and it is safe to sell. On the second part, price clearly breaches the 50 MA in yellow. Although it goes back below it, it’s not advisable to sell the retraces anymore because the trend might reverse anytime now that the retraces have become stronger. We see that the downtrend does reverse later on.
The Weaker The Retrace, The Stronger The Trend
Current Price Action Strategies: Rejection Time
This one a primary forex price action strategy. It is crucial for trading because the rejection time shows us how fast certain levels are rejecting the price.
After several attempts at the 1.0930-55, the EUR/USD chart below gives the impression of quick rejections because of the long wicks. In truth, this may not be the case. Price may have stayed at the top of the wick for almost the entire time, only to drop at the last minute before the candles closed. That is why you have to observe the price in real-time in order to see how quickly it reversed from the top. It is a bit time consuming, but you have to put in the effort to succeed in this business.
If the price only spikes to the top for a moment, and then quickly reverses back down, it means that a lot of sellers are waiting to sell at that level. This makes it a very strong resistance, thus a very safe place to open a sell position.
Price action trading strategies, such as rejection time analysis, are crucial for identifying potential trading opportunities based on market behavior.
You Have To Observe Forex Price Action Closely To See How Quickly Price Reverses From The Top
Big Opposing Candles/Doji/Pin/Hammers
Candlestick chart formations are current price action strategies that require you to observe the price and trade as the pattern takes place. This is unlike the past price action strategies where you must identify the swing low/high levels and leave a sell/buy pending order.
During a trend, candles might be of different sizes and shapes. Yet, when a trend has run its course, one of the signs that a reversal is imminent is a big opposing candle. Quite often at the end of a trend, we see a big candle take place in the direction of the trend followed by an opposing candle of similar size.
A Bearish Engulfing Candle Leads To A Trend Reversal
What does this mean? It means that the bears in a downtrend have had a last go at a level, pushing the price further. In response, the bulls jump right back in and take price to the level where the previous candle opened. This means that buyers have finally matched sellers. In this case, the sellers added more shorts or took profit on the ones that were already open. Both of these actions led to a trend reversal.
The same logic applies to dojis, pins, and hammers. In the case of a downtrend, when the opposing candle is bigger than the previous one, the pattern is called a bullish engulfing pattern. It is a strong signal of a pending trend reversal since the buyers have outnumbered the sellers. Observe forex price action closely when you see that one of these patterns taking place.
Then get ready to buy or sell because a reversal is taking place right in front of you. Advanced price action strategies often involve analyzing complex candlestick patterns to predict market movements and make informed trading decisions.
Narrow Range Candles
When the price moves in a narrow range it creates small candles. On such occasions, the buyers and sellers haven’t made up their mind yet and have let go of their positions after making small gains. When this happens you should observe price, because these patterns lead to some explosive moves and you don’t want to be absent when it happens.
Narrow Range Candles Are Often Followed By Large Moves
After one party makes up its mind and breaks the range, even slightly, the others get scared and remove all orders. This creates a liquidity hole which allows the price to move directionally without any resistance. You can make two trades out of this pattern; either enter immediately as the narrow range breakout occurs and/or enter again when the price reverses back to test the range.
Trading price action involves analyzing narrow range candles to identify potential breakout opportunities and make informed trading decisions.
Getting Started With Forex Price Action
These are some of the most common methods to understand, read and trade based on price action. Price action trading tells you the mindset of the market and how basic human emotions, like fear and greed, play out in forex trading. It shows the important levels where the buyers or sellers don’t have the nerve to take the price above or below.
Price action trading, when combined with a few other indicators, can be a very profitable way to engage the markets. We hope the strategies explained in this article will help you identify some good trading opportunities and stock your trading account with an abundance of green pips. While price action trading work is a viable trading system, it is important to remember that no method guarantees a perfect win rate.
Conclusion: Mastering Price Action in Forex Trading
Price action trading is the backbone of many successful forex strategies, offering traders an unfiltered view of the market. Unlike indicators that lag behind price movements, price action reflects real-time market sentiment, allowing traders to respond swiftly to shifts in momentum.
By observing patterns such as candlestick formations, swing levels, retracement strength, and breakout signals, traders can make informed decisions without relying heavily on technical indicators. Whether it’s identifying strong support/resistance zones, analyzing rejection times, or spotting engulfing patterns, price action provides clarity amidst market noise.
In essence, “the price is always right”—it never lies. Mastering price action not only sharpens your technical analysis skills but also helps develop discipline, patience, and the ability to adapt to different market conditions. It’s not about predicting the future but understanding how the market behaves, which ultimately leads to more consistent trading success.
FAQs Section
1. What is Price Action in Forex Trading?
Price action refers to the movement of a currency pair’s price over time. It’s a method of analyzing raw price data without relying on technical indicators, focusing on patterns like candlestick formations, support/resistance levels, and trendlines.
2. Is Price Action Trading Better Than Using Indicators?
Price action trading isn’t necessarily better, but it offers a clearer view of the market. Unlike lagging indicators, it reflects real-time market sentiment. Many traders combine price action with indicators for a more comprehensive approach.
3. What Are the Most Reliable Price Action Patterns?
Some of the most reliable patterns include:
- Engulfing Patterns (bullish/bearish)
- Pin Bars and Doji Candles
- Head and Shoulders
- Breakouts from Narrow Range Candles
- Rejection Wicks and Big Opposing Candles
4. Can Price Action Strategies Be Used on All Timeframes?
Yes, price action strategies work across all timeframes. However, they tend to be more reliable on higher timeframes like the 4-hour, daily, and weekly charts due to reduced market noise.
5. How Do I Get Started with Price Action Trading?
To start:
- Learn to read candlestick patterns and identify support/resistance levels.
- Observe price behavior around key levels without adding too many indicators.
- Practice on a demo account to develop your understanding before trading live.
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