How to use Price Action in Forex to Trade Contrarian
The forex currency market ebbs and flows in a contrarian fashion. This means the directional movements this market makes are generally counter to what looks like should or would logically happen next. This is a big reason why many aspiring forex traders have trouble developing a profitable trading plan and why consistent success in the forex market can seem so elusive. The forex market is designed to handle big volumes, as a result of this there is often volatile price action induced by commercial bank traders that can cause extreme price swings from one day to the next. This type of volatility combined with the ability to employ high leverage is what attracts many retail traders to forex. However, these same two factors can be, and often usually are, what ends up causing many forex traders to blow out their trading account and ultimately give up.
We can take advantage of the large price swings within the forex market by knowing what to look for and thinking in a contrarian manner. Anyone can look at a price chart and if it is going higher make the observation that they think it will continue higher. This same mentality is what gets many FX traders into trouble however. Often times beginning forex traders are nervous or fearful to enter the market, this is usually a result of them being un-confident in the method they are using and/or using too much leverage, which means trading too big a position size for their trading account. Managing position size is a direct result of self-discipline and control over one’s own emotion, unfortunately this skill cannot really be taught, it is generally acquired through trial and error or from belief in the teachings of a forex mentor or professional trader who has already made the same discipline errors their self. The skill of analyzing price movement and learning to trade and think contrarian is however a skill that can be taught.
The power of a price action setup lies in is ability to allow traders to see possible price direction before it occurs in the forex market. Often times large moves in forex terminate in a specific reversal pattern that we can learn to spot and use to our advantage. Many traders will feel good about a market as it trends in one direction and often times right when the trend is at its peak or trough is when many traders enter a trade due to the safe feeling they get from such a powerful movement. Unfortunately feeling is not something that is useful to successful forex trading. Professional forex traders know that the market moves contrarian to what the masses usually expect, consequently they will trade contrarian to what most forex traders are doing and generally use a method like price action analysis that gives them a clear and concise method to enter and exit positions.
Price action setups can help to safe-guard a forex trader from jumping in with the amateurs just as a strong move is ready to reverse. Developing a keen eye for specific price action setups is the best tool that one can employ to develop a contrarian mindset in the forex market. Analyzing the raw price data inherently supplied by the forex market with no lagging indicators is the most efficient way to develop your contrarian forex trading skills. Once you develop this skill you will start to pull apart from the masses of amateur traders who are constantly losing money and become one of the professionals who are taking it.
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