Pure price action provides a basic, unvarnished strategy for those seeking to buy and sell foreign currencies for a profit. While there are any number of sophisticated indicators to project future price action based on complex mathematical formulas and series of numbers, the only ones that pure price action focuses on are those of the recent buying and selling levels. As such, it is adaptable to all market conditions with the benefit of not chasing lagging indicators.
Utilizing the proper technical analysis, pure price action can not only deliver profits, but also be an effective risk management tool in forex trading. Scott Patterson, from his book, “The Quants,” which detailed the fall of Wall Street asset managers utilizing sophisticated computer programs, stated that, “…risk management is about avoiding the mistake of betting so much you can lose it all…the mistake made by nearly every bank and hedge fund that ran into trouble in 2007 and 2008. It can be tricky in financial markets which can exhibit wild, Mandelbrotian swings at a moment’s notice.”
Pure price action works against this as it responds to the immediate buying and selling. This makes it suitable for day trading, scalping, and those punters going after PIPs for profit. For the risk management aspect, the only hedge fund that prospered during The Great Recession was the Renaissance Fund as pointed out by Patterson in his book, which a focus on constant buying and selling, so that it was able to profit from short term trading the changing financial markets during that period.
Pure price action offers that same time protection from its basic form.
While it can be combined with any number of technical indicators, each of these will add another layer to the pure pricing action model. That detracts from the immediate buying and selling in the market. Not only does it cloud the view of the market action, it can lead to misreading the trend of the foreign currencies being bought and sold. Should this happen, there would be a constant pattern of small trading losses that would total a very large one at the end of the period.
Although pure price action is not a strategy that will result in huge profits, mastered, and practiced with risk management such as avoiding margin debt so as to not be leveraged, it can prevail in all market conditions. . Used by itself, it should avoid major trend reversals by focusing on incremental movements that yield small profits but avoid large losses.
Over time, these profits will add up for the success forex trader: as an example, the founder of the Renaissance Fund, Jim Simon, is a multi-billionaire.