Most Forex trading systems are made off technical indicators (a moving average (MA) crossover, overbought/oversold conditions in an oscillator, etc.) But what are technical indicators? They are just a series of data points plotted in a chart; these points are derived from a mathematical formula applied to the price of any given currency pair. In other words, it is a chart of price plotted in a different way that helps us see other aspects of price.
After a new trader finds out about all these indicators, they absolutely flood their charts with all these lagging tools. The sad thing is that it never dawns on traders that they should be learning about price action, when it comes to trading the forex market. It is believed this has to do with the fact, that many traders think its impossible to tell which direction the market is headed without having to use these generic indicators. They truly dont know which way the market is going.
The thing is when you are trading with indicators, its a lot like trading with other peoples signals. You are only hoping that the information they are giving you is right. The reason for this is because you dont actually understand the REAL reason why you are taking the trades that you are taking. All you hope is that the indicators formula is accurate.
But the real beauty of trading forex with price action is that once and for all, you are able to eliminate these useless tools, and you are able to see the market the way it was initially intended: without the need for indicators.
The forex price action trader will use no indicators but just a study of the price in his trading charts to decide on the next line of action. In that sense, the forex price action trading has been described as the no-frills, plain vanilla type of trading, as there are no technical indicators such as bollinger bands, Relative strength index, moving average convergence divergence (macd) and other related indicators on his price charts that he uses to trade.
Price action can be simply defined as trading from a naked price chart, with no other inputs. We display a bar or candle chart on time frames such as daily, weekly or hourly etc. The term price action signal will be given to any pre determined pattern/trigger which develops from a single price bar or series of price bars.
Most traders understand lifes core philosophy to KISS,’ keep is simple stupid’. Price action is trading from a first tier piece of information. Our decisions are based on 1 input i.e.: price. Conversely, when we trade from indicators and fancy patterns etc, there is subjectivity and multiple inputs. Trading price action is trading the here and now, with no lag or delay. Price action allows the trader to trade what he is seeing first hand, without subjectivity.
Price action makes a traders life easier
When a trader has to make fewer decisions in regards to every trade, his life becomes livable and stress free. Contrary to what most so called experts say, it is very possible to trade with fewer inputs. Inputs would be areas like financial, economic news, world news etc etc. Another input might also include the number of indicators and charting tools that are used for discovering and managing trades. Another input that could be avoided is listening to friends opinions about what or when to make a trade (except us of course).
Whenever you listen to the news and the opinions of others, you then have to filter that data through your thinking process. You actually have to make some kind of decision concerning all those bits of information you come across. Attempting to understand how all those various inputs will affect the markets is usually difficult to manage. Predicting how traders will react to the plethora of news items is often a haphazard and illogical process to go through. It is really a guessing game that most so called experts are unable to consistently figure out.
The best alternative is trading price action
In a nutshell, great forex traders, always go back to the very foundation of a price chart, (a raw blank candle or bar chart), and make decisions based on the truest information available.
Observe the price behavior. Without any indicators, a market can be seen as trending, hitting resistance or support, congesting sideways, etc etc. No computer or indicator, or news item will provide this information perfectly, except the human brain.