Forex Price Action Trading: Entry and Exit Strategies

If you’re a beginner trader eager and curious about forex price action trading, you’re in the right place. In this blog post, we’ll dive into the definition of price action, identify price action patterns, and use them to enter and exit trades.

So strap on as we dash off pace by pace to unravel the concepts and some practical tips using this strategy.

What is Forex Price Action Trading? 

Price action is the movement of the price of a currency pair on a chart. It reflects the collective psychology of the market participants, such as buyers and sellers, who are constantly reacting to new information and events.

Price action isn’t influenced by any indicators, tools, or systems. It’s based on pure observation and analysis of the price itself.

By studying price action, you can understand the underlying forces that drive the market and anticipate its future direction.

How to Identify Price Action Patterns?

Price action patterns are specific formations or arrangements of price bars or candles. These formations indicate a potential change or continuation of the trend. They can be classified into two main categories: reversal patterns and continuation patterns.

Reversal Patterns 

Reversal patterns signal that the current trend is likely to end and reverse. Some examples of reversal patterns are:

Head and shoulders:

A bearish pattern that consists of three peaks, with the middle one being the highest (the head) and the other two being lower and roughly equal (the shoulders).

The pattern is confirmed when the price breaks below the neckline, which is a horizontal line that connects the lows of the two shoulders.

Double top:

A bearish pattern that consists of two peaks, with the second one being lower or equal to the first one. The pattern is confirmed when the price breaks below the support level, which is a horizontal line that connects the lows of the two peaks.

Double bottom:

A bullish pattern consists of two troughs, with the second one being higher or equal to the first one.

The pattern is confirmed when the price breaks above the resistance level, which is a horizontal line that connects the highs of the two troughs.

Continuation Patterns

Continuation patterns signal that the current trend is likely to resume after a pause or consolidation. Some examples of continuation patterns are:

Flag:

A bullish or bearish pattern that consists of a sharp price movement (the pole) followed by a narrow and sloping consolidation (the flag). The pattern is confirmed when the price breaks out of the flag in the direction of the pole.

Triangle:

A bullish or bearish pattern consists of two converging trend lines that form a triangular shape. The pattern is confirmed when the price breaks out of the triangle in the direction of the prevailing trend.

Rectangle:

A bullish or bearish pattern that consists of two parallel trend lines that form a rectangular shape. The pattern is confirmed when the price breaks out of the rectangle in the direction of the prevailing trend.

How to Use Price Action Patterns to Enter and Exit Trades?

Once you’ve identified a price action pattern, you can use it to plan your entry and exit strategy. Here are some general guidelines:

Entry:

You can enter a trade when the price breaks out of the pattern in the direction of the expected trend. For example, if you see a bullish flag pattern, you can buy when the price breaks above the upper trend line of the flag.

Stop loss:

You can place your stop loss below or above the pattern, depending on whether you are buying or selling. For example, if you buy after a bullish flag breakout, you can place your stop loss below the lower trend line of the flag.

Take profit:

You can set your take profit based on your risk-reward ratio or use another price action indicator, such as support and resistance levels, Fibonacci retracements, or moving averages.

For example, if you buy after a bullish flag breakout, you can take profit at a resistance level or a Fibonacci extension level.

To find out more about price action trading in forex, click here to open a demo account with VT Markets today to practice risk-free trading.