Foreign exchange trading is all about making the right decisions at the right time. This includes being able to read the market and what the next potential trading opportunities may be. One way that many FX traders do this is by trying to interpret price action.

Interpreting price action is a challenge for many Forex traders. It is the direct result of order flow which may give traders the means to determine the right move. And because of this relationship, price action comes with hints of bias, rate of buying and selling that may show when a breakout is genuine and when a reversal is likely to occur. There are different means to interpret and understand price action:

Candle Counting

When trying to interpret price actions, there might be a need for checking the charts which display how certain currencies may be moving. A candlestick chart may be used to interpret price action by counting candles. Trying to count the candles in a series of a candlestick chart for a currency pair can tell traders the frequency and the time of when a pair is being bought or sold. It can also tell traders a specific instance where buying and selling pressure may likely to occur.

Impulsive Or Corrective

According to the Elliot Wave Principle, price movements in any market may be influenced by investor or crowd psychology and develop a certain pattern typical with highs and lows. The pattern of price movements may be composed of changes caused by impulsive and corrective moves. Impulsive moves are characterized by a sudden and forceful move in one direction.

A corrective move on the other hand, is characterized by smaller movements that tend to show a relatively horizontal movement on the chart. A corrective move usually comes as a prelude to the next impulsive move from which would be the ideal situation for traders to be in in terms of order flow.

Time Variables

Interpreting price action may also be dependent on time variables to be more effective. One thing to bear in mind that when reading charts on price actions, considering the time lapse involved may give a more accurate picture of the price movements relative to certain periods of time. One other time variable that should be considered is the length of the consolidation of a pair. The longer the consolidation, the chance of a breakout coming in strong and powerful may be higher.