What is Price Action Trading on the Tick Chart?
To me price action is literally everything a securities price does in relationship to time. It is purely subjective and no two speculators will interpret price action the same. Most users of PA trade on higher time frames but it is a legitimate analytical tool on the tick chart.
On the higher time frames proponents consider swing highs and lows, support and resistance, candlestick and chart patterns etc. On the tick chart we concern ourselves in the here and now. Only the last couple of hours trading really influences our trade decisions. Are the highs forming higher or low. Same with the lows. These will form our support and resistance levels on our chart. What is the range between these levels, is it tight and consolidating or is it wide and whipsawing. Where is the price in relation to the rounded numbers level of 0000, 0020, 0040, 0050, 0060, 0080. What is the current trend? Rarely will we trade against the trend. However the same method that generates our entry point with trend will produce a valid entry point countertrend. There is literally dozens of valid entry signals generated each day. The skilled practitioner knows that all he has to do is capture one or two of those to see their account grow. Timing then is everything.
This is a key point, time of day dictates how we trade. This methodology can be traded 24/5. One advantage we as speculators have is that the reality of our trade ever getting to the Spot Forex market is about as likely as me getting a hole in one at golf. It just isn't going to happen. That's because the market is about the world of financial organizations, Money Makers, not us speculators. We are merely taking a variable odds bet on what the market will do next based on our analysis of the here and now. These financial organizations however operate by business hours and many traders take advantage of that fact. The London break out strategy is the obvious one to come to mind. As each market comes on line and then off, the tick trader can watch and get hints to what the rest of the day's activities might entail. How one manages a trade will vary during the different sessions.
Fundamental analysis also plays a part in trading the tick chart. Although we are more concerned with capturing price moments during the intraday trading period where price is controlled by the institutes, fundamentals govern the bigger picture and it takes a sustained effort from the market to reverse the overall trend. Researching and staying on top of "news" takes up very little time and quickly becomes part of your trading ritual.
The rule of thumb is to trade the trend. The beautiful thing about trading a solitary pair is after about three weeks of trading you quickly develop a bias toward either looking for long or short signals and trade only one side. But no matter how strong a trend is, the market will always correct itself. It may be swift and last only a few hours, it might drag on for a day or two. It could drag on for months. Being able to identify the trend vs correction vs reversal gives the speculator the ability to respond to the here and now of market conditions ensuring they're on the right side of the trade.
Also trading this methodology opens the trader up to the opportunities that arise during news release. These opportunities are the most lucrative with double digit returns possible. They are also the most risky as you will be trading when the market is most volatile and liquid. There is no guarantee that you will get into a trade at the price you want or out for that matter. Slippage can be hell. As much as you stand to win you can equally loss. But again our advantage is that it's the same market players trading the same news at the same time of day each and every month. They leave the same evidence behind on the tick chart to which we the speculator can identify and trade according to.
Things are seen in a different light, a fresh perspective on the tick chart. What is considered noise by many is purely evidence of the actual money makers activities that present themselves day in day out. The battle between the bulls and the bears. It's just like a self for-filling prophecy, by nature of their own operations, there are times of the day that this battle stalls, the price goes flat and neither side can dictate direction. This might last just minutes like during a speech from a reserve bank chair or the opening of the London session. It could develop over hours like the lead up to NFP data. The same money makers agents trade these same events and they are governed by their corporate policies. Like it or not they leave clear patterns of evidence of their activities. Essentially we are looking for the market to stall and trade flat within a range. The tighter the range, the longer it takes to form and the more trades that where made within the range the better. This is pressure building up between the bears and the bulls and eventually one side has to give. The longer that pressure builds up the more explosive will be the breakout. When it does the price moves and moves quickly as other agents spot this movement and try to get in on the action. We see this in real time on a tick chart and can trade immediately so maximizing the potential return of the trade. Often we are in and out, banking our profits before many have time to even contemplate that a potential trade exists.
Finally at this point, Price Action Trading on tick charts is about disciplined Money Management (MM). One vital aspect the speculator has to come to terms with is the high Cost of Trade (CoT - not to be confused with CoT as in Commitment of Traders data).CoT includes aspects such as spread, commission, slippage and swap. By far the greater majority of trades will only produce single digit pip returns. A 2 pip win with a 1 pip CoT and you'll lose 50% of your profit in fees. A 5 pip win loses 20% and a 10 pip win 10%. Slippage only compounds the high CoT. Suffer a 2 pip slip entering and exiting a trade at 10 pip Take Profit and now 40% of that profit is gone. The effect is even worse on a losing trade. Example, you enter a trade with a 4 pip Stop Loss and 2% risk. It all goes wrong from the start, slippage causes you to lose 2 pip straight away. Before you have time to place your SL the price blast through that level and you exit only to have 2 more pips lost to slippage. Bang you lose 8 pip double the original target. End result 4% lost from your balance. Bit of an extreme example but nevertheless a probable case scenario to this style of trading. This however is not to be feared. It just merely has to be understood. It helps the speculator evaluate whether a trade signal will produce the desired result. Remember there will be numerous opportunities to trade though out the day. You don't have to trade every one. Just the right one. Later on I hope to go into MM in more detail.