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Price Action 1-2-3 method in the Forex Market

Price action is the use of only charts to trade Forex, without the use of technical chart indicators. When trading with this method, candlestick charts are used. This strategy uses lines and pre-determined patterns such as the 1-2-3 pattern that either develops or series of bars.

 

Traders use this strategy because this analysis is very objective and allows the one to analyze the market moves based on what they see on the currency charts and market movement analysis alone.

 

This strategy is used by many traders; even those that use technical indicators also integrate some form of price action in their strategy.

 

The best use of this method is achieved when the signals generated are combined with line studies so as to provide extra confirmation. These line studies include trend lines, Fibonacci retracement, support and resistance levels.

 

Price Action 1-2-3 Breakout

This strategy uses three chart points to determine the break out direction of a currency pair. The 1-2-3 method uses a peak and a trough, these points forms point 1 and point 2, if market moves above the peak the signal is long, if it moves below the trough the signal is to short. The break out of point 1 or point 2 forms the third point.

Price Action 1-2-3 method breakout trading

 

 

Series of breakouts

Series of breakouts 1-2-3 method

 


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Investors use price action to try and predict where a currency direction might go. The foreign exchange market is either trending or ranging.

 

A trending market moves in a specific direction while a ranging market moves sideways, normally after hitting a support or resistance level.

 

Observing the behavior of price action provides this information of whether the market is trending or ranging or reversing its direction.

 

As with any other Forex strategy this method should also be combined with other confirming indicators to avoid whipsaws. The 1-2-3 pattern can give good signals in a trending market but will give whipsaws when the market is ranging, it is best to determine if the market is trending or not before you start using this strategy.

 

 

Combining This Strategy With other Indicators - RSI and Moving Averages

Good indicators to combine with are:

  • RSI
  • Moving Average

 

Investors should use these two indicators to confirm if the direction of breakout is in line with the trend direction shown by these two indicators. If the direction is also the same as those of these indicators then investors can open a trade in the direction of the signal. If not investors should not open a trade as there is more likely a chance that this signal may be a whipsaw.

 

Just like any other indicator in Forex, price action also has whipsaws and there a requirement to use this as a combination with other signal as opposed to just using this strategy alone.

Combining Price Action 1-2-3 Method With Indicators RSI and Moving Averages

Combining With other Indicators - RSI and Moving Averages

Market Sentiment: Did you know that traders and market participants have been buying US Dollars because USD is the best currency to hold when there is a recession – this is because the dollar is held as the reserve currency by most central banks and during recession most traders also prefer to hold this currency, this is why USD is known as a safe haven currency. But now the market sentiment has changed and all the economies are on their way to recovery and most have even returned to economic growth based on the economic reports coming from these countries.

During times of economic growth traders prefer to sell the dollars they had bought and start buying higher yielding currencies. These higher yielding currencies include EURO and Great Britain Pound. This is why the Euro is starting to appreciate against the USD. The EURUSD is trending upwards; Crude Oil Prices have also started to move back up because demand of oil is growing because of the global economic growth, Gold is also in an upward trend because during economic growth the prices of commodities also go up because there is increase in their demand.

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