Price action trading is not relying on well-known and widely used technical indicators. Instead, as its name suggests, it tries to find and use some order in random price movements. Examples of price action trading can be using market swings between highs and lows, or using levels of support.
Contrary to indicators, price action is subjective. However, if used in automated trading, price action has to be objective. As the algorithms are deterministic, we just have to give an unambiguous definition of the price action and how we want to use it.
In addition, standard indicators, like RSI or ADR are of little use in automated trading on short timeframes like day trading. The problem is that indicators are lagging market. They are the more informative the more extensive price data they use. Obviously, this is only possible with delay. So the faster you need the reading, the less predictive value the indicators have.
Bottom line, for real-time Forex trading, price action trading and automation is a win-win combination. Further we will give some examples of the software that we are developing to trade without indicators.
Forex Price Action Trading Strategies
An adage “buy low, sell high” is well-known. While easy to understand, it is not easy to accomplish with indicators. The reason is described above: market lag. E.g. by the time you are sure market has made a top, real price might have already gone down. Market tops look nice on smoothened charts like M15, but to enter the market, you have to use real-time quotes! But can we turn the idea into a trading strategy with price action?
With price action approach, we can use the observation that it takes some while for significant market peaks to form. Another observation we use is that significant peaks are those that are rare – formed once a trading session or once a week etc. So price action trading algorithm can use these assumptions to try to catch market extremes.