Price Action or Trading Forex with Indicators

What is price action? Traders talk about it as if it is something special, something that only advanced traders use. That it takes time for traders to learn how to trade "naked" or without indicators on their charts. We see it described as being leading not lagging meaning that when you are looking at price it is telling you what it happening now versus an indicator that is telling you something that is based on past prices.

One of the most successful forums on the Internet today is called the James16 Forum and it is dedicated to trading pin bars, double highs with lower closes, double lows with higher closes, inside bars, engulfing bars, etc. All price action trading "patterns".

But here is something to consider. Price action has no definition. Probably the truest definition is given by Al Brooks in his book, Reading Price Charts Bar by Bar. Every price change, he says becomes an example of price action.

Price action really boils down to a variety of subjective price patterns that are no more predictably correct than if you traded using the RSI, MACD, or any other indicator. If price action actually did what it tries to imply all you would need is one bar on your chart blinking at you and you would know in that instant what to do. Price action is a still a pattern that depends on past information. Even if you are trading a single bar you are always basing your trading on something that has already happened. We trade in the present, but our decision for the future are based on what we have just seen in the past; regardless of whether you call it price action or something else.

For example, one of the most used price action patterns is the pin bar. This was recognized by Martin Pring. It is a bar with a long nose. Suppose price is headed up on an hourly bar but by the time it closes price has fallen back so that the open and the close are very much the same. A pin bar is short for Pinocchio bar, because it is lying to you that prices will continue to go long. However, there is no more certainty that this price action pattern is going to go short than an indicator that might use the last 14 price closes to indicate the same thing.

Both require some form of information in the form of a pattern and to say that one is more relevant because it has newer information is impossible to prove. It has been proven that all information in price is not immediately discounted therefore there is no way to know how price will react.

Therefore my contention is that price action is simply trading a price pattern which you can find on your chart with both successes and failures. Scroll back on your chart and you will find pin bars that succeeded and those that failed. The same can be said for any pattern.

The failure of technical analysis is that traders who devise these systems do not take the step of testing them and providing statistical data that gives us information that might help us influence our decision. The best they can offer is subjective information such as, this works "most" of the time, or, this is a "very predictable pattern". Or, "you will be a success if you trade this system."

Price action is subjective and interpretative just as any system without statistical data. Here is an example of what a trading system should give the trader at a minimum at the time a trade decision is to be made.

"Pin bars on this currency pair in this time frame have a 45% chance of being correct when the retracement is 30 to 50%. This trade would have an expected target of 2:1."

That is data that makes a trading system worth its salt and renders the price action vs. indicator discussion moot.