The FX market started September in buoyant mood as the prospects of the pound heating up against the US dollar – once unthinkable – are now becoming a reality.
but Like other developed nations in the West, the UK economy has taken its fair share of hits so far this year. The threat of a looming recession, acute reliance on foreign capital, rising debt costs and the likelihood of the Bank of England becoming independent have all been major headwinds for the country as it tries to recover its economy from the pandemic.
Earlier in the summer, forex investors were surprised when the euro managed to reach parity with the dollar for the first time in more than two decades.
Across the board, FX markets have ventured into shaky territory in recent months as many countries – those with dominant currencies – struggle to take control, curbing rampant inflation with aggressive rate hikes and raising the overall cost of borrowing contribute to the cooling market conditions.
Here in the United States, too, the erratic market performance has led many investors to scalp the market in hopes of hedging against a potential recession.
Late last month, Federal Chairman Jerome Powell estimated that rising interest rates and slower macroeconomic and labor market growth could potentially lower inflation. Powell continued: “These are the unfortunate costs of reducing inflation. But failure to restore price stability would mean far greater pain.”
Since Powell’s speech, investors have moved in all sorts of directions as the Federal Committee intends to walk away from monetary tightening in 2023.
Sentiment was unsettled nonetheless, and many are still looking for that small window of opportunity that might help them switch positions should unruly waves hit the market.
Since Powell’s aggressive remarks at the Jackson Hole Symposium on Friday, August 26th, currency markets have calmed down and investors have managed to recover and erase small daily losses.
With the markets almost upside down, some investors see price action trading as an opportunity. However, these strategies have progressed beyond arbitrage as forex traders watch the needle move out of the mid-range in hopes that it will return to baseline.
This is where the misconception lies for traders who want to take that many trades before the needle moves again. Unless you already have a working scalping strategy in place or are constantly following market trends, it would be best to focus on a limited number of currency pairs – for now, at least until conditions calm down.
To clear the air, I considered three aspects, among many others, that should draw more interest from traders to support better trades.
Of course, there are a lot of things to consider in price action trading, and scaling the market isn’t nearly as easy. Perhaps these aspects could lead to a better understanding of how FX prices fluctuate against broader market indicators and provide a framework that can contribute to a better strategy.
consistency of analysis
Having a consistent analysis to follow will help you get the analytical points right more than once. It’s important to consider your consistency as it plays a big part in your daily, weekly or monthly performance.
The consistency of the analysis consists of three buckets. First, traders should minimize the impact of recency bias, which is difficult given the ongoing market volatility. Being influenced by the outcome of events only leads to greater disregard for your analysis.
Second, if your analysis proves successful, it is common for your morale or self-confidence to be inflated automatically. Being confident is one thing, but overconfidence can affect your baseline and expose you to a new set of problems.
Finally, consider the importance of having a checklist in creating your analysis. A checklist will help you to cover all reasons and the most important steps of the analysis. If you skip a step, it’s possible that your entire analysis will collapse.
It takes longer to get used to, but the quicker you start using different strategies that can help drive meaningful analysis, the quicker you’ll get used to the idea. In its current state, a bit of consistency is all it takes now to help you navigate the choppy waters.
Support and Resistance Levels
Almost every forex trader or investor has some form of support and resistance indicators embedded in their strategy; it’s almost a given.
Three important pillars of support and resistance are: market direction, market entry timing, and market exit timing. Regardless of whether you are trading for profit or loss, it helps to plan your exit strategy.
However, what many newer and less experienced traders fail to realize is that support and resistance levels need to be monitored as they tend to change in line with price movements.
Additionally, traders should also consider the type of trading strategies they will be using for their support and resistance levels. I’ve found range trading, pullbacks, trend lines, and moving averages to be the most useful for support and resistance as they give you more leverage to control and adjust your analysis and overall strategy as you progress through each trade.
Typically, directional uncertainty causes you to look for an exit before worrying about the potential near-term outcomes. At this point, you need to go back to your consistency analysis and minimize the impact of recency bias. When faced with a sharp change in direction, consider how pulling back toward the resistance point will help you avoid a false breakout.
The most difficult aspect of price action trading is incorporating indicator confirmation to validate the analysis. You can add indicator confirmation before or during trading to accurately represent the market.
First of all, we know that indicators work in mathematical formulas that work against the background of the market. This is what makes it so difficult to follow, which means that if your analysis doesn’t match an indicator, you could almost completely miss your target.
Even more, indicators help identify a price breakout; In addition, technical indicators can also help determine the launch and trajectory of an eruption. This gives the perfect open position early in the move to create better analysis and follow a baseline strategy.
So what do you use as a technical indicator to pinpoint or identify potential breakouts?
For starters, you can consider the MACD or moving average convergence/divergence indicator as a base instrument. This is typically a more common choice for price action trading forex traders as it helps them understand the dynamics behind a breakout. The MACD also makes it easier for traders to hold a close position when momentum wanes.
For relevance in assessing a possible breakout, traders then look to the Relative Strength Index or RSI to scale buying trends of currency pairs in the broader market.
The reason the RSI works so well in most cases is that it helps determine if a currency pair is overbought or oversold, allowing traders to better analyze a potential breakout point. The RSI helps monitor conditions, but lagging data and information can leave traders in the dark.
Other trading strategies that can also help traders are slow stochastic and Bollinger Bands, both of which can help locate breakouts but also make a good combination of strategies for new and experienced traders alike.
An honorable mention
As an honorable mention, I thought it would be interesting to include the bid-ask spread in price action trading.
Without going through the most basic principles of the bid-ask spread, traders need to focus more on working with either a floating or a fixed spread. Current conditions may make it the perfect time to use floating spreads, but fixed spreads have their fair share of positive effects when market performance suddenly slows.
In price action trading, traders need to consider the instrument they are trading and its liquidity. For best results, it’s best to consider your position in the market and account size, and experts like ForexFactory suggest that peak hour execution is important for traders looking to take advantage of larger swings based on variable spreads.
It is fairly easy to understand how price action trading works in the forex market; it’s right there in the name itself. While that’s easier said than done, the actual results are reflected in the performance strategy and components used.
The general rule is to keep a good foot on both sides of the market so you can better determine market volatility, price breakouts, and set an entry and exit point.
It’s also important not to be swayed by the myths and misconceptions that fill the Forex market, but rather stick to your strategy, building and improving as needed and seeing how closely you can follow the needle through sustained swings .