Markets are at any given time in one of three states: trending up, trending down, or in a trading range. Our goal as forex traders is to develop a trading strategy that allows us to consistently profit from one or all of these market states.
We have all heard the axiom, “the trend is your friend”; well this can be a very true statement, assuming that you have a well thought out trading plan that allows you to take advantage of market trends. However, it is very obvious by looking at any price chart that markets typically spend more time in consolidation or trading ranges than they do trending. Ideally we would like to develop a trading strategy that allows us take advantage of market consolidation as well as market trends.
Most oscillating indicators such as stochastics, rsi, or MACD, are designed to show you when a market is over-sold or over-bought. The problem with this is that when a market is in a strong trend these indicators will show over-bought or over-sold on a small pullback in the trend. So if you take the entry signals from these indicators during a strong market trend, you will get slaughtered. They do work semi-good in a ranging market; however they are still quite unnecessary to developing a widely applicable trading system.
Ideally what we would like to have is a trading system that gives us a unique market perspective which allows us to profit in all three market conditions. Once you accept the fact that indicators only work in certain market conditions and even then are really just confusing the true price action that you should be concerning yourself with, you can get down to the real meat of the market, which is price action analysis.
Stripping your charts of all unnecessary and confusing indicators will leave you with only price bars. After all, aren’t we mainly making our trading decisions off of price anyways? Why then would you look at something that is derived from price when you could just look at the price itself? Any entry or exit signal that any indicator will give you has already occurred in the market in the form of a price pattern. All we need to do is educate ourselves on what to look for and we will be able to spot entry and exit signals right as they occur, instead of 5-10 bars later via some lagging indicator.
So to re-cap, in order to consistently profit in a trending or ranging market we will need a trading methodology that gives us the knowledge to do both. Price action analysis, in my opinion, is the only educational tool available to traders that will give you the necessary perspective on markets that you need to develop a trading strategy that will allow you to consistently profit. Whatever market condition you encounter; trending or consolidation, a solid back round in price action analysis will give you the ability to devise an applicable trading plan and consistently profit.
