Price action is talked about in nearly every trading circle regardless of the asset class as it is the most basic, yet important, focal point in technical analysis. The price of a currency exchange-rate, or stock, etc., is not only what people value the asset at a given time period; but, it is made up of a combination of valuation, human psychology, socio-economic data, geo-political factors, and pure speculation on future events that directly, or indirectly, affect the asset.
Price action is very important because it is a sequence of historical prices traders and investors deemed fair value during that time frame, and analysis of the past trends in real-time, while combining the above factors, allow traders to determine whether the currency is overvalued, undervalued or neutral (fair). It also allows forecasting that can give an idea of whether the currency may trend in the near or long-term.
Studying price action is common among short-term traders because it can be less time consuming and time-intensive then fundamental analysis, but, make no mistake, being a successful technician takes time and effort. Traders build on their experiences in the study of price action, and when price action can be mapped a trader can find high reward, low risk trading opportunities. Studying price action can allow traders to customize their trading, too. For instance, a fundamental analyst may find the EURUSD bullish due to weakening US economic data, and refuses to go short until their fundamental outlook changes.
On the other hand, a technician could potentially agree over the long-run as the fundamental analyst but still find highly probable shorting opportunities in the short-term by following the pair’s price action.
For instance, in “EURUSD Reaching Triangle Apex in Early Trade,” I indicated that EURUSD spiked higher on poor US economic data. However, the short-term price action began to consolidate in converging trend lines, known as a triangle pattern. Price action was challenging support while previous candles suggested that the upward momentum was fading. This indicated a low-risk shorting opportunity on a close below the support level and a break of the ascending triangle. The pair broke lower roughly 60 pips. This was relatively low risk because if the pair broke higher through resistance, the trade would have ended in a 30 pip loss, so the trade ended up having a 2:1 reward to risk ratio. At that point in time, traders felt the EURUSD was overvalued and sent it lower.
Price action is a continuous fight between buyers and sellers fighting for the right price. Each trader has a different view on what is fair value, but the result ends in the pricing trend. And by studying the price action into the trend, traders can find countless opportunities to profit.
Price is the most fundamental principle of technical analysis. Whether you are trading on a bar chart or candlestick, using oscillators or moving averages, pivot points or supply and demand zones, all represent price and price action.