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Indicators: Price Action Indicator
newdigital, 2014.06.13 15:52
Indicators VS Forex Price Action (based on article)
There
is an endless debate within the forex trading community whether
investors are better suited to use price action mechanisms or technical
indicators when developing their portfolio strategies. The reality is
that both sets of strategies have advantages and disadvantages, but the
benefits gained from them are based heavily on the timeframe. Let us
take a look at some important factors to keep in mind when determining
which strategy to use.
What is price action?
The
most basic definition of price action is a strategy that involves an
investor taking all forex trading decisions based solely on the movement
of a currency’s price. A price action strategy does not take into
account any technical indicators that may be typically used to determine
whether a currency is supporting or resisting a particular trend.
Regardless of the various complicated strategies that investors around
the world may use, their actions are all accounted for in the final
price chart. The need to predict the impact of external global events on
the market is eliminated because the price chart will inevitably come
to reflect the impact on its own.
The entire focus in price
action trading is the current movements taking place on a price chart.
There are a number of tools that price action traders use, with one
notable example being that of candlesticks. Candlesticks are tools that
are used to determine whether a currency is truly on an upward or
downward trend. The only information taken into account is that which is
provided on a currency’s price chart.
What are technical indicators?
Forex
trading using technical indicators goes above and beyond the
information presented on a currency’s price chart. While price action
trading involves using only price data, technical indicators are used to
discover why a particular currency is moving in a certain direction to
predict its future behavior. Nowadays, there are a number of technical
indicators available for use in the market. However, most forex traders
using technical analysis incorporate three main indicators – moving
averages, bolinger bands and average directional indexes.
A
moving average line is one of the most common indicators that helps
forex traders determine whether a currency is exhibiting a bearish or
bullish trend, or if there is no trend at all. Moving averages can also
help investors identify whether a currency is resisting or supporting
price movements. Moving averages are usually created by determining a
particular period of time, and calculating the average price within that
period.
Bolinger bands are bands that are typically located
around a moving average and a currency price. They help investors
determine whether a currency is trending, while also suggesting points
at which this trend may begin reversing. They help in identifying
support or resistance patterns, and in calculating the volatility of a
currency.
Average directional indexes are used in tandem with
Bolinger bands and moving averages. An ADX essentially calculates the
strength of a trend through measurement of gradient. From these calculations, an investor will be able to determine whether a trend is
strong or weak.
Which one works?
Financial
theorists who develop technical indicators and publish them within the
market do so by studying market behavior in the past. As such, they are
using previous data and creating measurements that fall in line with
this data. When these measurements hold, they can be used by investors
to predict the price movement of a currency.
Price action
traders, however, live in the present. They react to how a currency is
doing presently, and trends that are easily visible on a price chart.
When price action traders look at a price chart, they do not need to
understand the interplay between demand and supply, but only the final
outcome as reflected in a price movement.
The two types of
strategies both have their own uses. Technical indicators are shown to
have an extremely low probability of success when the timeframe is
short. The opposite holds for price action trading. However, as the
timeframe of analysis increases, the probability of technical indicators
working begins to rise. Investors who are looking for long-term trading
strategies may be best placed to use technical indicators over price
action. Conversely, investors who prefer to make quick trades within the
short term are better suited to a price action trading strategy.