PRICE ACTION TRADING
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Overview of Price Action Charts
If you browse the web at times, it can be difficult khổng lồ determine if you are looking at a stoông xã chart or hieroglyphics. When you see a chart with manyindicators & trend lines, it is likely a trader trying lớn overcompensate for lachồng of certainty.
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For example, I have talked with traders whose screens look something lượt thích the picture below.
Too Many Indicators
I have sầu even seen some traders that will have sầu four or more monitors with charts this busy on each monitor. When you see this sort of cài đặt, you hope at some point the trader will release themselves from this burden of proof.
What if we lived in a world where we just traded the price action indicator? A world where traders pichồng simpliđô thị over the complex world of technical indicators and automated trading strategies.
When you remove sầu all the clutter from the trades, all that is remaining is the price.
To see a chart minus all the indicators, take a look at the following image.
Price Action Chart
At first glance, it can almost be as intimidating as a chart full of indicators. Like anything in life, we build dependencies và handicaps from on pain of real-life experiences. If you have sầu been trading with your favorite indicator for years, going down to lớn a bare chart can be somewhat traumatic.
While price action trading is simplistic in nature, there are various disciplines. The disciplines can range from Japanese candlestiông xã patterns, tư vấn & resistance, pivot point analysis, Elliott Wave sầu Theory, & chart patterns <1>.
In this article, we will explore the six best price action trading strategies and what it means khổng lồ be a price action trader.
Chapter 1: What Makes up Price Action
Before we dive sầu inlớn the price action trading strategies, I want first khổng lồ ground you on the four pillars of the price action indicator.
CandlesticksBullish TrendBearish TrendFlat MarketIf you can recognize and understand these four concepts and how they are related khổng lồ one another, you are on your way.
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Pillar 1 – Candlesticks
I have listed candlesticks here because this is the most popular size of charting in today’s trading world. Historically, point & figure charts, line graphs và bar graphs were the raves of their day.
Not to lớn make things too open-ended at the start, but you can use the charting method of your choice. There is no hard line here.
However, for the sake of not turning this inkhổng lồ a thesis paper, we will focus on candlesticks. The below image gives you the structure of a candlestick. To learn more about candlesticks, please visit this article that goes into detail about specific formations và techniques.
Candlestick Structure
The key point khổng lồ rethành viên with candlesticks is each candle is relaying information, và each cluster or grouping of candles is also conveying a message. You have sầu lớn begin khổng lồ think of the market in layers.
Pillar 2 – Bullish Trend
This is a simple thành tích to identify on the chart, & as a retail investor, you are likely most familiar with this formation.
A bullish trkết thúc develops when there is a grouping of candlesticks that extover up & to the right.
Think of a squiggly line on a 45-degree angle.
The key thing khổng lồ look for is that as the stoông xã goes on khổng lồ make a new high, the subsequent retracement should never overlap with the prior high. This ensures the stoông xã is trending and moving in the right direction
Make sense?
Pillar 3 – Bearish Trend
Bearish trends are not fun for most retail traders. Shorting (selling a stock you vì chưng not own) is likely something you are not familiar with or have any interests in doing. However, if you are trading this is something you will need to learn to be comfortable with doing.
This formation is the opposite of the bullish trkết thúc. This is where a security will trover at a 315-degree angle.
Pillar 4 – Flat Market
Get ready for this statement, because it is big. In general terms, the market is in a flat trading range approximately 70% <2> of the time according to lớn author Heikin Ashi Trader, which is the pen name of a trader with over 15 years of futures & forex experience.
Rarely will securities trkết thúc all day in one direction. You will mix your morning range within the first hour, then the rest of the day is just a series of head fakes.
If you can re-imagine the charts in these more abstract terms, it is easy to form size up a security’s next move quickly.
Flat markets are the ones where you can chiến bại the most money as well. Reason being, your expectations và what the market can produce will not be in alignment. When the market is in a tight range, big gains are unlikely. The main thing you need lớn focus on in tight ranges is to lớn buy low và sell high.
Chapter 2: Price Action Trading Strategies
#1 – Outside Bar at Support or Resistance
For those unfamiliar with an outside bar, an example of a bullish outside bar is when the low of the current day exceeds the previous day’s low, but the stochồng rallies and closes above the previous day’s high.
The bearish example of this would be the same cài đặt, just the opposite price action.
outside down day
Therefore, it’s not just about finding an outside candlestiông xã and placing a trade. As you can see in the above sầu chart of Cambrex (CBM), it’s best khổng lồ find an outside day after a major break of a trover. In the CBM example, there was an uptrover for almost 3 hours on a 5-minute chart prior khổng lồ the start of the breakdown.
After the break, CBM experienced an outside down day, which then led to a nice sell-off inkhổng lồ the early afternoon.
#2 – Spring at Support
Spring at Support
A spring is when a stoông chồng tests the low of a range, only to lớn quickly come baông xã inlớn the trading zone & kick off a new trover. According lớn the author xxx, “springs, shakeouts, and tests usually occur late within the trading range và allow the market và its dominant players to lớn make a definitive sầu kiểm tra of available supply before a markup campaign will unfold. <3>
I lượt thích lớn use volume when confirming a spring; however, the focus of this article is lớn explore price action trading strategies, so we will zone in on the candlesticks.
The one common misinterpretation of springs is traders wait for the last swing low lớn be breached. Just khổng lồ be clear, a spring can occur if the stoông xã comes within 1% to lớn 2% of the swing low.
Trading setups rarely fit your exact requirement, so there is no point in obsessing a few cents. To illustrate this point, please have a look at the below example of a spring thiết đặt.
Spring Example
Notice how the previous low was never breached, but you could tell from the price action the stock reversed nicely off the low and a long trade was in play.
#3 – Inside Bars after a Breakout
Inside bars are when you have many candlesticks clumped together as the price action starts to lớn coil at resistance or tư vấn. The candlesticks will fit inside of the high và low of a recent swing point as the dominant traders suppress the stock lớn accumulate more shares.
To illustrate a series of inside bars after a breakout, please take a look at the following chart.
This chart of Neonode is truly unique because the stochồng had a breakout after the fourth attempt at busting the high. Then there were two inside bars that refused to lớn give sầu baông xã any of the breakout gains. NEON then went on to rally almost 20% in one trading day.
Please note inside bars can also occur prior khổng lồ a breakout, which strengthens the odds the stock will eventually breakthrough resistance.
This is honestly my favorite thiết đặt for trading. I love sầu it when a stochồng hovers at resistance & refuses lớn back off. This is a sign khổng lồ you that things are likely going khổng lồ heat up.
The other benefit of inside bars is it gives you a clean phối of bars lớn place your stops under. This way you are not basing your stop on one indicator or the low of one candlestick.
#4 – Long Wiông xã Candles
Are you able to see the consistent price action in these charts? If not, were you able to lớn read the title of the thiết đặt or the caption in both images?
Just having a little fun here, don’t get sensitive sầu.
The long wick candlestick is one of my favorite day trading setups. The thiết đặt consists of a major gap up or down in the morning, followed by a significant push, which then retreats. This price action produces a long wick & for us seasoned traders, we know that this price action is likely to lớn be tested again.
Reason being, a ton of traders, entered these positions late, which leaves them all holding the bag. The counter pressure will be weak comparatively, so what can’t go down must go up again. This leads khổng lồ a push back to the high on a retest.
That may have sầu been a little tough to lớn follow, so let’s illustrate this point through the charts.
Notice after the long wichồng, CDEP.. had many inside bars before breaking the low of the wiông chồng. After this break, the stochồng proceeded lower throughout the day.
#5 – Measure Length of Previous Swings
Have you ever heard the phrase history has a habit of repeating itself? Well, trading is no different.
As a trader, you can let your emotions and more specifically hope take over your sense of súc tích. You will look at a price chart and see riches right before your eyes.
Well, that my friend is not a reality. Did you know in stocks there are often dominant players that consistently trade specific securities?
These traders live sầu and breathe their favorite stoông xã. Given the right cấp độ of capitalization, these select traders can also control the price movement of these securities.
What you can bởi vì lớn better underst& the price action is to measure previous price swings.
As you perform your analysis, you will notice comtháng percentage moves will appear right on the chart. For example, you may notice that the last 5 moves of a stochồng were all 5% lớn 6%.
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If you are swing trading, you may see a range of 18% lớn 20%. Bottom line, you shouldn’t expect stocks khổng lồ all of a sudden double or triple the kích thước of their previous swings.
I fully understand the market is limitless; however, it’s better to lớn play the odds with the greademo chance versus swinging for the fences. Over the long haul, slow & steady always wins the race.
To further illustrate this point, let’s go lớn the charts.
Notice how FTR over a 10-month period experienced many swings. However, each swing was on average 60 to lớn 80 cents. While this is a daily view of FTR, you will see the same relationship of price on any time frame.
As a trader, vày you think it would make sense to lớn expect $2, $3, or $4 dollars of profit on a swing trade? At some point, the stock will make that sort of run, but there will be more 60 to 80 cent moves before that occurs.
Just on this one chart, I can count 6 or 7 swings of 60 to 80 cents. If you can trade each of these swings successfully, you, in essence, get the same effect of landing that trang chính run trade without all the risk và headabít.
#6 – Little khổng lồ No Price Retracement
Not to lớn get too caught up on Fibonacci, because I know for some traders this may cross inlớn the hokey pokey analysis zone. However, at its simplest form, less retracement is proof positive the primary trover is svào và likely to lớn continue.
The key takeaway is you want the retracement lớn be less than 38.2%. If so, when the stoông chồng attempts to kiểm tra the previous swing high or low, there is a greater chance the breakout will hold & continue in the direction of the primary trend.
This is especially true once you go beyond the 11 am time frame. This is because breakouts after the morning tkết thúc lớn fail. So, in order to filter out these results, you will want to focus on the stocks that have consistently trended in the right direction.
Chapter 3: False Setups
Trading comes down to who can realize profits from their edge in the market. While it is easy to scroll through charts và see all the winners, the market is one big cat and mouse game.
Between the quants and smart money, the false setups are everywhere.
As a price action trader, you cannot rely on other off-chart indicators to lớn provide you clues that a formation is false. However, since you live in the “now” và are reacting to directly what is in front of you, you must have strict rules to know when khổng lồ get out.
For me, in lieu of a technical indicator, you can use time as a gauge.
Just to be clear, the chart formation is always your first signal, but if the charts are unclear, time is always the deciding factor.
I did a study of all my winning trades and over 85% of them paid in full within 5 minutes.
If you have sầu been trading for a while, go baông chồng và take a look at how long it takes for your average winner to lớn play out.
Let’s review a few head fakes khổng lồ get a feel for what we are up against in terms of false setups.
I just showed you two examples of head fakes in both equities and futures markets.
In each example, the break of tư vấn likely felt lượt thích a sure move, only to lớn have sầu your trade validation ripped out from under you in a matter of minutes.
Chapter 4: How to Protect Against the Head Fakes
There are many ways you can protect yourself against head fakes.
For starters, vì not go hog wild with your capital in one position. Make sure you leave yourself enough cushion, so you vày not get antsy with every bar that prints.
Also, let time play to lớn your favor. I know there is an urge in this business lớn act quickly. However, there is some merit in seeing how a stoông chồng will trade after hitting a key tư vấn or resistance level for a few minutes.
If you think baông chồng to the examples we just reviewed, the security bounced baông xã the other way within minutes of trapping traders.
Where to Place Your Stops
One thing khổng lồ consider is placing your stop above or below key levels. Since you are using price as your means to measure the market, these levels are easy to lớn identify.
Now one easy way lớn bởi this as mentioned previously in this article is lớn use swing points. A more advanced method is to lớn use daily pivot points.
Now I know what you are thinking, this is an indicator. Well yes và no. Unlượt thích other indicators, pivot points bởi vì not move sầu regardless of what happens with the price action.
So, let’s see how you can use pivot points to lớn avoid getting caught in false signals.
Notice how the price barely peaked over the key pivot point and then fall baông xã below the resistance màn chơi. In order khổng lồ protect yourself, you can place your stop below the break out màn chơi khổng lồ avoid a blow-up trade.
Another option is to place your stop below the low of the breakout candle. Some traders such as Peters Andrew even recommends placing your stop two pivot points below. <4> This doesn’t work for me, as I vày not like that much risk, but it can work for some.
This is honestly the most important thing for you khổng lồ take away from this article – protect your money by using stops. Do not let ego or arrogance get in your way.
Chapter 5: Price Action Traders
Price action traders are the Zen traders in the active sầu trading world.
These people believe the human brain is more powerful than any machine.
Please vì not mistake their Zen state for not having a system. The price action trader can interpret the charts và price action to lớn make their next move.
Benefits of Price Trading
For starters, there isn’t as much information lớn process, so you can focus on the chart action.
Secondly, you have no one else khổng lồ blame for getting caught in a trap. Don’t bother emailing the guru with the proprietary trade signal that had you on the wrong side of the market.
The biggest benefit is that price action traders are processing data as it happens. There is no lag in their process for interpreting trade data.
Chart PatternsBy relying solo on price, you will learn lớn recognize winning chart patterns. The key is lớn identify which setups work and lớn commit yourself to lớn memorize these setups.
The next key thing for you khổng lồ vì is khổng lồ traông chồng how much the stochồng moves for & against you. This will allow you khổng lồ mix realistic price objectives for each trade. You will ultimately get khổng lồ a point where you will be able lớn not only see the thiết đặt but when khổng lồ exit the trade.
Challenges
Price action traders will need to lớn resist the urge to lớn add additional indicators khổng lồ your system. You will have sầu lớn stay away from the lathử nghiệm holy grail indicator that will solve all your problems when you are going through a downturn.
The real challenge is it’s extremely difficult to trade purely on price. It’s not something you can just piông chồng up và start doing right away.
You need to lớn think about the patterns listed in this article & additional setups you will uncover on your own as stages in your trading career.
First, learn to lớn master one or two setups at a time. Learn how they move sầu và when the setup is likely to lớn fail.
This, my frikết thúc, takes time; however, get past this hurdle và you have sầu achieved trading mastery.
To further your research on price action trading, kiểm tra out this site which boasts a price action trading system.
In Summary
Trading with price action can be as simple or as complicated as you make it. While we have covered 6 common patterns in the market, take a look at your previous trades lớn see if you can identify tradeable patterns. The key thing for you is getting to lớn a point where you can pinpoint one or two strategies.
To start, focus on the morning setups. The morning is where you are likely to lớn have sầu the most success. Avoid the lunchtime & kết thúc of day setups until you are able to lớn turn a profit trading before 11 or 11:30 am.
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