Everything that affects a market and makes it move, from news, to economic reports, to big players like hedge funds and banks, is reflected via the raw price action on a price chart. Thus, when you try analyzing all variables external to the price action of a market, you are doing something that is unnecessary, a waste of time and that makes the entire trading process far more complicated than it needs to be.
Fundamental analysis vs. Technical analysis
The age old debate of Fundamental vs. Technical analysis is one that will probably never end. Fundamental traders trade solely off news and economic data, or “fundamentals”, as they believe they can make the best trading decisions from analyzing this information. Whereas, technical analysis traders make their trading decisions solely off price charts. Price action traders, are a specific type of technical analysis trader who make all their trading decisions solely off a market’s price movement or price action. Other technical analysis traders may use indicators or trading software systems, etc., but the price action trader only uses a market’s price action.
The primary reason why I trade with and highly recommend price action trading, is simply because all of the fundamental variables that affect a market, from any news event (war, weather, politics, etc.) to economic reports, are all ultimately reflected by price movement (price action) on a raw / ‘naked’ price chart. Thus, in my opinion, and in the opinion of many other successful traders, analyzing fundamental data is simply a distraction and a waste of time. It’s a waste of time because you can get all the information you need about a market simply by analyzing its price action, as the price action reflects all this fundamental data anyways.
Think of price action trading as getting the purest form of market data, filtered and cleaned up for you to use. As a trader, we are simply trying to take advantage of price movements in the market, so it only makes sense to analyze the actual price action, rather than trying to analyze variables that will eventually lead to price action. I like to think of price action as getting the market data ‘straight from the horses mouth’, as the old saying goes.
Noise vs. Clarity
Price action filters all market data and provides a clear picture of what is happening in a market. If you try analyzing all the fundamental variables that can influence a market each day, you will drive yourself crazy. It really comes down to noise versus clarity. There’s a lot of ‘noise’ in the financial media about what a market ‘might’ do next if X,Y or Z happens, it all sounds very professional coming from the talking heads on T.V. and the internet, but at the end of the day, nothing they say really matters. This is because, all that really matters is what the charts show us via the price action.
In the chart below, notice how the EURUSD market was in a clear downtrend from early May 2014 through mid-November 2015. Simply reading the raw price action of the chart would have told you that prices were likely to continue to fall because a downtrend was in place during this time. From this information, we could have watched for price action reversal strategies from resistance as well as bearish price action breakout patterns to trade in-line with the downtrend. Meanwhile, there were countless news events and economic reports released during these 7 months that implied price could push higher, while others said price might continue falling. You can avoid all this noise and contradictory data by simply looking at the raw price data on your price charts…
Not everyone reading this lesson is going to agree with me 100%. Some people are always going to be convinced that they ‘need’ to analyze fundamental data and economic news reports, as there’s just so much of this information streaming out of the financial media each day. However, you will need to decide that you will follow and trade from something, and you can’t follow everything or you’ll be in a constant state of confusion and doubt.
Experienced traders will likely understand better what I am talking about when I say that “all market variables are filtered through and reflected on a naked price chart”, but as a beginner it can be a hard pill to swallow at first. However, based on my experiences in the market, I am 100% confidence that following news and other fundamental data will eventual lead you to blow out your trading account. My experiences have shown me that a trader should strive to analyze and trade from a limited amount of data and use that data (price action) to make their trading decisions. If you let everything and anything influence your trading decisions, you will just be a gambler with no real strategy or trade edge.
I cannot guarantee that you will make money in the market by trading price action, but I can guarantee that doing so will give you the best possible chance, if you trade with discipline and patience. Trading with price action will remove a lot of the mental confusion from your trading and will give you clarity as to what your trading method is and what the market *might* do next. It won’t be easy, but the next time you see CNBC on, or Bloomberg, or come across an article from some ‘expert’ on what the Forex market ‘might’ do next, you’ve got to ignore it and go check out the charts to see what the price action is doing, as this is the best way to see what market actually IS doing and MIGHT do next.
I hope you’ve enjoyed this lesson on price action versus news trading. To learn more, visit the price action trading university.