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An Introduction to Price Action Trading Strategies
Price action describes the characteristics of a security’s price movements. This movement is quite often analyzed with respect to price changes in the recent past. In simple terms, price action is a trading technique that allows a trader to read the market and make subjective trading decisions based on the recent and actual price movements, rather than relying solely on technical indicators.
Since it ignores the fundamental analysis factors and focuses more on recent and past price movement, the price action trading strategy is dependent on technical analysis tools.
[ Many day traders focus on price action trading strategies to quickly generate a profit over a short time frame. For example, they may look for a simple breakout from the session’s high, enter into a long position, and use strict money management strategies to generate a profit. If you’re interested in day trading, Investopedia’s Become a Day Trader Course provides a comprehensive review of the subject from an experienced Wall Street trader. You’ll learn proven trading strategies, risk management techniques, and much more in over five hours of on-demand video, exercises, and interactive content. ]
Tools Used for Price Action Trading
Since price action trading relates to recent historical data and past price movements, all technical analysis tools like charts, trend lines, price bands, high and low swings, technical levels (of support, resistance and consolidation), etc. are taken into account as per the trader’s choice and strategy fit.
The tools and patterns observed by the trader can be simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility, channels, etc.
Psychological and behavioral interpretations and subsequent actions, as decided by the trader, also make up an important aspect of price action trades. For e.g., no matter what happens, if a stock hovering at 580 crosses the personally-set psychological level of 600, then the trader may assume a further upward move to take a long position. Other traders may have an opposite view – once 600 is hit, he or she assumes a price reversal and hence takes a short position.
No two traders will interpret a certain price action in the same way, as each will have his or her own interpretation, defined rules and different behavioral understanding of it. On the other hand, a technical analysis scenario (like 15 DMA crossing over 50 DMA) will yield similar behavior and action (long position) from multiple traders.
In essence, price action trading is a systematic trading practice, aided by technical analysis tools and recent price history, where traders are free to take their own decisions within a given scenario to take trading positions, as per their subjective, behavioral and psychological state.
Who Uses Price Action Trading?
Since price action trading is an approach to price predictions and speculation, it is used by retail traders, speculators, arbitrageurs and even trading firms who employ traders. It can be used on a wide range of securities including equities, bonds, forex, commodities, derivatives, etc.
Price Action Trading Steps
Most experienced traders following price action trading keep multiple options for recognizing trading patterns, entry and exit levels, stop-losses and related observations. Having just one strategy on one (or multiple) stocks may not offer sufficient trading opportunities. Most scenarios involve a two-step process:
1) Identifying a scenario: Like a stock price getting into a bull/bear phase, channel range, breakout, etc.
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2) Within the scenario, identifying trading opportunities: Like once a stock is in bull run, is it likely to (a) overshoot or (b) retreat. This is a completely subjective choice and can vary from one trader to the other, even given the same identical scenario.
Here are a few examples:
1) A stock reaches its high as per the trader’s view and then retreats to a slightly lower level (scenario met). The trader can then decide whether he or she thinks it will form a double top to go higher, or drop further following a mean reversion.
2) The trader sets a floor and ceiling for a particular stock price based on the assumption of low volatility and no breakouts. If the stock price lies in this range (scenario met), the trader can take positions assuming the set floor/ceiling acting as support/resistance levels, or take an alternate view that the stock will breakout in either direction.
3) A defined breakout scenario being met and then trading opportunity existing in terms of breakout continuation (going further in the same direction) or breakout pull-back (returning to the past level)
As can be seen, price action trading is closely assisted by technical analysis tools, but the final trading call is dependent on the individual trader, offering him or her flexibility instead of enforcing a strict set of rules to be followed.
The Popularity of Price Action Trading
Price action trading is better suited for short-to-medium term limited profit trades, instead of long term investments.
Most traders believe that the market follows a random pattern and there is no clear systematic way to define a strategy that will always work. By combining the technical analysis tools with the recent price history to identify trade opportunities based on the trader’s own interpretation, price action trading has a lot of support in the trading community.
Advantages include self-defined strategies offering flexibility to traders, applicability to multiple asset classes, easy use with any trading software, applications and trading portals and the possibility of easy backtesting of any identified strategy on past data. Most importantly, the traders feel in-charge, as the strategy allows them to decide on their actions, instead of blindly following a set of rules.
The Bottom Line
A lot of theories and strategies are available on price action trading claiming high success rates, but traders should be aware of survivorship bias, as only success stories make news. Trading does have the potential for making handsome profits. It is up to the individual trader to clearly understand, test, select, decide and act on what meets his requirements for the best possible profit opportunities.
The Most Successful Price Action Trader in History: Munehisa Homma
Today’s article is going to focus on the man who invented the candlestick chart, candlestick trading patterns, and whom I consider to be the “father” of price action trading and technical analysis. In the past I’ve written an article on the market wizards, but today’s article is about one incredible man who was known as the “God” of the markets in his day; Japanese rice trader Munehisa Homma. He lived from 1724 to 1803 and even if half of the legends about him are true, he was by far one of the most amazing traders in history and we can learn a lot from the stories that surround him.
Homma is rumored to have made the equivalent of $10 billion in today’s dollars trading.
You should probably listen to a “Samurai trader”
Homma is rumored to have made the equivalent of $10 billion in today’s dollars trading in the Japanese rice markets. In fact, he was such a skilled trader that he served as an important financial advisor to the Japanese government at the time and was later raised to the rank of honorary Samurai. I don’t know about you, but I think it’s pretty safe to say we can learn something from a guy who was such a great trader that he become a Samurai because of it, to me that is totally cool in what is probably a semi-nerdy kind of way. Rumor has it that he once had 100 profitable trades in a row….granted there’s a bit of an advantage when you are basically the “inventor” of technical analysis and no one else really knows about it yet…but clearly Homma was a force to be reckoned with in the markets and his legend lives on today.
Homma began recording price movements in the rice market on paper made out of rice plants. He laboriously drew price patterns on his rice parchment paper every day, recording the open, high, low and close of each day. Homma began seeing patterns and repetitive signals in the price bars he was drawing and soon started to give them names, including some of the popular Japanese candlestick patterns that you are probably already familiar with like Spinning tops, Stars, Doji’s, Hanging Man and others, each pattern clearly conveyed a specific meaning and Homma began using these patterns to predict the future direction of rice prices. The discovery of the price action patterns left behind by the movement of rice prices gave Homma a huge advantage over other traders in his day, and combined with his passion and skill for trading, this advantage is what allowed him to become one of the most successful traders ever, if not theemost successful trader ever.
To any of you reading this who may still be “on the fence” about the relevancy and effectiveness of price action trading, consider the fact that it was used centuries ago by Homma and others and it’s still effective in today’s markets. I cannot think of any other trading method, system, indicator or robot that has been effective for that long and stood the test of time as pure candlestick price action trading has. Whether or not Homma knew the term “price action” in his time is irrelevant, he was clearly trading from the pure price movement of the market and he was the first person who realized the advantages of focusing one’s attention on a market’s price movement to predict its direction.
Homma realized price action reflects market psychology, and used it to his advantage
In Homma’s book “The Fountain of Gold — The Three Monkey Record of Money”, which he wrote in 1755, he says that the psychological aspect of the market is critical to trading success and that traders’ emotions have a significant influence on rice prices. He notes that this can be used to position oneself against the market when all are bearish, because at that time there is cause for prices to rise (and vice versa).
In other words, Homma was the first trader to realize that by tracking the price action in a market he could actually “see” the psychological behavior of other market participants, and make use of it. As it relates to the price action strategies that I teach, this could mean for example that after a large run up or down in a market a long-tailed pin bar signal can give rise to a large move in the opposite direction. I imagine that Homma was the first person to trade a pin bar signal and I’m sure when he realized the power of the signal he got goose bumps all over his body.
Homma also probably took advantage of false break trading strategies by the sounds of what he wrote in his book. I’m sure that he quickly identified patterns similar to what I teach as the fakey setup and saw that they sometimes form at major market turning points just as the last market participants have finally committed to a direction. The tendency of people to jump into a market when it “feels” safe has probably been around ever since Homma’s trading days back in the 1700’s, and it has not changed over the centuries. Homma probably realized this as it’s very evident by studying the price action of a market and using a big of logic and commonsense. In essence, Homma was the first true “contrarian” trader and this is why he is one of my heroes to this day. Using the price action of the market and logical thinking, we can often find high-probability entries into the market while most other market participants are stuck in a cycle of trading mainly with their emotions and from what makes them feel good.
Homma would definitely agree that what “feels” like the “surest” trade is often the wrong one, and once he could start to see the emotion of market participants via candlestick price patterns, this likely became very obvious to him.
The trend has been your friend or over 250 years, so stop fighting it!
Homma described the rotation of Yang (bull market), and Yin (bear market) and claims that within each type of market is an instance of the other type.
I can only imagine the amazement that Homma must have felt when he started to see price trends emerge over his years of drawing price patterns on his rice parchment paper. It must have instantly set off a euphoric feeling in him because he likely realized very quickly that trading with the trend would be the easiest way to make money in the rice markets.
To this day, trading with the trend is still the easiest way to trade. Traders try to fight it by continuously trying to pick tops and bottoms, but trend-trading has long been the easiest way to make a lot of money in the markets. Simply put, there’s a reason for strong trends, so it’s illogical to fight the trend. Homma was the first trader to be able to identify high-probability entry points in a trending market via simple price action patterns. This method has worked for literally over 250 years, and why so many traders still try to fight it and over-complicate it is beyond me.
If Homma was alive today and he saw all the messy indicators and trading robots people put on their charts, he would probably get a confused look on his face and wonder why anyone would behave so illogically and ignorantly when everything they need to find high-probability entries into the market has been right in front of their face the whole time.
Mirrors don’t lie
Homma wrote several books in his time, which are apparently out of print now, but the candlestick patterns he described in his books became known as the “Sakata Rules”. These Sakata Rules became the basis of modern candlestick charting and thus most of what Homma wrote about is still relevant today. The fact that the first person to trade from a price chart and arguably the most successful trader of all time was a price action trader, is really not surprising to me. What Homma discovered, and what many of us now know, is that the price movement on a “naked” price chart reflects everything about a market.
Everything you need to know to find high-probability entry signals into virtually any market is available on a natural price chart. If you want to see your reflection in the mirror, you just go to a mirror and look at yourself. You do not put a wig on or throw a paper bag over your head. Similarly, if you want to see what a market is doing, you simply need to look at its price chart. You do not need to cover up the most accurate reflection of a market with indicators and other nonsense. Munehisa Homma discovered this simple truth about markets over 250 years ago, and to this day many other traders, including myself, are still using pure price action to trade the markets, because there is simply no better way to trade. If you’d like to learn how I trade with price action candlestick patterns and how to trade in-line with time-tested concepts very similar to those Homma and other traders have been using for centuries.
Successful Price Action Strategy In 3 Steps
Successful price action trading has been a great interest of mine over the past few years. The first day I heard about the term “price action”, I became fascinated. Over the years, I got to develop a price action strategy that works for me, which I want to share here.
Unfortunately, I think both of those terms have become highly overrated these days. It’s as if every single successful trader out there uses some form of price action, which is right.
But for a long time, I associated price action solely with candlesticks patterns, which is a very typical newbie mistake…
Here’s what you must understand about having a successful price action strategy: When used right, it gives you access to high probability trade setups, that is because patterns in the price often reflect repeated human behaviors.
Before diving in, I do want to say that I am by no mean a price action trading expert. My current trading methodology allows me to understand what the price is doing and I take this into account prior to entering any trade.
I do not trade “zero-indicator charts” because I believe indicators are great to remain objective in a trading environment that can sometimes be overwhelming (especially when you trade and travel).
That being said, I use indicators for one reason only – to indicate. Nothing more.
Ultimately, I’m a believer that price movements can provide great clues for any trading decision.
How I Got To Learn A Price Action Strategy
As mentioned earlier, I used to think that price action only meant candlestick patterns. My early growth consisted of reading Japanese Candlesticks Charting Techniques by Steve Nison. No matter what “bad” some traders say about this book, I found it very interesting and definitely recommend it to any trader.
At one point, however, I began to understand that candlesticks alone wouldn’t allow me to stay consistent in my trading results. That’s when I came across the idea of using Support & Resistance areas. I struggled with those for a long time too until I figured out how to draw support and resistance zones.
I thought I had figured it out at that point…but again I was wrong. While I understood back then that candlesticks were the way to go, I was forgetting to look at a lot of things beyond that.
More recently, several guests on my podcast mentioned that they do not include candlesticks as part of their trading methodology. One trader (that I consider my mentor) also pushed my thinking a few times by saying he was willing to enter trades without having any candlestick signal forming.
The main reason for this is that other factors are present on any chart to help traders understand what’s going on with the currency pair they’re looking at. Exploring those factors will be the #1 goal of this article.
So let’s jump into those 3 steps of the successful price action strategy…
1) Identify Areas Of Trading Interest
Whenever I think of entering any trade, the first thing I must see is the price of a specific currency pair being at a particular location. In other words, I don’t trade anywhere.
It’s a little bit like crossing a road, as I explain in the video below. You wouldn’t want to cross the road anywhere. You’re looking for a specific cross lane first.
People have various ways of calling areas of interest in trading. Some might identify patterns (i.e. triangles, head & shoulders, pennants, etc.) and pick areas at which trades can be entered. That would sound along the lines of:
“If price breaks this level, the pattern is valid.”
Some others call those areas of interest Supply And Demand areas. There exists quite a complete methodology about that topic.
Personally, I’ve always liked simple Support and Resistance areas. I do have a simple way to identify them to get a consistent result. I outline this in A Powerful Way To Draw Support And Resistance Zones.
I’m using a broad name here by saying “areas of trading interest”.
In any case, there are 2 reasons why you want to use areas of interest to place your trades:
- It is likely that there will be more activity in those areas.
- It enables you to enter your trades with a more favorable Reward-To-Risk.
However, be careful to stay simplistic in your identification of trading areas. A chart clustered with lines and patterns isn’t going to help! For more on this topic, check out the video below:
2) Getting A Feel For The Market
Remember when I said a successful price action strategy isn’t only about candlesticks?
This is where we are NOT going to use candlesticks in order to get a feel for how the market (i.e. your specific currency pair) is moving.
Getting a feel for the market means we must stop for a few seconds to try to understand the relationship between the buyers and the sellers.
“Who is in control of the market right now? Are the buyers or the sellers more aggressive?”
The price on EUR/GBP is consolidating on the daily chart.
We look at things such as:
- Is there any one party that’s driving price movements (forming an uptrend/downtrend)?
- Has there been any sign of a possible reversal in the past price history?
- Are price movements exhausted? (marked by very small candlesticks at the top/bottom of a move)
- Are the breakouts in a trend strong? (marked by no fakeouts)
- How is price behaving at the area of interest? (going right through vs. consolidating vs. bouncing)
An example of chart where sellers recently tool the control:
3) Confirmation (or Not)?
No, you cannot simply look a little bit at the previous criteria and jump into price action trading without confirmation expecting the market to do as you thought.
You need to have a solid trading methodology.
However, the more losses we experience at the early stages of our trading, the more worried and careful we become as traders. That might make us want to unnecessarily look for ‘confirmation’ in the market.
The truth is, nothing will ever be confirmed in trading and things will forever remain close to a game of probability.
Do We Need To Confirm Our Trades?
Kim Krompass, the woman behind the Price Action Trader Institute invites traders around her to give up the need for confirmation. As she mentioned on my podcast, a lot of traders use indicators because of a desire to be right and to confirm the validity of trade. I’ve seen this need for confirmation multiple times myself.
We Aren’t Looking For Confirmation But For Confluence…
In my current trading methodology, I find myself building confluence. That won’t confirm any trade, but it is likely to increase your win rate over time.
A price action strategy doesn’t rely on confirmation, but instead on confluence.
For instance, entering a buy trade only if the price goes above the high of the previous candlestick is a way to be a little more certain that the currency pair is ready to move in the right direction after a candlestick signal.
Waiting for an indicator to form a certain signal after you went through the previous 2 steps of this article is also a way to build up confluence.
If you want to see a recent example of confluence, check out the video below:
Price action is (and will probably remain) one of the most searched topics online when it comes to Forex trading. However, having a process to apply price action to your trading is absolutely essential. Whether or not you use the process highlighted in this article, I strongly suggest you write it down in your own words. A good thing to do next might be grabbing the One Page Trading Plan template I have. That template has helped me and lot of trader structure our trading plan on a single sheet of paper. Oh, and it’s free!
Let’s keep in touch in the Facebook group! Are you a price action trader? What are the things you consider or find difficult on that topic? What do you think is required for having a successful price action strategy? Comment below ⬇️
9 Price Action Secrets Every Trader Should Know About
9 Price Action Secrets Every Trader Should Know About
Price action is among the most popular trading concepts. A trader who knows how to use price action the right way can often improve his performance and his way of looking at charts significantly.В However, there are still a lot of misunderstandings and half-truths circulating that confuse traders and set them up for failure. In this article, we explore the 8 most important price action secrets and share the best price action tips.
#1 Order absorption: Support and Resistance
Support and resistance indicate important price levels, because if the price is repeatedly forced to turn at the same level, this level must be significant and is used by many market players for their trading decisions.
If an upward trend is repeatedly forced to reverse at the same resistance, this means that the ratio between the buyers and the sellers suddenly tips over. Not only do all buyers withdraw at once, but the sellers immediately dominate the market activity when they start the new downward trend.
Naturally, support and resistance do not always stop the price from continuing a trend. Breakouts can provide high probability trading signals as well.
The conventional technical analysis says: The more often the price reaches a certain level of support or resistance, the stronger it becomes. However, I cannot fully agree with this.
Every time the price reaches a support or resistance level, the balance between the buyers and the sellers changes. Whenever the price reaches resistance during an upward trend, more sellers will enter the market and enter their sell trades. If the price reaches the same resistance level again, fewer sellers will wait there. This phenomenon is also called order absorption. The resistance is gradually weakened until the buyers no longer encounter resistance and the price can break out upward and continue the upward trend.
We can observe this phenomenon when the rejections from a resistance become increasingly weaker and the price can return to the resistance level more quickly in each case. Formations such as triangles or the Cup and Handle are based on the concept of order absorption as well.
The figure below shows such an example. The Silver price returns sooner and sooner to the same resistance level, as the arrows indicate. This suggests that fewer sellers are interested in selling at the resistance level each time. In this case, the resistance level becomes increasingly weaker. Furthermore, just before the breakout occurred, the trend was accelerating upwards as the dotted arrow indicates. Eventually, the price broke through the resistance level and an extended upward trend emerged when no selling interest was left.
#2 Chart phases
At any given time, the price can either rise, fall, or move sideways. This may sound simple, but as we have already seen during the candlestick analysis, we can quickly acquire comprehensive knowledge when we break down complex facts into its single components.
The screenshot shows that each chart comprises the following five phases:
If the price rises over a period, it is called a rally, a bull market or just an upward trend. If the price falls continuously, it is called a bear market, a sell-off or a downward trend.
Different trends can have varied degrees of intensity. In the next section, we will learn the individual facets of trend analysis.
Corrections are short price movements against the prevailing trend direction. During an upward trend, corrections are short-term phases in which the price falls. As we will see, the price does not always move in a straight line in one direction during trend phases, but constantly moves up and down in so-called price waves.
Consolidations are sideways phases. During a sideways phase, the price moves sideways in a usually clearly defined price corridor and there are no impulses to start a trend.
The buyers and the sellers are in equilibrium during a sideways phase. If the strength ratio between the buyers and the sellers changes during consolidations and one side of the market players wins the majority, a breakout occurs from such a sideways phase. The price then starts a new trend. Breakouts are, therefore, a link between consolidations and new trends.
- Trend reversal
If a correction continues for a long time and if its intensity increases, a correction can also lead to a complete trend reversal and initiate a new trend. Like breakouts, trend reversal scenarios, thus, signal a transition in prices from one market phase to the next.
The chart phases can be universally observed since they represent the battle between the buyers and the sellers. This concept is timeless and it describes the mechanism that causes all price movements. The trend phase pushes the price upwards, indicating the buyer overhang. The consolidations mark temporary trend pauses; however, a trend is continued until the price does not reach a new high during an upward trend. Corrections show the short-term increase of the opposition. If these are fended off, the trend continues its movement. On the other hand, long correction phases eventually develop into new trends when the strength ratio shifts completely.
Although the sequence and strength of individual chart phases can vary greatly, any chart contains only these phases. If we understand them comprehensively, price analysis becomes relatively simple.
#3 Wave length and steepness
Now, we are going even more granular. After seeing that any chart can only be made up of the various chart phases, which are made up of price waves themselves, we will explore the four different elements of wave analysis. Those conclude our foundational work. Every following chart formation, and any chart in general, can then be explained and understood with the previously learned building blocks.
The length of the individual trend waves is the most important factor for assessing the strength of a price movement.
During an upward trend, long rising trend waves that are not interrupted by correction waves show that buyers have the majority. On the other hand, smaller trend waves or slowing trend waves show that a trend is not strong or is losing its strength. The figure below shows that the trending phases are clearly described by long price waves into the underlying trend direction.
Left: Long trend waves confirm the high trend strength. The trend comes to a standstill as soon as the waves shorten. Right: The downward trend is characterized by long falling trend waves. However, the length decreases downwards and the trend reverses shortly thereafter.
The rate with which the price rises during a trend is also of great importance. In general terms, moderate trends have a longer life span and a sudden increase in price usually indicates a less sustainable trend. We can often observe this phenomenon during so-called (price) bubbles, wherein the price falls again just as quickly after an explosive rise.
The development of the steepness of trends and price waves, compared to the overall chart context, is also important: Accelerating or weakening price waves might show that a trend is picking up speed or is slowly coming to a standstill.
Interesting correlations can be made together with the concept of length: A trend is intact if we find long trend waves or trend waves that become longer with a moderate or increasing angle. On the other hand, a trend with trend waves that become increasingly shorter, and which is simultaneously losing its steepness, indicates a possible imminent end. The screenshot below shows such a situation where the length and the steepness changed during the uptrend. The complete reversal soon followed.
#4 Location вЂ“ improve your trading instantly
Even if you see the best price action signal, you can still greatly increase your odds by only taking trades at important and meaningful price levels. Most amateur traders make the mistake of taking price action signals regardless of where they occur and then wonder why their winrate is so low.
In my own trading, I pay a lot of attention to the location. A good signal at a very important support/resistance or supply/demand area can often foreshadow a great trade.
On the other hand, even a great price action signal at a bad location is nothing that I would trade.
To increase the chances of a successful trading opportunity, do not blindly enter trades in such support and resistance areas. It is advisable to wait for more confluence factors. For example, if a head-and-shoulders formation or a double top appear at a support and resistance level, then this can increase the chances of a positive result.
The screenshot below shows how the left head-and-shoulders pattern occurred right at a long-term resistance level on the right. Point 4 on the right chart marks where the head-and-shoulders forms. Zooming in and out on your chart can often help to see the bigger picture better and enable you pick up important clues.
When we zoom out, we can see that the Head-and-shoulders formation forms directly at the lower end of the strong resistance level, creating additional confluence for our trade.
#5 Stop looking for textbook patterns
One big problem I often see is that traders keep looking for textbook patterns and they then apply their textbook knowledge to the charts.
Just ask yourself: why do so many traders lose money? Does it maybe have to do with the fact that they all read the same books, trade the same patterns in the same way and look at charts identically? I think so! As a trader, you need to think differently.
Trading doesn’t work this way and the price is a very dynamic concept. Price and patterns change all the time and if everyone is trying to trade the same way on the same patterns, the big players will use that to their advantage.
This is maybe one of the most misunderstood price action secrets. Stop looking for shortcuts and do not wait for textbook patterns – learn to think and trade like a pro.
#6 The 4 clues of candlesticks and price action
To understand the price and candlestick analysis, it helps if you imagine the price movements in financial markets as a battle between the buyers and the sellers. Buyers speculate that prices will increase and drive the price up through their trades and/or their buying interest. Sellers bet on falling prices and push the price down with their selling interest.
If one side is stronger than the other, the financial markets will see the following trends emerging:
- If there are more buyers than sellers, or more buying interest than selling interest, the buyers do not have anyone they can buy from. The prices then increase until the price becomes so high that the sellers once again find it attractive to get involved. At the same time, the price is eventually too high for the buyers to keep buying.
- However, if there are more sellers than buyers, prices will fall until a balance is restored and more buyers enter the market.
- The greater the imbalance between these two market players, the faster the movement of the market in one direction. However, if there is only a slight overhang, prices tend to change more slowly.
- When the buying and selling interests are in equilibrium, there is no reason for the price to change. Both parties are satisfied with the current price and there is a market balance.
It is always important to keep this in mind because any price analysis aims at comparing the strength ratio of the two sides to evaluate which market players are stronger and in which direction the price is, therefore, more likely to move.
1) The length of wicks
If you see a lot of long wicks, it means that volatility and uncertainty are increasing.
2) Bullish vs. bearish wicks
Do you see more/longer wicks to the upside or to the downside? Wicks that stick out to the downside typically signal rejection and failed bearish attempts.
3) Position of the body
Is the body of a candle positioned closer to the top or the bottom of the candle? Bodies that close near the top often signal bullish pressure.
4) The body
Candles with a large body and small wicks usually indicate a lot of strength whereas candles with a small body and large wicks signal indecision.
#7 Broker time doesnвЂ™t matter
We get the question of how broker time and candle closing time influence price action a lot. It does not make any difference to your overall trading although time frames such as the 4H or daily will look different on different brokers.
The graphic below illustrates what we mean. The charts show the same market and the same period and both are 4H time frames. They used different closing times for their candles and, thus, the charts look slightly different. Some of the important clues that the left market shows are not visible on the right chart and vice versa.
So there is no broker time that is вЂњbetterвЂќ than the other вЂ“ just the signals you get slightly vary. The most important point is that you make consistent decisions and donвЂ™t confuse yourself by changing between different broker feeds.
DonвЂ™t stress out about your broker time; over the long-term, everything averages out as long as you stay consistent.
#8 The amateur squeeze and stop hunting
Conventional price action patterns are very obvious and many traders believe that their broker hunts their stops because they always seem to get stopped out вЂ“ even though the setup was so clear.
It is very easy for the professional trader to estimate where the amateur traders enter trades and place stops when a price action pattern forms. The вЂњstop huntingвЂќ youвЂ™ll see is not done by your broker, but by profitable traders who simply squeeze amateurs to generate more liquidity.
This is one of those price action secrets that can make a huge difference and we have seen that many of our students have turned their trading completely around with it.
#9 Subjectivity of Trendlines
Traders can get into trouble quickly because it is not always obvious how a trend line can be drawn. If there are uncertainties in the correct application of the trend lines, it is advisable to combine them with horizontal breakouts. This makes trading more objective. Thus, do not trade at the first signal when the price breaks the trend line, but only when the price subsequently forms a new low or high as well. These signals usually occur in quick succession, and hence the trader does not have to wait too long for his/her signal, but can nevertheless improve the quality of his/her trading and, at the same time, integrate another confluence factor into his/her trading.
The next screenshot shows various confirmed trend lines with more than three contact points in each case. A break of a trend line always initiates a new trend. Interestingly, every break of a trend line is preceded by a change in the highs and lows first and a break of a more objective horizontal breakout. When the price breaks a trend line during an upward trend, we can often notice how the trend has already formed lower highs.
The break of the trend line is then the final signal, whereupon the trend reversal is initiated.
Most of those tips are probably not considered price action secrets by advanced traders, but amateurs can usually improve the quality of their trading and how they view the markets by just picking a few of them. If you have any other tips or know about some mistakes traders do in price action trading, leave a comment below.
Comments ( 28 )
I guess another example would be buying or selling after a Talley in price. I like that you all focus on price action and compared the EMA over the SMA I have been using the EMA 8,21 on smaller time frames but I think for my swing trades IвЂ™ll start back tearing how the Entry and Exits worked out on the SMA & EMA 21s
I meant *Rally not Talley .
And back tearing not tearing . Predictive text sucks lol….
Success With Price Action Trading
Hello everyone, I’m back finally after a long Christmas and New Years break. I hope that everyone had a wonderful Christmas and a great start to the New Year! While I was away I was reading up extensively on Price Action, in particularly Al Brooks books on price action (they finally came in!). I am nowhere near done reading them, they are huge books, and not the easiest ones on the shelf to read…..by far. Those books contain so much detail about Price Action I feel like I’m sifting through a forest made of mud. Sometimes I have to re-read a page to grasp what was said, and I may read all three of these books over again just to let it sink in. They are hard to read, but they are the best source of what price action is to me. I will be applying some of the concepts from those books in my trading, and I will do it as I read the books, so bear with me it may take a while.
So lets have a look at what I did today, this is the first day I started trading since I stopped when the markets were getting a bit crazy and scarce. One thing I do not do is trade during December; everything just seems sporadic to me so I stay away. Plus it gives me time to focus on family and friends; otherwise my head is stuck in the books lol. Anyways I made four trades today, and three of them were ITM. I am trying to make my trades as simple as possible, no need to be super technical about it, because I’ve tried many strategies with crazy chart setups, colors, bells and whistles, and I find it just distracts me from what’s really happening. I have made a slight modification to my charting setup, nothing big really, just I changed and added an extra EMA to the chart. Those EMA periods are 180 and 365, and I chose those because it gives me the bigger picture of the trend on a smaller time frame, and also price seems to treat the EMA’s as Support/Resistance.
My first trade was with EUR/GBP, and I watched as price bounced a couple times off the 180 period EMA, so I waited for it to approach the EMA again. Once it reached it again I waited for some other form of confluence. We can see that the overall trend was down, and there was a bearish inside bar that formed after the candle that reached the EMA. To help things out further the Value Chart was at the 106 level which also signaled a possible overbought situation. Keep in mind everyone, it may sound like a lot, but it’s easy for me to see all of these hints and it takes me just a couple of seconds to decide. I placed a Put with a 10Min expiry and it was about a 4 pip win.
My second trade was with AUD/NZD. This is the first time I have traded this pair, so I’m not that familiar with it. But I did find confluence and adequate PA to trade it. Here price was reacting to the 180 and 365 EMA, so I waited until it came down and touched one of them. It did and shortly after there was some rejection of that level, and also a pin bar formed, which I highly value. The trend was also changing direction to the north side and the Value Chart had just dipped down below the 94 level, signaling to me a possible oversold situation. All of these gave me enough confidence to place a Call on the 10Min expiry, and ended up ITM by almost 2 Pips. It wasn’t the best win, but price did respect the EMA.
My Third trade was with AUD/USD, and I didn’t win this one. This trade I should have just threw out the window, because I didn’t have all of my criteria met to take this trade, yet I did anyways. I’m still working on my patience, sometimes I get antsy looking for a trade, and I DON’T need to do that, I need to let the market come to me. The only thing I really had going here was there was a small bullish inside bar, and that’s about it. Remember folks, follow your rules.
My fourth and final trade was back with EUR/GBP. It was ITM by about 4 pips as well. My reasoning for this trade was because price was continuously being rejected around .81057. I waited for price to come down and reach that level again, and see if it was going to push though. After price reached that level, it had more rejection, in the form of another Pin bar. I also had confluence from the Value Chart as well as the fact the EMA’s were flattening out, signaling the downtrend was slowing to range for a while.
Well, that’s about it for today, I hope everyone enjoyed my explanations of my trades. If you have any questions please ask!
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