One of the most common questions that traders would at some point ask themselves is to whether to trade with the aid of indicators or to make use of forex price action charts. A quick look at any of the forums will see that a good section is dedicated to this debate. Price action traders often tend to look down upon traders who trade based on indicators, which brings to question as to which of the two a…
Understanding Price Action
In order to better answer this question, we need to first understand what is price action based trading. Price action interestingly is a very vague and broad term and can mean different things to different traders. To encompass all of it, price action is nothing but the study of price using just price and the charts without any additional indicators.
Some of the common methods of trading with price action include chart patterns such as the head and shoulders, double or triple tops and bottoms, flags and pennants and so on. Price action trading can also include other aspects such as trend lines, horizontal support and resistance levels as well as candlestick patterns.
Regardless of the methods that may be employed, the bottom line being that price action trading focuses on price as it evolves rather than rely on indicators.
Understanding the Technical Indicators
There are many technical indicators available today, from the good old trusted moving averages to oscillators and some advanced indicators such as cycle oscillators and so on.
Beginners to forex will almost certainly start off trading with indicators and the proof of this being the fact that most of the forex forums tend to focus a good section on trading systems, which is nothing but various combinations of the same old technical indicators.
When trading with technical indicators it is quite easy to miss the big picture. Technical indicators are plotted based on price. However, it is easy to ignore price as traders often tend to focus on how the indicators are moving instead of having to focus on price and this is where comes the major debate as to which of the two approaches is better.
There is no right way or the wrong way
Ask any trader who has recently switched sides and the most common answer one could get is that they believe the ‘other approach’ looks more promising. Indeed, isn’t grass always greener on the other side?
The important aspect to bear in mind is that whether you trade with price action or with indicators, the trading goal remains the same, which is to make a profit. There is no direct proof that price action trading gives better results or vice versa. It entirely depends on what the trader is comfortable with.
Price action trading requires a bit more experience and knowledge about the various market concepts such as supply/demand, the market sentiment and so on. New traders are often put off by price action trading as initially it might seem a bit too complicated to understand. Whereas trading with technical indicators in comparison is easy. Certainly, how hard can it be to understand the buy and sell signals when two moving averages cross over?
If you are one of those traders contemplating to switch sides, only because you think switching your trading approach might improve your odds, then think again. It doesn’t matter whether you are trading with price action or trading with technical indicators. What does matter is how well you understand your trading method.