If you want to learn
about Price Action Trading, then this forex price
action trading course will really help you.
There’s a lot of practical
trading tips and examples about how
to trade with price action in this course and at the end of it, you
will really have a solid understanding and hopefully become a better price
action trader.
I must warn you though that this price action trading course is
fairly long and you many need a cup of coffee…but it’s not boring.
That’s my guarantee! If you think it’s boring and let me know and
I will hire a comedian to edit it :-).
To give you an idea of the topics that this price action trading
course covers, just scroll on the table of contents shown above.
If you see any topic or chapter on this table of contents below
that interests you, all you need to do is click that link and you will be taken
to the chapter/topic immediately without having to scroll or read through
everything in this course.
After going through the price action trading course, you will need
this:
Enjoy!
CHAPTER 1: INTRODUCTION TO PRICE ACTION
To really understand price action means you need to study what
happened in the past. Then observe what is happening in the present and then
predict where the market will go next.
“Regardless of what you may
think, all traders are forecasters, just like the weatherman.”
The weatherman knows where the wind is blowing from, sees the high
and low pressure systems forming over the land, knows the temperature
variation, cold front, hot front…you know what I’m talking about, right?
Then what does he do? He
will say something like “tomorrow,
the weather in Nagpur will be mostly cloudy, slight chance of shower and
possibly sunny in the afternoon.”
How does he know that?
Well, from studying the past data and seeing what the current
weather situation is at the moment (and these days, their prediction is more
reliable due advanced computer models and weather satellites in space).
So traders are like that…
If we get the direction
wrong, we lose money, we get it right, we make money. Simple as that. So
everything you are going to read here is
about trying to get that direction right before you place a trade.
Before you get started, these are some words that you may
encounter:
Long= buy
Short= sell
Bulls= buyers
Bears= sellers
Bullish=if the market is up, it is said to be bullish (uptrend).
Bearish=if the market is down, it’s said to be bearish.
Bearish Candlestick=a candlestick that has opened higher and
closed lower is said to be bearish.
Bullish Candlestick=a candlestick that has opened lower and closed
higher is said to be a bullish candlestick.
Risk : Reward Ratio=if you risk 50 in a trade to make 150 then
your risk: reward is 1:3 which simply means you made 3 times more than your
risked. This is an example of risk: reward ratio.
Now, the next chapter of the price action trading course, you are
going to learn what price action is and lots more.
CHAPTER 2: WHAT IS PRICE ACTION
TRADING?
This is the basic definition of price action trading:
When traders make trading
decisions based on repeated price patterns that once formed, they indicate to
the trader what direction the market is most likely to move.
Price action trading uses
tools like charts patterns, candlestick patterns, trend lines, price bands,
market swing structure like upswings and downswings, support and
resistance levels, consolidations, Fibonacci retracement levels, pivots etc.
Generally, price action traders tend to ignore the fundamental
analysis-the underlying factor that moves the markets. Why? Because they
believe everything is already discounted for in the market price.
But there’s one thing I
believe you should not ignore: major economic news
announcements like the Interest Rate decisions, Non-Farm Payroll, FOMC etc. (If
you are interested in trading currency news, check out these news trading
strategies: interest rates news forex trading strategy, Non Farm Payroll Forex Trading
Strategy & the 1 minute forex news trading strategy)
From my own experience and from
what I’ve seen, I say this “the release of economic news
can be both a friend and an enemy for your trades.”
Here’s what I mean by that:
§
If you did take a trade in line with the result of economic news
release you stand to make a lot more money very quickly in a very short time
because the release of the news often tends to move price very quickly
either up or down due to increased volatility.
§
But if your trade was against the news, you can walk away with all
your profits wiped out or a loss and the loss can be huge because markets can
move so fast during that period that there’s also the chance that your stop
loss cannot be triggered.
The chart below shows and example of what can happen when there is
major forex fundamental news release:
This is one experience I will never forget. I traded a perfect
price action setup, the trade went as I anticipated but a few minutes later,
the market dropped down very quickly.
My stop loss was never
triggered at the price level where I set initially.
I tried to close that trade as many times as I could but it was
impossible to close because the price was way down below where my stop loss
price was! Price jumped my stop loss.
I just stood there and
watched helplessly. After what seemed like an eternity, the trade was closed by
broker at the worst possible price way-way-way- down below!
That single trade nearly wiped out my trading account. Instead of
losing 2% of my trading account, I lost almost half of it. I did not understand
and did not know what happened that night to make the market move like that. I
could not sleep that night.
Later I found out that it was a major economic news release that
moved the market like that.
From that incident, I’ve
learn’t my lesson, so before I place a trade, I head over to the forex factory calendar to check
if there is any high impact news coming out before I place my trades.
If there’s a valid trade setup but If I see that the time is close
to a major news to be announced, I will not enter. There are exceptions where I
will take a trade if I see that I can place my stop loss behind a major support
or resistance level.
The high impact news are colour coded in Red. That’s what you look
for(see figure below):
Here’s what you can do:
1.
If a valid trade setup happening, check with forexfactory.com to
make sure there are no major news announcements to be made soon that can impact
your trade.
2.
If there’s news to be released you can do these 2 things: don’t
trade until after the news release and wait until markets starts trading
normally again, or if you decide to trade, trade small contracts because the
market is very volatile when the news is released. This can works for you or
against you. You need to know what you are doing during these times.
3.
If you already have a trade that has been running (prior to the
news release time) for some time and in profit, think about moving stop loss
tighter or taking some profits off that table in case the market goes against
you once the news is released. In an ideal case, you would have taken this
trade a while ago and that the current market price is far away from your trade
entry price and you would have locked some profits already and if the market
moves in the direction of your trade after the news release, you will make a
lot of money.
3 Important Reasons Why You
Should Be Trading Price Action
1.
Price action represents collective human behavior. Human
behavior in the market creates some specific patterns on the charts. So price
action trading is really about understanding the psychology of the market using
those patterns. That’s why you see price hits support levels and bounces back up. That’s
why you see price hits resistance levels and heads down. Why? Because of
collective human reaction!
2.
Price action gives structure to the forex market. You
can’t predict with 100% accuracy where the market will go next. However with
price action, you can, to an extent predict where the market can potentially
go. This is because price action brings
structure. So if you know the structure, you can reduce the
uncertainty to some extent and predict with some degree of certainty where the
market will go next.
3.
Price Action helps reduce market “noise” and false signals. If you
are trading with stochastic or CCI indicators etc, they tend to give too many
false signals. This is also the case with many other indicators. Price action
helps to reduce these kinds of false signals. Price
action is not immune to false signals but it is a much
better option than using other indicators…which are essentially derived from
the raw price data anyway. Price action also helps to reduce “noise”. What is
noise? Market noise is simply all the price data that distorts the
picture of the underlying trend… this is mostly due to small price corrections
as well as volatility.
One of the best
ways to minimize market noise is to trade
from larger timeframes instead of trading from smaller
timeframes. See the 2 charts below to see what I mean:
And now, compare market noise in the 4hr chart (notice the white
box on the chart? That equates to the area of the 5min chart above!):
Smaller timeframes tend to
have too much noise and many traders get lost trading in smaller timeframes
because they do not understand that the big trend in the larger
timeframe is the one that actually drives what happens in the smaller
timeframes.
But having said that, I do
trade in smaller timeframes by using trading setups that
happen in larger timeframes. I do this to get in at a better
price point and keep my stop loss tight.
This is called multi-timeframe
trading and I will also cover this on Chapter 16 to show you
exactly how it’s done.
Is Price Action Applicable To Any Other Market?
The answer is yes. All the price action trading stuff described
here are applicable to all markets.
In here, I will be mostly be talking in terms of using price
action in the currency market but as I’ve mentioned, the concepts are universal
and can be applied to any financial market.
Price
Action Trading Allows You To Trade With An Edge
Price Action Trading is
about trading with an edge. What is a trading edge?
Well, put simply it
means you need to trade when the odds are in your favour. Things
like:
§
Trading with the trend
§
Trading With Price Action Using reliable chart patterns and
candlestick patterns.
§
Trading using Support and resistance levels.
§
Making your winners larger than your losing trades
§
Trading only in larger timeframes
§
Waiting patiently for the right trade setups and not chasing
trades.
All these kinds of things above helps you to trade with an edge.
They may not be exiting and probably you’ve heard of these before but hey…this
stuff is what separates winners from losers
What
Price Action Trading Is Not
§
Price action trading will not make you rich…but
price action trading with proper risk management can make you a profitable
trader. Some of you will go through this guide and learn and make much money
but some of you will fail. That’s just the way life is.
§
Price action trading is not the holy grail but
it sure does beat using other indicators (most of which often lag and a derived
from price action anyway!).
§
Price action trading will not make you an overnight success. You
need to put in the hard yards, observe and see how price reacts and see those
repetitive patterns and then have the confidence to trade them then you will be
rewarded for that.
If you are one of those that are going to learn from this course
and apply it to your forex trading, my hats off to you and I say “go and
succeed.”
Chart
Time-Why It Is Important
You need chart time to understand Price Action. For some of you,
it may take a while for you to understand, while some of you may be very quick
to learn.
Observe the price action of
the market. Go back to the past and see how the market had behaved. What
caused it to behave that way? You
cannot be a confident price action trader until you do this.
If you could simply read the charts well enough to be able to
enter at the exact times when the move would take off and not come back, then
you would have a huge advantage.
Trend lines, specific candlestick patterns, specific chart
patterns, Fibonacci retracement levels & support and resistance
levels…these are the tools I use to trade.
If you put the time and effort into learning them, it won’t be
long before you will begin to understand and see how all these things fit
together.
Start learning to trade naked price action.
CHAPTER
3: UNDERSTANDING MASS PSYCHOLOGY IN TRADING
Here’s one thing about
price action: it represents a collective
human behavior or mass psychology.
Let me explain.
All human beings have evolved to respond to certain situations in
certain ways. And you can see this happen in the trading world as well:
The way multitude of traders
think and react form patterns… repetitive price patterns that one can see and
then predict with a certain degree of accuracy where the market will most
likely go once that particular pattern is formed.
For example, if you see a major resistance level, price hits the
level and forms a ‘shooting star’ a bearish reversal candlestick pattern. You
can then say with a greater degree of confidence that Price is going to head
down.
Why?
Because there are so many
trader watching that resistance level and they
all know that price has been rejected from this level on a previous one or two
occasions and that tells them that it is a resistance level and that they
can also see that bearish reversal candlestick formation… and guess
what they will be waiting to do?
1.
They will be waiting with their sell orders…not just one sell
order but thousands of them, some small and some big orders.
2.
But on the other side of the coin is that trader that have bought
at a low price and now that the price is heading up to the resistance
level, that’s where most of their take profit levels are. So
once they take their profits around resistance levels, that means there are
now less buyers now and more sellers. The
balance tips in the direction of the sellers and that’s how the price is pushed
back down from a resistance level.
Because price action is a
representation of mass psychology…the markets are moved by the activities of
traders.
So price action trading is about understanding the psychology of
the market using those patterns and making a profit as a result.
There are 2 types of price
action trading, the 100% Pure price actiontrading and the not-so-pure
price Action trading. Let me explain…
Pure
Price Action Trading
Pure price action
trading simply means 100% price action trading. No
indicators except price action alone.
Not-So-Pure
Price Action Trading
This is when price action trading is used with other indicators
and these other indicators form part of the price action trading system. These
indicators can be trend indicators like moving averages or oscillators like
stochastic indicator and CCI. (Please don’t go googling CCI and stochastic
indicators!)
Origin
of Price Action Trading
Charles Dow is the guy credited to be the father of technical
analysis. He came up with the DOW Theory.
The theory tries to explain market behavior and focuses on market
trends. One part of the theory is that the market price discounts everything.
Therefore, technical analysts use price charts and chart patterns to study
market and don’t really care about the fundamental aspects of what move the
markets.
I will cover this a little bit later when I talk about what are trends,
how trends begin (or end) in Chapter 5 of this price action trading course.
CHAPTER
4: PRICE AND CHARTS
Now, let’s study price in a
little bit more detail…this stuff is for the newbies…please
skip this section if you think you know!
What
is price?
Price is value given to a particular instrument usually in
monetary terms and its value is dependent on supply and demand.
§
If the demand is more, price increases as more traders start
buying and driving prices up.
§
Demand zones on your price charts are around
support levels, that’s where buyers come and start buying and driving prices up!
§
If there is an oversupply, price falls as there are more seller
and less buyers.
§
Supply zones on your charts are on and around resistance levels where
sellers come in and drive the prices down due the fact that there are very few
buyers.
Every time you open up your charts, all you are seeing are the
forces of supply and demand at work!
If the market is going up,
what does that tell you about the demand and supply then? It
means there’s a lot of demand for that instrument.
Or what if the marketing is
going down then what does that tell you about the demand and supply then?
There’s a less demand and lots of supply.
But there’s something else about price…it has a time component.
So the price of something
today will not be the same tomorrow or in a month or in a year.
Supply and demand over time drives up and down the price.
But how do you represent the value of price over time which in
turn tells you of the supply and demand forces?
Answer: You need price
charts: price bars, candlestick and line charts. These
are graphical and visual representation of
price over time, thus telling you a story about supply and demand forces over a
certain time period which can be 1 minute up to one month or year.
3
Main Types Of Price Charts
Price over a period of time is graphically represented in 3 main
ways:
1.
with a bar chart
2.
a candlestick chart
3.
or a line chart.
Now, I will go through each on of these 3 main charts…
What
Is A Bar Chart?
The chart you see below is a bar chart.
Those green and red thingies are called bars. The green bars are
bullish bars which simply means that the closing price is higher then the
opening price withing a certain time period.
Those red bars are bearish bars and that means that the closing
price is lower than the opening price for that period of time.
The bar char chart is simply looks like a “stick” or bar with 2
short knobs on both sides. The knob on the left is the opening price and the
knob on the right is the closing price.
Then there’s the wick on the upper end and the lower end. The
highest point or level of the wick on the upper end is the highest price that
was reached during a certain timeframe or period and the lowest point of the
lower wick is the lowest price that was reached also during the same time frame
or period.
What Is A Candlestick
Chart?
The chart below is an example of a candlestick chart.The
candlestick chart conveys the same information as in the bar chart above, the
only difference is that a candlestick chart has a body and a bar chart has not
body.
A candlestick chart…to put
it in another way is like putting a body over a skeleton
of the bar chart!
Here’s a comparison of the Bar chart vs the candlestick chart and
note how they convey the same information:
That’s the only difference between the bar chart and the
candlestick chart…is that the candlestick chart has a body and the bar chart
does not.
The red
colour is most often used to indicate a bearish
candlestick which means the price opened up high and closed lower. A green
candlestick represents a bullish candlestick and is the exact opposite.
What
Is A Line Chart?
This line chart below is based on the same price information as
the bar and candlestick chart shown above.
As you can see, even though, it conveys the same price
information over time but does not reveal everything.
§
The line chart is one of the least
favorite of charts for trading.
§
A line chart is simply drawn by connecting either the closing,
high or low price and that’s how you get the line on a chart.
§
Line charts can be useful for looking at the “bigger picture” and
finding long term trends but they simply cannot offer up the kind of
information contained in a candlesticks chart.
Out of these 3, the candlestick
chart is the most popular followed by the bar chart. So from here
on, I will be only focused on candlestick chart only but I may end up using the
word bar to refer to candlestick pattern as well
so just be aware of that.
I will talk more about the candlestick (and candlestick charts) as
this is the bread and butter for price action traders.
The
candlestick
§
The candlestick chart had its origins in Japan and can also be
referred to as the Japanese candlestick chart.
§
The colour of the candlestick chart tells you if price was up or
down in a particular timeframe which means that candlesticks are either bullish or bearish
Now most traders prefer to
set green candlesticks as bullish and red
candlesticks as bearish. And I like it to be that way for me
personally.
§
Some broker’s trading platforms have options where you can change
the colours of the candlesticks to any colour you want. If you are a woman, you
may change a bullish candlestick to pink! And bearish candlestick to Purple! (I
have never seen a pink and purple candlestick yet).
This candlestick shown below is an example of bullish candlestick.
§
A Bullish candlestick simply means the price opened lower and
closed up higher after a certain time period, which can be 1minute, 5minute,
1hr or 1 day etc.
§
The candle body represents the distance price has moved from the
opening price to the closing price. The longer the body, means price has moved
a great deal upward after opening. The shorter the candle body means the exact
opposite.
§
The high is the highest price that was reached during that time
period.
§
The low is the lowest price that was reached during that time
period.
All these candlesticks shown below are bullish candlesticks which
mean that their opening prices was lower than the closing prices and therefore
reflect and overall uptrend in the timeframe each candlestick was formed:
Now, the candlestick shown below is an example of a bearish
candlestick.
A bearish candlestick simply means that the candlestick opened up
at a high price and closed lower after a certain time period:
All these candlesticks shown below are bearish candlesticks
meaning that the opening price was higher than the closing price, therefore
reflecting a downtrend:
Understanding
Buying and Selling Pressure on Candlesticks
Did you know that there are
bullish candlesticks that are considered bearish and bearish candlesticks that
are considered bullish? To really understand this concept, you need to understand buying and selling pressure.
You see, every candlestick that is formed tells you a story about
the battle between the bulls and the bears-who dominated the battle, who won at
the end, who is weakening etc. All that is reflected in any candlestick you
see. The length of the body of the candlestick as well as the shadow (or wick)
tells you a story about the buying and selling pressure.
For example, look at the two charts below:
Look at the first green candlestick on the left chart, it’s a
bullish candlestick right? Yes. But you can see that it has a very short
body and very long wick (tail).
It tells you the sellers
(bears) were dominant. If this candlestick was to form after hitting a resistance level,
it will be considered a bearish signal even though it’s a bullish candlestick.
Now, you can apply the same sort of logic to all the other
candlesticks above and read the story each one is telling you.
§
If the upper wick is very long, it simple tells you that there’s a
lot of selling pressure. It means price opened and got pushed higher by the
buyers but then at the highest price, sellers got in and drove it back down.
§
If the lower wick is long, it tells you that there’s a lot of
buying pressure. Sellers drove the price down but buyers got in and drove the
price back up.
§
If the lower wick is short, it tells your there’s very minimal
buying pressure.
§
If the upper wick is short, it tells you that there’s very minimal
selling pressure.
What about the length of the body of candlesticks?
§
The longer the body of the candle indicates very strong buying or
selling pressure.
§
A short body of a candlestick indicates little price movement and
therefore less buying or selling pressure.
§
Sometimes the candles will have no upper or
lower shadows but with very long bodies. These are interpreted the
same way as standard candlesticks but are an even stronger indication of
bullish or negative market sentiment.
§
In the case of bullish candle, prices never decline below the
open. In the case of bearish candle, price never trade above the open. See
below:
Now, so far we have looked at individual candlesticks…what if you
combine more than one candlesticks? What does it show you?
§
Well, one important thing that group of candlestick can show you
is how strong or weak a bullish or bearish move is.
§
They can also tell you if the bullish or bearish move
is weakening.
§
The word used to describe such a situation is momentum.
The chart below shows 3 bearish candlesticks in a downtrend, each
with decreasing length and body lengths.
In a downtrend situation, when
you see such happening, it is one signal the that downward trend is weakening.
And if this happens around
support levels, you should sit up and take notice and also watch for bullish
reversal candlesticks which will give you the confidence to buy!
The following chart below shows you an example of decreasing
downward momentum as price nears a support levels.
What you will see is that
the prior candlesticks will tend to be longer and as
price nears the support level, the candlesticks starts to get shorter:
This next chart below shows
3 bullish candles in an uptrend each with decreasing lengths. In
an uptrend, when you see such happening around resistance levels, you should
take notice. Also watch for bearish reversal candlestick patterns to form. This
will give you the confidence to sell:
Here is an example of a bullish momentum decreasing in an uptrend
and then price tumbles right after that :
Notice (on the chart above) how the bullish candlesticks had
increasing lengths and then gradually decreased as the price went up then
followed by a big downward fall/move?
That’s price momentum. Every time you look at your charts, you
need to be aware of such. Very important!
Candlestick
Wicks-Why They Are Important
The wicks of candlesticks along with the body tell a story. A wick
which can be called a shadow or tail of a candlestick is a line situated above
and below the body of the candlestick.
How are candle wicks (tails/shadows) formed and what do they mean?
§
Well, they are formed because of a change in market sentiment.
§
For an upper wick, price is moving up and then market perception
is changed by traders and then price is pushed down towards the open by
sellers. That’s how the upper shadow is formed.
§
For the lower shadow, price is moving down but the market
sentiment changes and price is pushed up towards the close buy the bulls.
That’s how a lower wick or shadow is formed.
Longer wicks
indicate increase change in market sentiment:
What
is the Significance of Candlestick Wicks?
§
Candlestick wicks with long upper shadows commonly occur when an
uptrend is losing strength.
§
Long lower shadows occur when the downtrend is losing steam.
Ok, that’t the end of chapter 4 of the price action trading
course….now lets head to chapter 5 where you will learn about trends.
CHAPTER 5: TRENDS
When you have price moving
across time due to supply and demand,then this creates trends. This
section is a discussion about trends, how they form and how many types of
trends and what kind of structure trends have.
It is important for you to understand the structure of trends so
you will not depend on any indicator to tell you if the trend is up or down
because understanding what a trend is, the structure of a trend, what signals
to look to tell you that a new trend may be starting and previous one ending is
one key knowledge you require as a price action trader.
And you only need to use price action to tell you if a trend is
up, down or sideways.
As I’ve mentioned above,
there are 3 types of trends. In simple terms,
a trend is when price is either moving up, down or sideways.
§
So when price is moving up, it’s called an uptrend.
§
When price is moving down, it’s called downtrend.
§
When price is moving sideways, it’s called and sideways
Now each of these 3 trend types have certain price structure about
them that tells you whether the market is in an uptrend, downtrend or sideways
trend.
These structures are derived from the Dow Theory. But I will
explain it in here briefly.
The
Dow Theory Of Trends Summarized
The theory in simple terms says that:
1.
when price is in an uptrend, prices will be making increasing
higher highs and higher lows until a higher low
gets intercepted, then that signals the end of the uptrend and the beginning of
a downtrend.
2.
For downtrend, prices will be making
increasing lower highs and lower lows until a lower low is
intercepted and that signals an end of the downtrend and a beginning of an
uptrend.
Structure of An Uptrend
(Bull) Market
With an uptrend market, prices will be making higher highs (HH)
and Higher Lows (HL), see chart below for clarity:
Structure
of A Downtrend (Bear) Market
Prices will be making Lower Highs (LH) and Lower Lows (LL). The
chart shown below is a really ideal case, see chart below for clarity:
But you know that in reality, the market is not like that, it’s
more like this chart shown below:
The chart above shows an initial downtrend and along the way there
is a false uptrend which does not last and price moves down and then eventually
another uptrend moves is happening because another lower high has been
intersected(which signals end of downtrend).
This is how you use price action to identify trends. You should
know this stuff.
Because the market is not
perfect when these trends are happening, you should develop the skill to judge
when a trend is still intact or when a trend is potentially reversing. And it’s
pretty much price intersecting highs or lows.
Structure
Of A Sideways/Ranging Market
For a ranging market, in an ideal scenario, you will see price
moving in a range between a support and resistance level like shown below:
But what you see in the real world is not ideal as above, it’s
more like this as shown below:
CHAPTER
6: REVERSALS & CONTINUATION
A reversal is a term used to describe when a trend reverses
direction. For example, the market has been in an uptrend and when price
hits a major resistance level, it reversed and formed a downtrend. That’s what
reversal means.
Now where can reversals happen? The following are the major areas
where price reversals do happen:
§
Support levels
§
Resistance levels
§
Fibonacci levels
Here’s an example of price reversing form a support level and went
up and then later broke it and went down. Now that broken support level acts as
resistance level when price came for a re-test of the level and sent the price
tumbling down:
Now, what about continuation then?
Well, in simple terms,
continuation means that there is a main trend, for example an uptrend, that is
happening… and you will notice that price slows
down and maybe consolidates for a little while and may fall back
down a little…it is like a minor downtrend in a major
uptrend move called a downswing in an a major uptrend.
So when
that ends and price resumes in the original uptrend direction then that
is called a continuation. The chart below makes this concept a bit more
clearer:
So the big question
is: how to spot trend continuity and execute trades at the right time?
The secret is
in identification of specific chart patterns as well as very
specific candlesticks patterns and you will discover
more on the Chart Patterns and Candlestick Patterns section of this course.
Top
3 reasons why it is so important for you knowing reversal points/levels as well
as understanding trend continuity patterns and signals:
1.
You don’t want to be buying near or at a resistance level (which
is a reversal point).
2.
You don’t want to be selling at near or at a support level (which
is a reversal point).
3.
You don’t want be buying when the trend is down and you don’t want
to be selling when the trend is up that’s why you need to know about
continuation charts and candlestick patterns which will allow you to trade with
the trend. (There are exceptions though when you can trade against the main
trend like that like in trading channels…see Chapter 9 of this price action
trading course where it talks about: How To Trade Channels)
CHAPTER
7: UNDERSTANDING MARKET SWINGS
Market Price moves in swings. A price
swing is when markets moves like what a wave does.
So in an uptrend, price
will be making higher highs and higher lows like the figure shown
below:
So in an uptrend, price moves in swings like this chart shown
below:
And in a downtrend, price will be making lower highs and lower
lows:
So in a downtrend, price moves in swings like the chart shown
below:
3
Reasons Why It’s So Important For You To Understand Market Price Swings
If you want to be really good price action trader, you have to
understand this concept of how price moves in swings. This is especially true
if your style of trading is trend trading or swing trading.
Because if you don’t
understand how price moves in swings, this is what you are going to
end up doing:
1.
You will execute trades at the very wrong spot! For example, in a
downtrend, you will sell when the market is just doing an upswing! Not good!
2.
Which means, you will get stopped out or you need to put in a
large stop loss. Large stop loss does not necessarily mean large risk if you do
position sizing based on the stop loss distance. But if you don’t then that’s a
large risk you are taking.
3.
If you have a large stop loss, then you’ve got to wait a while
before the market makes downswing before you to start seeing profits on your
trade.
Here’s an example of what I’m talking about:
It’s really not a good situation to be in. Every traders
wish is that “the moment a trade is placed, it goes to profit immediately.” But
we know the market is not like that, sometimes that happens, and sometimes it
doesn’t.
That’s the nature of the market.
So in an uptrend, you should be
looking to buy on the downswing. In a downtrend, you should be looking to sell
on an upswing.
And the best way for doing that is by using Price Action (reversal
candlesticks) as shown below:
Now, these chart below is what actually happens in real life
trading environment:
CHAPTER
8: HOW TO TRADE SUPPORT AND RESISTANCE LEVELS
Nothing is more noticeable
on any chart than support and resistance levels. These levels stand
out and are so easy for everyone to see! Why?
Because they are so obvious.
As a matter of fact, support and resistance trading is the core of
price action trading.
The key to successful price action trading lies in finding effective
support and resistance levels on your charts.
Now, in here, I talk about 3 types of support and resistance
levels and they are:
1.
The normal horizontal support and resistance levels that
you are probably most familiar about.
2.
Broken support levels become resistance levels and broken
resistance levels become support levels.
3.
Dynamic Support and Resistance Levels
Now, let’s look at each in much more detail.
Horizontal
Support and Resistance Levels
These are fairly easy to spot on your charts. They look like
peaks and troughs.
The chart below is an example and shows you to trade them:
How
To Find Horizontal Support And Resistance Levels On Your Chart
§
If price has been going down for some time and hits a price level
and bounces up from there, that’s called a support level.
§
Price goes up, hits a price level or zone where it cannot continue
upward any further and then reverses, that’s a resistance level.
So when price heads back to that support or resistance level, you
should expect that it will get rejected from that level again. The use of
reversal candlestick trading on support and resistance levels becomes very
handy in these cases.
Significant
Support & Resistance Levels
Not all support and resistance levels are created equal. If you
really want to take trades that have high potential for success, you should
focus on identifying significant support and resistance levels on your charts.
Significant support and
resistance levels are those levels that are formed in the large timeframes like
the monthly, weekly and daily charts.
And when price reacts to these levels, they usually tend to move
for a very long time.
Here’s an example of NZDUSD that hit a resistance level on the
monthly timeframe and made a 1,100 pips move down to the next significant support
level and price can now be seen bouncing up from that support level:
Now, here’s the technique I use to trade setups that happen in
larger timeframes:
I switch to smaller timeframes
like the 4hr & the 1hr, 30min, 15min and even the 5min and wait for a
reversal candlestick signal for my trade entries. This is so that I can get in
at a much better price level as well as reducing my stop loss distance.
That’s what’s multi-timeframe trading is all about.
Support
turned Resistance Level And Resistance Turned Support Level
Now, the next on is this
thing called Support turned Resistance Level And Resistance Turned Support
Level.
There are many traders that don’t realize that usually, in a
downtrend, when a support level has been broken to the downside, it often tends
to act as a resistance level. Here is an example shown on the chart below:
So when you see such happening, you should be looking for bearish
reversal candlestick to go short. As a matter of fact these “R’s” are the
upswings in a downtrend.
Similarly, in an uptrend you will also see such happening where
Resistance levels get broken and when price heads back down to these, they now
will act as support levels…Here’s an example:
Look for bullish reversal candlestick around these type of
resistance turned support levels as your signal to buy.
Can you see how the need for using other indicators is diminished
once you understand how easy is to spot such trading setups like these?
CHAPTER
9: HOW TO TRADE PRICE CHANNELS
What is a channel? And How Do You Trade A Channel? This section is
about that.
The path price follows and the
area enclosed within it is called the price channel.
The fundamental principle of how a channel form is based on
support and resistance. Why price does that, I don’t know… but consider it
as supply and demand at work.
There are 3 major types of channels:
1.
the uptrend channel,
2.
the downtrend channel and
3.
the sideways/horizontal
This is what a downtrend channel looks like and how to trade it:
This is what an uptrend channel looks like and shows how you can
trade it:
This is what a sideways channel looks like and how you can trade
it:
Sideways channels (or
horizontal channels) are little bit different from
uptrend and downtrend channels because with uptrend and
downtrend channels, you would require 2 points to draw trendlines and wait for
price to touch them later on before you take a trade because the trend lines
are at an angle.
But with
sideways/horizontal channels, you can actually start trading
the setup at point #2 which can be both a resistance or support
level based on the fact that a prior resistance or support level is already
visible and you should expect price to bounce from those levels. Look for
reversal candlesticks to buy or sell when you see such setups happening.
General
Rules For Trading Channels
1.
If you buy or sell on the other side of the channel, you wait for
price to reach the other end of the channel to take profit or exit the trade.
2.
Place your stop loss on just outside the channel or just above the
high of the candlestick (for a sell order) or just below the low of the
candlestick (for a buy order) that touched the channel and shows signs of
rejection. This candlestick can also be a reversal candlestick.
3.
You may also decide to take half the profits off as price is in
the middle of the channel for a profitable trade.
CHAPTER
10: NINE (9) PROFITABLE CHART PATTERNS EVERY TRADER NEEDS TO KNOW
There’s a difference
between chart patterns and candlestick patterns.Chart
patterns are not candlestick patterns and candlestick patterns
are not chart patterns:
§
Chart patterns are geometric shapes found in the price data that
can help a trader understand the price action, as well make predictions about
where the price is likely to go.
§
Candlestick patterns on the other hand can involve only one single
candlestick or a group of candlestick which have formed one-after-the
other in regard to how they form in relation to one another in
terms of their body length, opening and closing prices, wicks(or shadows) etc.
Not knowing what chart
patterns are forming can be a costly mistake. If
you are like that, this is your opportunity to get back on track.
Why costly mistake? Because you are completely unaware of what is
forming on the charts and you end up taking a trade that is not in line with
what the chart pattern is signalling or telling you!
These are the 9 chart patterns you will learn about today:
1.
Triangle chart patterns-symmetrical, ascending and descending (3
patterns)
2.
Head and shoulders and Inverse Head and Shoulders (2 patterns)
3.
Double Bottom and Double Top (2 patterns)
4.
Tripple Bottom and Tripple Top (2 patterns)
But first up, I am going to talk about triangle chart patterns.
1.Symmetrical
Triangle
There are 3 types of triangle chart patterns and the chart below
shows the differences between each very clearly:
Now, lets starts with
the symmetrical triangle pattern first.
Is
A Symmetrical Triangle Bullish Or Bearish Chart Pattern?
The
Symmetrical triangle chart pattern is a continuation patterntherefore
it can be both a bullish or bearish pattern:
What does this mean then? Well, if you see this pattern in
an uptrend, expect a breakout to the upside. See an example below:
If you see a symmetrical triangle pattern form in a downtrend,
then expect a breakout of this pattern to the downside like this one shown
below:
How
To Draw A Symmetrical Triangle
§
You will see price moving up and down but this up and down
movement is converging to a single point.
§
You need a minimum of 2 peaks and 2 troughs to draw the two
trendlines on both sides.
§
It will be only a matter of time before price breaks out of the
pattern and either moves up or down.
Two
Simple Ways To Trade The Symmetrical Triangle
#1: Trade the Initial
Breakout
The best way is to confirm that the breakout actually happens with
a candlestick before placing your order. What I do I is for example, say I’m
watching a symmetrical triangle form in the 4hr charts and I know that soon a
breakout will happen. I then switch to the 1hr chart to wait for the breakout
to happen. If a 1hr candlestick has broken the triangle and closed below/above
it, that’s my trade entry signal. So I will place a pending buy stop/sell stop
order to catch the breakout from there.
Often I want to make sure that the 1hr candlestick closes
outside of the triangle before I enter a pending buy stop or sell stop order to
capture the move that happens to avoid false breakouts while the candlestick
has not closed yet.
But here’s the problem with trading triangle breakouts, see chart
below:
I don’t like trading breakouts like the one shown above and here’s
why:
§
The stop loss distance is too large. I’d prefer to enter trades
with breakout candlesticks that are close to the trend lines that have been
broken.
§
I often see that such breakout of extremely long candlesticks are
not sustainable and price will often tend to reverse after such
candlesticks as can be seen by the chart above…notice
that after the breakout candlestick, there was one bearish green pin bar and
then for the next 4 candlesticks afterward, the price
went down. This is what tends to happened with such long breakout
candlesticks. So if you entered a buy order using that long breakout
candlestick above, you would have to wait a while for your trade to turn profitable.
#2: Trade the retest of the
trendline that is broken
§
The second way to enter is to wait for a retest of the broken
trendline in the triangle pattern then either buy or sell.
§
This may also be handy if you had an extremely long breakout
candlestick on the initial breakout, you best option is to wait for a retest of
the breakout trendline then if that happens you enter.
Stop
loss Placement Options On Symmetrical Triangle Pattern
Here are 3 ways on how to
place stop loss on triangle patterns, which include symmetrical, ascending and
descending triangle patterns which you will learn next. The
stop loss placement techniques here are applicable to all triangle patterns so
take note of that:
2.Ascending
Triangle Chart Pattern
And ascending triangle pattern looks like this chart shown below:
And this is how a real chart looks like:
Is
Ascending Triangle Pattern Bullish Or Bearish?
It is considered a bullish continuation pattern in an existing
uptrend. So when you see this forming in an uptrend, expect a breakout to the
upside.
However, it can also be a strong reversal signal (bullish) when
you see it form in a downtrend.
Stop
Loss Placement Options
You can use the strategies given in symmetrical triangle.
Take
Profit Options
I prefer to target previous resistance levels as my take profit
target.
Or as shown on the chart below, you can use the “x” pips distance
as your take profit target. Another way to do it would be say 3 times the “x”
pips or 2 times the “x pips” distance. That should give you your profit target
level(s).
3.Descending
Triangle Chart Pattern
Important things to note about the descending triangle chart
pattern: The descending triangle chart pattern is characterized by a
descending resistance levels and a fairly horizontal support levels converging
to a point until a breakout happens to the downside as shown below:
And this is how a descending triangle looks like on a chart shown
below:
Is
Descending Triangle Pattern Bullish Or Bearish?
It is a bearish chart pattern that forms in a downtrend as a
continuation pattern.
However, this pattern can also form as a bearish reversal pattern
at the end of an uptrend.
Therefore regardless of where it forms, it’s a bearish chart
pattern.
How
to Trade The Descending Triangle Formation
Similar to the other 2 triangle patterns, you can either trade the
initial breakout or wait to see if price reverses back to test the broken
support level and then sell.
Note: with a triangular pattern, I often prefer to wait for a
candlestick to breakout and close outside of the pattern before I enter a
trade. This helps to reduce false breakout signals.
But there will be times when I will just trade the breakout with a
pending sell stop order just a few pips under the support level to catch the
breakout when it happens but when I do that, I sit and watch the close of the
1hr candlestick to make sure that it does not close above the support line (if
that happens, it may mean a false breakout).
And then there’s the issues of extremely long breakout
candlesticks again like this:
As mentioned previously:
§
when you have such extremely long breakout candlesticks like that,
better to sit and wait to see if price will reverse and get back up to the
support level that was broken ( a retest) which will now be acting as a
resistance level and then sell when that level is touched.
How
To Take Profit
I prefer to use previous support levels, lows or troughs and use
those as my take profit target level.
Another method of take profit that is commonly used is to measure
the height of the triangle and if the height is say 100 pips then that is your
take profit target. The chart below should give you a clear idea of how it’s
done:
Note that on the chart, the descending triangle formed the end of
an uptrend.
4.Head
& Shoulders Chart Pattern
The head
and shoulder chart pattern is a bearish chart pattern. This is what a head and
shoulder reversal pattern looks like:
Important things to note about the head and shoulder pattern:
§
The head and shoulders pattern is a bearish reversal pattern and
when found in an uptrend, it signals the end of the uptrend.
Here’s how this pattern forms:
§
Eventually, the market begins to slow down after going up for some
time and the forces of supply and demand are generally considered in balance.
§
Sellers come in at the highs (left shoulder) and the downside is
probed (beginning neckline.)
§
Buyers soon return to the market and ultimately push through to
new highs (head.)
§
However, the new highs are quickly turned back and the downside is
tested again (continuing neckline.)
§
Tentative buying re-emerges and the market rallies once more, but
fails to take out the previous high. (This last top is considered the right
shoulder.) Buying dries up and the market tests the downside yet again. Your
trendline for this pattern should be drawn from the beginning neckline to the
continuing neckline.
Here’s another example:
Here’s another one:
How
To Trade The Head & Shoulder Chart Pattern.
The following chart below makes it much clearer.
How
To Calculate Profit Targets
§
I use previous lows or troughs to set my take profit target.
§
However, you can also use the distance in pips between the
neckline and the head as your take profit target level. So if the distance is
100 pips, then if you trade the initial breakout, you set it at 100 pips take
profit target level like the chart shown below with the two blue lines:
5.Inverse
Head and Shoulder Pattern
You will also see this pattern, though not as popular, it’s good
to keep an eye out for it. The inverse head and shoulder pattern is bullish
reversal candlestick pattern and just the opposite of head and shoulders
pattern.
Here’s what it look like on the chart shown below:
And this is what it looks like on a real chart:
How
to Trade the Inverse Head and Shoulder Pattern
You can buy the initial breakout of the neckline or wait for the
re-test, that is wait for price to breakout and then come back down to test the
broken neckline and then buy. Use bullish reversal candlesticks for trade entry
confirmation if you are waiting to buy on re-test.
I often tend to place my profit target on previous highs. One
method of calculating profit target is to measure from the head up to the
trendline and what the distance in pips is your profit target. See the two blue
vertical lines in the chart above.
6.Double
Bottom Chart Pattern
A double bottom chart pattern is bullish reversal chart pattern
and when it forms in an existing downtrend, it signals a possible upward trend.
Here’s what It look like:
This is what a double bottom pattern looks like on a real forex
chart:
3
Ways on How To Trade Double Bottoms
#1: Trade the breakout of the
neckline:
Many traders once they see that the double pattern has formed and
the neckline is being tested, that’s when they get in as soon as a breakout
happens.
#2: Wait to enter on retest of
Broken Neckline
Then there are other groups of traders that like to enter when
price reverses back down to touch the neckline, which now would act as a
support level. Once it hits that neckline level they buy.
#3: Buy on bottom 2. In this way, you have the potential to ride
the trade all the way up if the neckline is intercepted. You should consider
buying on bottom 2 as buying on a support level…as a matter of fact, that it
what is is! Look for bullish reversal candlestick patterns for trade entry
signals.
Take
Profit Target levels
§
If you buy on bottom 2, you can use the neckline as your take
profit level, or any previous highs above that as well.
§
If you buy the breakout of the neckline, use the distance between
the bottom and the neckline in pips to calculate your profit target. See chart
below for example:
7.Double
Top Chart Pattern
A double top chart pattern
is a bearish reversal chart pattern and when found in an uptrend and once the
neckline is broken, that confirms a downtrend. The
double tops are very powerful patterns and if you get into a trade at the right
time, you stand to make a lot of profits when the breakout happens to the downside.
Here’s an example of a double top Chart Pattern shown below:
How
to Trade the Double Top Chart Pattern
There’s 3 ways to trade the double top chart pattern:
#1: Trade the initial breakout of the neckline.
#2: The technique I like most to take a sell trade on Peak 2 when
I see a bearish reversal candlestick. And if price moves down and intersects
the neckline and continues to do down further, your profits are dramatically
increased.
#3: You can wait for price to go back up to test the broken neckline
(which would now act as resistance level) and when you see a bearish reversal
candlestick pattern, go short (sell) as this example below shows:
This is how it would look like in a real forex chart:
How
to Take Profit On The Double Top Chart Pattern
Use previous low (support levels) to set take profit targets. Or
another option would be to measure the distance between the neckline and the
highest peak (the range) and use that difference in pips as take profit target
if you are trading the breakout from the neckline.
8.Triple
Bottom
I do not see triple bottoms forming quite as often…Regardless of
that, you should have an idea of what it looks like:
Triple bottoms are bullish reversal chart patterns, which means if
found in a downtrend and this pattern starts to form and once the neckline is
broken and price head up, this confirms that the trend is up.
Here’s another example of a triple bottom shown below:
How
to Trade The Triple Bottoms
§
Many traders wait until the neckline is broken and trade the
initial breakout.
§
Others will wait for a retest of the broken neckline to enter a
buy order once they see a bullish reversal candlestick…
§
I prefer to take trades on the 3rd bottom by watching the price
action. If I see a bullish reversal candlestick pattern, I buy. Why do I do
that? Well, if price goes up and breaks the neckline and goes upward, I would
be in a lot more profit than if I bought the breakout of the neckline.
Profit taking methods would be similar to double bottom chart
pattern mentioned previously…
9.The
Triple Top Chart Pattern
Triple tops are the opposite of triple bottoms and they are
bearish chart patterns. They rarely occur but its good to know what they look
like.
Triple tops when found in an uptrend, it signals the end of the
uptrend when the neckline is broken and price heads down.
How
To Trade The Triple Top Chart Pattern
§
Some conservative traders wait for the neckline to be broken to
trade that breakout.
§
Some will most likely wait for retest of neckline and then sell.
§
I prefer to take trades on Peak 3 and if the trade breaks the
neckline and goes all the way down, I have a lot more profit to make. The key
to taking a good trade on peak 3 is by looking for bearish reversal
candlesticks. These are your signals to go short.
§
If you take a trade at peak 3, you profit target can be the
neckline.
§
Or if you take a trade on the breakout of the neckline, measure
the distance in pips between the neckline and the highest of the 3 peaks and
use that distance to calculate your profit target. Or you can use a previous
low and use that as your take profit target level as well.
CHAPTER
11: TEN (10) PROFITABLE CANDLESTICK PATTERNS EVERY TRADER NEEDS
TO KNOW
There are lots of candlesticks, but out of all of them only 9 that
you really need to know. Why? Because there are very popular are really
powerful so why waste time with the rest?
When these candlesticks form at support and resistance levels or
Fibonacci levels they are great trade entry signals.
#1:
The Doji Candlestick Patterns.
The doji
candlesticks are single (individual) candlestick patterns. There are 4 types of
doji candlesticks as shown below:
1.
The doji cross can be both considered a bullish or bearish signal
depending on where it forms.
2.
The gravestone doji is considered a bearish reversal candlestick
when formed in an uptrend or in a resistance level.
3.
The dragonfly doji is considered a bullish candlestick pattern
when formed in a downtrend or in a support level.
4.
The long-legged doji shows a period of indecision by bulls and
bears and depending on where it forms (uptrend/resistance level=bearish signal,
downtrend/support level=bullish signal) it can be considered a bearish or
bullish signal.
#2: The Engulfing
Candlestick Patterns
The engulfing patterns are 2 candlestick patterns. For a
bullish engulfing pattern, you will see that the first candle is bearish
followed by the second candle which is very bullish and this 2nd candle completely engulfs
1.
Bullish Engulfing-when formed in a support level or in a
downtrend, this can signal that the downtrend is potentially ending.
2.
Bearish Engulfing-when formed in an uptrend or or in a resistance
level, this is a signal that the uptrend may be ending.
#3:
Harami Candlestick Patterns.
The harami is a 2 candlestick pattern and can be bullish or
bearish.
1.
Bullish Harami-this is a 2 candlestick pattern. The first
candlestick is a very bearish candlestick followed by a bullish candle, which
is quite short and is completely covered by the shadow of first candle. When
you see this in a downtrend or in an area of support, this will be your
bullish(buy) signal.
2.
Bearish Harami is the exact opposite of bullish harami.
When you see this pattern form in a resistance level or in an uptrend, this is
a bearish reversal signal and may indicate that the uptrend is ending and you
should go short (sell).
The easiest way to remember the harami patterns is to think about
a pregnant woman and a baby inside her tummy:
#4:
Dark Cloud Cover Candlestick Pattern
The dark cloud is another bearish reversal candlestick pattern
formation consisting of 2 candlesticks. The first one is a bullish candlestick
showing a strong upward momentum but when the second candle forms, it shows a
completely different story…its bearish and it closes at about the middway point
of the first candlestick.
When you see the dark cloud cover candlestick pattern in an
uptrend or in level of resistance, it’s a bearish reversal signal
and you should be thinking to go short (sell).
#5:
Piercing Line Candlestick Pattern
The piercing line is the opposite of dark cloud cover. You may see
this in a downtrend or forming at a support level. The first candlestick is
very bearish and when the 2nd candle
forms, it tells a completely different story, it’s bullish. This tells you that
the bears are losing steam and that the bulls are gaining strength to
potentially move the market price up.
The second bullish candlestick should close somewhere up the
mind-point of the first candlestick.
So when you see the piercing line pattern forming at support
levels or in a downtrend market, take note as this is a potential bullish
reversal signal so you should be thinking of going long (buying).
#6:
Shooting Star Candlestick Pattern
This is one of the most reliable candlesticks and obviously one of
the most popular due to the fact that they are so easy to spot on any chart.
The shooting star is single candlestick pattern and when it forms
in an uptrend or in a resistance level, then it is considered as a bearish
reversal pattern and so you should be looking to sell.
Note: the
shooting star is sometimes called the bearish hammer, inverse hammer, inverted
hammer or bearish pin bar. They all mean the same and refer to the shooting
star candlestick pattern.
#7:
Hammer Candlestick Pattern
The hammer candlestick is a single candlestick pattern pattern and
its is considered a bullish reversal candlestick pattern and it’s the opposite
of the shooting star candlestick pattern.
It has a very long tail and a short upper wick or none at all.
When it forms in a downtrend or at support levels, you should take
note…this is a very high probability bullish reversal candlestick pattern
and you should be looking to go long (buy).
#8:
Hanging Man Candlestick Pattern
Now, what happens if you see in an uptrend a candlestick that
looks like a hammer? Is it still a bullish signal? Well, in
that case, this candlestick is a hanging man and its not a bullish signal. Here’s how it looks:
Now, the hanging man, is
exactly like hammer but the only difference is that it must form in an uptrend.
When it forms in an uptrend or in resistance levels, it tells you
that there is a possibility that the uptrend is ending so you should be looking
to go short (sell). See chart below:
#9:
Railway Track Candlestick Patterns
The railway track pattern is a 2-candlestick pattern and there’s a
bearish and bullish railway track candlestick pattern. A notable feature of
railway tracks is thatthey look like paralled railway tracks…and both
candlesticks should be of almost the same lengh and body and almost look like
mirror image of each other.
1.
For a bearish railway track, the first candle is bullish followed
by almost exactly the same length and body of the second candlestick which is
bullish. This tells you that bulls are losing ground and bears have gained
controlled.
So when you see the bearish railway track pattern in an uptrend,
or in an area of resistance, this is a signal that the downtrend may be
starting so you should be looking to sell.
1.
Similarly but opposite is the bullish railway track pattern. When
you see this in a downtred or in an area of support, take note because the
market may be heading up and this is your signal to buy.
#10:
Spinning Top
Spinning tops can be continuation candlestick patterns or reversal
candlestick patterns. Spinning tops have small bodies with upper and
lower shadows that exceed the length of the body. Spinning tops signal
indecision. A spinning top is a single candlestick pattern and it can be both
bullish or bearish.
Let me explain. If
you see are bearish spinning top in a support area or in a downtrend, this can
be considered a bullish reversal signal when the high of tha bearish spinning
top is broken to the upside.
Similarly, a bullish spinning
stop in a resistance level or in an uptrend can be considered a bearish signal
as soon as the low is broken to the downside.
Example below shows what I mean:
Spinning tops are fairly short in length compared to other
candlesticks and their body length is a few steps wider than that of doji
candlesticks(which actually have none or very tiny bodies).
Another notable feature of
spinning tops is that the wicks on both sides should be
almost the same length.
When I see spinning tops
form on support or resistance levels, all it tells me the bears and bulls do
not really know where to push the market and so when a breakout
of the low or high of a spinning top by the next candle that forms usually
signals the move in that direction of breakout!
Here’s an example:
Blending
Candlesticks-A Concept Every Trader Needs To Know
This is a technique where not many traders are aware about and I
will just give you a simple example so you understand this concept better.
To give you a bit of context, if you are a forex trader and you
are using the metrader4 trading platform, it got only 9 timeframes where your
charts can be viewed in which are the 1m, 5min, 15m, 30min, 1hr, 4hr, daily,
weekly & monthly timeframes as shown on the chart below:
You may see a hammer in the 1hr timeframe but remember that that
1hr timeframe has two-30minute candles to make 1 hr, right? Yes.
So what do you think the candlestick pattern would be in the
two-30 minute candlesticks to give you a bullish hammer candlestick pattern in
the 1hr timeframe? Or if you see a shooting start bearish candlestick in the
1hr timeframe, what do you think would be the candlestick pattern in the
two-30minute candlesticks that gave that 1hr candlestick a shooting star?
Well, your answers are below:
Hope you really understand this concept because here’s why:
In the metatrader4 trading platform, there’s not partner timeframe
for 1minute…you need a 2minute chart which does not exist. Similarly, there’s
no 10min chart which you can use to blend with the existing 5min timeframe.
Similarly, there is no 2hr timeframe to go with 4hr timeframe and no 8hr
timeframe to go with the existing 4hr timeframe.
So let’s say you are a trader that loves to trade only hammers and
shooting stars and you are waiting buy at a major support line in the 1hr
timeframe.
You’ve been waiting
patiently for a bullish hammer candlestick pattern to form to give you the
signal to buy .But unfortunately, no hammer forms in the 1hr
timeframe and even though you see a bullish engulfing
pattern formed, you did not enter a buy trade.
You just watched as price shoots up and you wished you could have
bought at the bullish engulfing signal that was given but you are only
interested in trading hammers.
Well, if there was a 2hr time frame in metrader4, you could have
switched to it and seen a very bullish hammer and you could have taken the
trade but because you did not understand the concept of blending candlesticks
you missed a very good trade!!!
Here are few more examples:
Notice also that a piercing line pattern when blended forms a
hammer.
A Dark cloud cover when blended also forms a shooting star
CHAPTER
12: HOW TO TRADE FIBONACCI WITH PRICE ACTION
Now, I
don’t know about you but one thing I continue to see is that price action
respects Fibonacci levels…not all the time but when it does, some of the market
moves generated can make you money very easily. The trick is to use Fibonacci
and combine it with price action by using reversal candlesticks.
But first, if you’ve never heard about Fibonacci retracement tool,
then here’s a brief introduction…
What
Is The Fibonacci Retracement Tool?
This tool is a series or
sequence of numbers identified by a guy called Leonardo Fibonacci in the 13th Century. (He’s long dead…) No, need to go
into pointless details about how those numbers are derived.
So what actually is a Fibonacci Retracement?
In
technical analysis Fibonacci retracement is created by taking two extreme
points (usually a major peak and trough) on your forex chart and dividing the
vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and
100%. Once these levels are identified, horizontal lines are drawn and used to
identify possible support and resistance levels.
The two fib levels I use the most are the 50% and the 61.8%. I
really do not focus at all on the others.
If you are using metetrader4 Trading platform, the Fibonacci tool
has an icon as shown on the chart below:
Top
3 Reasons Why You Need A Fibonacci Retracement Tool:
1.
In a downtrend, after price has been going down for some time, it
will move back up (upswing…remember?). The Fibonacci retracement tool can help
you estimate or predict potential price reversal areas or levels.
2.
Similarly, in an uptrend, price will make minor downtrend moves
(downswings) and the Fibonacci retracement tool will help you predict potential
reversals areas or price levels.
3.
If used in conjunction with support and resistance levels and
combined with price action, they do really form a powerful combination and do
give highly profitable trading signals. This describes something known as “price
confluence”. I will talk more on that later.
How
to Use the Fibonacci Tool On Metatrader4
It is actually a very simple 3 step process:
Step1: find a peak (upswing point/resistance level) and a trough
(downswing point/support level)
Step2: Click on the Fibonacci tool icon on your chart.
For the next steps, it’s all click and drag process…
Step 3a: In a downtrend market, you click first on the previous
peak where you want to analyse from and drag down to the trough where price
reversed from and release.
Step 3b: In an uptrend market, click and drag first on the trough
up to the peak and release.
That’s how simple it is to draw Fibonacci retracement levels on
your charts.
On the chart below notice that price formed a peak and then moved
down, found support and formed a trough, and price went back up:
At around the 50% fib level, it starts to slow sign of losing the
upward steam. You can also see the bearish spinning top candlestick which could
have been used as a signal to go short (sell).
Can you
buy or sell just based entirely on the fib numbers like 50% or
61.8% as soon as price reaches these levels without price action?
Well, I think that there are traders out there that do that and
you can do that. But personally, I do not like that approach. I’d rather
combine Fibonacci with reversal candlesticks, trend lines, support &
resistance levels etc for trade entries.
Let’s study the past… here’s an example of how to trade Fibonacci
with price action in an uptrend. Notice the spinning top candlestick right at
the 50% level which could have been used as a buy signal:
Here’s another example of how to trade Fibonacci with price action
in a downtrend:
You can see that this is not complicated, isn’t it? Very
simple trade setups. Your risks are small compared to the profits you
potentially can make.
CHAPTER
12: HOW TO TRADE FIBONACCI WITH PRICE ACTION
Now, I
don’t know about you but one thing I continue to see is that price action
respects Fibonacci levels…not all the time but when it does, some of the market
moves generated can make you money very easily. The trick is to use Fibonacci
and combine it with price action by using reversal candlesticks.
But first, if you’ve never heard about Fibonacci retracement tool,
then here’s a brief introduction…
What
Is The Fibonacci Retracement Tool?
This tool is a series or
sequence of numbers identified by a guy called Leonardo Fibonacci in the 13th Century. (He’s long dead…) No, need to go
into pointless details about how those numbers are derived.
So what actually is a Fibonacci Retracement?
In
technical analysis Fibonacci retracement is created by taking two extreme
points (usually a major peak and trough) on your forex chart and dividing the
vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and
100%. Once these levels are identified, horizontal lines are drawn and used to
identify possible support and resistance levels.
The two fib levels I use the most are the 50% and the 61.8%. I
really do not focus at all on the others.
If you are using metetrader4 Trading platform, the Fibonacci tool
has an icon as shown on the chart below:
Top
3 Reasons Why You Need A Fibonacci Retracement Tool:
1.
In a downtrend, after price has been going down for some time, it
will move back up (upswing…remember?). The Fibonacci retracement tool can help
you estimate or predict potential price reversal areas or levels.
2.
Similarly, in an uptrend, price will make minor downtrend moves
(downswings) and the Fibonacci retracement tool will help you predict potential
reversals areas or price levels.
3.
If used in conjunction with support and resistance levels and
combined with price action, they do really form a powerful combination and do
give highly profitable trading signals. This describes something known as “price
confluence”. I will talk more on that later.
How
to Use the Fibonacci Tool On Metatrader4
It is actually a very simple 3 step process:
Step1: find a peak (upswing point/resistance level) and a trough
(downswing point/support level)
Step2: Click on the Fibonacci tool icon on your chart.
For the next steps, it’s all click and drag process…
Step 3a: In a downtrend market, you click first on the previous
peak where you want to analyse from and drag down to the trough where price
reversed from and release.
Step 3b: In an uptrend market, click and drag first on the trough
up to the peak and release.
That’s how simple it is to draw Fibonacci retracement levels on
your charts.
On the chart below notice that price formed a peak and then moved
down, found support and formed a trough, and price went back up:
At around the 50% fib level, it starts to slow sign of losing the
upward steam. You can also see the bearish spinning top candlestick which could
have been used as a signal to go short (sell).
Can you
buy or sell just based entirely on the fib numbers like 50% or
61.8% as soon as price reaches these levels without price action?
Well, I think that there are traders out there that do that and
you can do that. But personally, I do not like that approach. I’d rather
combine Fibonacci with reversal candlesticks, trend lines, support &
resistance levels etc for trade entries.
Let’s study the past… here’s an example of how to trade Fibonacci
with price action in an uptrend. Notice the spinning top candlestick right at
the 50% level which could have been used as a buy signal:
Here’s another example of how to trade Fibonacci with price action
in a downtrend:
You can see that this is not complicated, isn’t it? Very
simple trade setups. Your risks are small compared to the profits you
potentially can make.
CHAPTER
12: HOW TO TRADE FIBONACCI WITH PRICE ACTION
Now, I
don’t know about you but one thing I continue to see is that price action
respects Fibonacci levels…not all the time but when it does, some of the market
moves generated can make you money very easily. The trick is to use Fibonacci
and combine it with price action by using reversal candlesticks.
But first, if you’ve never heard about Fibonacci retracement tool,
then here’s a brief introduction…
What
Is The Fibonacci Retracement Tool?
This tool is a series or
sequence of numbers identified by a guy called Leonardo Fibonacci in the 13th Century. (He’s long dead…) No, need to go
into pointless details about how those numbers are derived.
So what actually is a Fibonacci Retracement?
In
technical analysis Fibonacci retracement is created by taking two extreme
points (usually a major peak and trough) on your forex chart and dividing the
vertical distance by the key Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and
100%. Once these levels are identified, horizontal lines are drawn and used to
identify possible support and resistance levels.
The two fib levels I use the most are the 50% and the 61.8%. I
really do not focus at all on the others.
If you are using metetrader4 Trading platform, the Fibonacci tool
has an icon as shown on the chart below:
Top
3 Reasons Why You Need A Fibonacci Retracement Tool:
1.
In a downtrend, after price has been going down for some time, it
will move back up (upswing…remember?). The Fibonacci retracement tool can help
you estimate or predict potential price reversal areas or levels.
2.
Similarly, in an uptrend, price will make minor downtrend moves
(downswings) and the Fibonacci retracement tool will help you predict potential
reversals areas or price levels.
3.
If used in conjunction with support and resistance levels and
combined with price action, they do really form a powerful combination and do
give highly profitable trading signals. This describes something known as “price
confluence”. I will talk more on that later.
How
to Use the Fibonacci Tool On Metatrader4
It is actually a very simple 3 step process:
Step1: find a peak (upswing point/resistance level) and a trough
(downswing point/support level)
Step2: Click on the Fibonacci tool icon on your chart.
For the next steps, it’s all click and drag process…
Step 3a: In a downtrend market, you click first on the previous
peak where you want to analyse from and drag down to the trough where price
reversed from and release.
Step 3b: In an uptrend market, click and drag first on the trough
up to the peak and release.
That’s how simple it is to draw Fibonacci retracement levels on
your charts.
On the chart below notice that price formed a peak and then moved
down, found support and formed a trough, and price went back up:
At around the 50% fib level, it starts to slow sign of losing the
upward steam. You can also see the bearish spinning top candlestick which could
have been used as a signal to go short (sell).
Can you
buy or sell just based entirely on the fib numbers like 50% or
61.8% as soon as price reaches these levels without price action?
Well, I think that there are traders out there that do that and
you can do that. But personally, I do not like that approach. I’d rather
combine Fibonacci with reversal candlesticks, trend lines, support &
resistance levels etc for trade entries.
Let’s study the past… here’s an example of how to trade Fibonacci
with price action in an uptrend. Notice the spinning top candlestick right at
the 50% level which could have been used as a buy signal:
Here’s another example of how to trade Fibonacci with price action
in a downtrend:
You can see that this is not complicated, isn’t it? Very
simple trade setups. Your risks are small compared to the profits you
potentially can make.
CHAPTER
13: HOW TO TRADE TRENDLINES WITH PRICE ACTION
When the
market is heading down, it forms down swings and up swings as it continually
moves lower.
Similarly, when the market is in an uptrend, it will form upswings
and downswings as it continues to move up.
The peaks that are formed by the up swings and the troughs that
are formed by the down swings can be used to draw trendlines.
§
And you need a minimum of 2 peaks to draw a downward trendline for
a market that is in a downtrend
§
and you need 2 troughs to draw an upward trendline for a market
that is in an uptrend.
How
To Draw Downtrend Trendlines
Now, for a market in a downtrend, you can connect the peaks
with a line and that forms you downward trendline.
What you are waiting for is for price to come back up and touch
that trendline and when it does, this could mean that a down swing will start
and it may be the best time to enter a short trade.
The use of bearish reversal
candlesticks as trade confirmation is highly recommended with this trading
method.
How
To Draw Upward Trendlines
When the the market is in an uptrend, connect 2 troughs and you
have an upward trendline. When price comes to touch it later, you have a
potential buy setup.
The chart bellows shows a live example of a long trade on AUDNZD
pair that I took at the moment whilst I was writing this guide.
As you can see, I was
anticipating a move up to the 1.1290 level and used that as my take profit
target level. Obviously, this trade was taken based on the setup in the daily
timeframe which means it may be a week or two before the profit target is hit
if the market makes a nice move up or the opposite can happen, price
breaks the trendline and I get stopped out or I can walk away with some profits
when my trailing stop gets hit.
But the next day, price
broke that upward trendline and I got stopped out with a loss. But here’s the
thing with a trade like that…my stop loss is tight, with a
potential reward of more than 3 times what I risked for
this trade. Here’s the chart of what happened:
I strongly recommend that you use bullish reversal candlesticks as
a signal for executing your buy/long trades.
I’m not glamorizing price action trading here. You will
have losses like what I’ve shown.
But think about this…if the
price had moved the way I analysed, I would have made a lot more profits than
what I lost.
With Price action trading, you are risking less with the potential
to make more and that’s the beauty of price action trading.
What
happens if the trendline gets intersected?
There are a couple of things you need to be aware when a trendline
gets intersected:
(1)The first is that it could mean the trend has now changed.
(2)The second is that it can be a false break only and price will
soon head back in the original direction.
Now, there’s another thing about trendlines, if one trendline
get’s broken, you need to be see if you can draw another trendline above (or
below) the one that’s broken. There can be 2 or more downward trendlines or 2
or more upward trendlines at any one time on any chart in any timeframe.
So if price breaks the first
trendline, it still has yet to head to the 2ndand the third
etc…
So if you take a sell trade
on the first trendline but price intersects it and you are stopped out with a
loss and now price is heading to the 2nd trendline
above, you should also look to sell if you get bearish reversal candlestick
signal.
Here’s an example of a trade in a similar situation that I took on
the AUDUSD pair. See chart below: (enlarge if you cannot see clearly).
You will notice that I took
the first trade on the first downward trendline based on a bearish harami and
also a spinning top pattern there but then price intersected that trendline and
went up to the 2nd downward trendline.
I saw a shooting star so I took another short trade. Obviously,
you can see how the price reacted to the trendline by forming a shooting star.
That was enough signal for me to short this pair.
You need to be aware of these kinds of trendlines not only on the
sell side buy ton the buy side as well.
I suggest you check
out Trendline Trading System for more
information on how to trade it.
CHAPTER
14: HOW TO TRADE MOVING AVERAGES WITH PRICE ACTION
Remember in the beginning I
did briefly mentioned something aboutNot-So-Pure Price Action
Trading?
Well, now we are at it!
When you use price action
trading with one other indicator or a combination of indicators which are
incorporated into your trading system then that’s what I call Not-So-Pure
Price Action Trading. (Call it whatever you like, if you think I’m
wrong, I really don’t care).
Many new traders that find it difficult to define the structure of
a trending market, therefore they rely on moving averages for trend detection
or identification.
The only thing I see useful
in moving averages is for dynamic support and resistance levels. I will explain
this concept shortly. As a matter of fact moving averages do a terrible
job of predicting trends in that they only do that after that
trend has already started already and price has moved a great deal already.
Here’s an example:
In the chart on the left, notice that price has crossed the
HL(higher low) already, indicating that the downtrend market has started
(potentially). But notice that the moving averages have not crossed yet.
So price action is telling you
that you are now potentially in a downtrend but moving average is saying “not
yet”.
So you have two conflicting
signals. And by the time moving average confirms what the price action has
indicated,
price has already made a great deal of move downward already as
shown by this chart on the left.
So which are you really going to pick? Depend on moving average to
tell you that a trend has changed or depend on price action?
I really can’t force, it’s your choice.
Using
Moving Averages For Dynamic Support And Resistance Levels
The concept of dynamic support and resistance can be fully
understood with a few charts given below.
When the market is in a downtrend, you will notice that price
moves up to the moving average lines (upswing) and then bounces back down from
them (downswing). (That is if you put moving average lines on your charts).
Here’s an example:
The similar situation happens in an uptrend: prices move down to
the moving average lines (downswing) and then bounces up from them (upswing).
Here’s an example shown on the chart below:
Now that you know this concept of dynamic support and resistance
using moving averages, the next thing you need to know is that trend trading
strategies can be created around them and in a very nice trending market, they
are really effective.
For those that love moving
averages, what you can do is to look reversal candlesticks as price starts
to go back to touch the moving average lines and these are used as your
confirmation signal to buy or sell.
§
In a downtrend, you should be looking for bearish reversal
candlesticks like the shooting star, bearish harami, spinning tops, dark cloud
cover, hanging man etc to go short (sell).
§
In an uptrend, you should be looking out for bullish reversal
candlestick patterns like pin bars, dojis, piercing line, bullish harami etc…
Let’s study the past again…on the chart below is an example of how
to trade dynamic support with Price Action:
Now, it’s easy to say here
that “ you could have bought here and sold here” etc based on what happened in
the past because now you can see how the market has played out
in the past…
But real challenge for many traders is that when a setup is
happening, they will most likely second guess it because this is how its going
to look:
And this is how how it turned out:
Here’s an example of trading
using dynamic resistance levels with price action:
CHAPTER
15: HOW TO TRADE CONFLUENCE WITH PRICE ACTION
What is confluence? Well,
let’s find out here in this following example…
What if you were watching the market and then you saw that price
is heading to a resistance level and then you checked your Fibonacci
retracement and it’s almost like a coincidence that the resistance levels is
also at 61.8 Fibonacci level as well. And there’s even more…the overall trend
is also down.
So you have 3 things lining up for you, here they are again:
1.
the overall trend is down
2.
you have a resistance level that price is coming to
3.
and you notice that the price is also heading up to the fib level
is 61.8 which coincides with the resistance level.
What I’ve described above
is an example of confluence. A confluence is a
point/level in the market where two or more levels intersect each other (or
come together) and they form a flash point or hot point or
confluent point.
Here’s
An Example Of How I Trade With Confluence
Let me give a real example of a trade that I took as I was writing
this. This is the daily chart for AUDUSD. Have a good and close look at
it.
Here’s why I took that trade:
1.
I first drew a downward trendline and was waiting to see if price
would come up to touch the trendline.
2.
And I also noticed that the previous support level that was broken
could potentially act as a resistance level causing
price to reverse. Therefore now I have two things coming together.
3.
Next thing I did was to check what the fib retracement level to
see if price came and hit that resistance level what the ratio would be. Surprisingly,
it was 61.8%. Sweet! So now I have 3 things coming together.
So how did I take the trade then?
I switched to the 1hr timeframe and waited for price to come and
hit the confluence zone and saw a shooting star, a bearish reversal Candlestick
pattern (also sometimes called a bearish pin bar). That was my clue to execute
a short trade right there.
Here’s is a close up of how the trade setup looked like in the 1hr
where I was waiting to take the trade(see chart below):
I risked 50 pips for this
trade and later I’m going to set the previous swing low as my profit
target which is 215 pips and if my profit target gets hits, I will
make 7 times what I risked initially.
Update:
Good thing as I was
stilling writing this guide this trade played out so I can show you what
happened: As you can see, I managed to make 138 pips on the first trade. Note
also that I also made a 2nd trade
which made 125pips as well. Even though my profit target was not hit, I used
trailing stop loss as shown below until I got stopped out when price moved back
up.
That’s the beauty about these kinds of trades:
§
They are really low risk-high reward entry trades.
§
They have great chance of being profitable.
There’s two ways you will learn from price action:
1.
First is to spend hours over your charts analysing what happened
in the past and asking these types of questions: Why
did price make a big upward move from here and why did price make a big
downward move from here? What price action signals that formed there that could
have given anybody an indication that this massive move was about to happen? You
will be bloody surprised at what type of reversal candlesticks and chart
patterns you will find!!!
2.
Then with that knowledge, get back to the present and see if you
can see these patterns unfolding in the current market.
Here’s an example of a doji
candlestick confluence with the dominant downtrend, as if formed telling you to
sell the market with the trend. This short trade setup had 4 factors of confluence supporting it:
1.
The doji had confluence with the dominant downtrend, as it formed
telling you to sell the market with the trend.
2.
The doji showed a clear indecision by the sellers and the buyers
therefore the breakout of the low of doji candlestick was what the sellers were
waiting for to push the market down.
3.
The doji candlestick also formed between 50-61.8 fibonacci
retracement zone.
4.
The moving averages providing dynamic resistance.
Here’s another example:
Now, I can put lots of charts giving you examples of what happened
in the past…but it’s best that now you see and understand what I am explaining
here, and then go and sit down and observe what happens on your charts in real
time.
All this information here is providing you the foundation; the
basic framework you need to trade price action, the learning comes from
observing and doing.
CHAPTER
16: TOP 2 REASONS WHY I USE MULTI-TIMEFRAME ANALYSIS AND
TRADING
There are 2 main reasons why I use multi-timeframe trading:
1.
For getting better trade entries
2.
For reducing stop loss distance so I have better risk:reward ratio
which means I can also increase the amount of
contracts I trade without risking more of my trading account…so if my trade
direction is right, I make a lot more money!
Now, I will explain both in detail…
How
To Get Better Trade Entries And So Reduce Your Stop Loss Distance With
Multi-Timeframe Analysis And Trading
If you are trading strictly using the large timeframes like the
daily chart, your stop loss distance will be huge and the issue with that is
your risk:reward ratio can be reduced (no necessarily all the time):
Risk
to Reward Ratio Explained
Simply put, investing money into the investment markets has a high
degree of risk, and if you’re going to take the risk, the amount of money you
stand to gain needs to be big. If somebody you marginally trust asks for a $50
loan and offers to pay you $60 in two weeks, it might not be worth the risk,
but what if they offered to pay you $100? The risk of losing $50 for the chance
to make $100 might be appealing. So in that case your risk:reward ratio will be
1:2
But what if you decided that you want to minimize your stop loss
distance?
And even though you are trading with a setup in the daily chart,
for your trade entry, you are actually switching to the smaller timeframe and
watching for a sell signal in the 1hr timeframe?
Well, what I’ve just
described is a really good example of multi-timeframe trading to get better trade
entries.
Let’s study a chart of what happened in the past to make you
understand what I am talking about…
This chart below is a daily chart and shows a triple top pattern
in a solid resistance level. Price has been pushed down twice from this level
and when the third time it price reaches this level, it was pushed down again.
Now, you can see the bearish harami reversal candlestick pattern
and you could have used this as your sell signal by placing a pending sell stop
order just a few pips under the low. And placed your stop loss outside of the
resistance line as shown on the chart above.
But if you switched to the 1hr chart to wait for trade entry, your
stop loss distances would be very small in comparison to the daily timeframe as
shown by the chart below(I’ve zoomed in to get in closer):
Now, let’s compare both trades in the daily chart:
Notice that for the 1hr trade entry, it was done almost at the
very top and the stop loss distance was very small in comparison to the trade
taken in the daily timeframe. Which means that the risk:reward of the 1hr
timeframe trade is a lot better than what you would get in the daily.
Now, you can do this
with daily timeframe and 4hrs or even down to the
30 and 15 minute timeframes.
Or you can watch trade setups in the 4hr but switch to either the
1hr, 30mins, 15min and 5mins for your trade entries.
I often use the 1hr for my trade entries and can even go down to
5min timeframe for my entries. If you are new trader, stick to 1hr or 4hr
timeframe for your trade entries.
So when you trade in the 1hr timeframe (or much smaller timeframe)
you can actually trade a lot more contracts without risking more because your
stop loss distance are very small compared to the larger timeframe trade.
For example, the stop loss for the 1hr timeframe trade is 20 pips
but for the daily timeframe trade is 80 pips. Let’s say that you have a $10,000
account and you risk 2%($200) each trade. If you trade in the daily chart, that
stop loss of 80 pips is roughly $800 so to keep your risk at 2% the amount of
contracts you will trade will be 0.25.
However If you’ve traded in the 1hr you can be able to trade 1
standard lot.
This simple example explains why I wait patiently for trade setups
to happen in the monthly, weekly, daily, 4hr timeframes and then use smaller
timeframes to get good trade entries. This is the beauty of multi-timeframe
trading using price action.
Let me give one more
example of multi-time frame analysis…As I’m writing this book (the date now is
5th of Dec 2014), I can see that EURJPY has been
on an uptrend since July 2012 on the monthly charts and I can also see that
there is resistance level at 149.115 which it hit already. This is the monthly
chart:
Now, lets zoom in on the daily chart and see what the price action
is like on where the arrow is pointing (see chart below):
Ok, I begin to see what’s happening…so obviously, EURJPY has been
rejected down on the 149.115 resistance level with the formation of the shooting
star (bearish candlestick signal) but now, I can see that its going back up to
test that level again.
Two things can happen here:
1.
Price is going to hit the resistance level and head back down (
and I will be waiting for a bearish reversal candlestick there to sell when I
see one).
2.
Or its going to break it and if it breaks it, there’s a
significant resistance level above it you can see on the monthly chart.
Now, let’s go down into the 4hr chart to see what is happening
there as well…
So now you can see how I do my multi-timeframe analysis to get
down a timeframe where I execute a trade at a very good price level or entry
point whilst keeping my stop loss distance tight.
Now, here’ the thing about larger timeframes:
“They cover up trading setups that are happening in smaller
timeframes that could be really reliable trading setups.”
But when you switch back
and forth between timeframes, you begin to see how you
can trade the larger timeframes setups based on the setups that happen in the
smaller timeframes.
For this eurjpy setup above, I’m going to be sitting down and
watching it to see if I get a bearish reversal candlestick in the 1hr or the
4hr….it’s probably going to happen tonight in maybe 4-8hrs time but the price
is getting close to that resistance level. I really don’t like trading
breakouts where I see the price has been overextend for a long period of time
so even if this one breakouts to the upside, I will not be buying. I will be
waiting for a pullback to buy, if that happens.
CHAPTER
17: TRADE THE OBVIOUS
I hope you have learnt how
powerful price action trading can be. Now, not all trading setups you
see will become winners.
But here’s the thing…if your losses are small but your profits are
large, you will always be in be out in front. That’s why trading risk
management is important.
When you are watching the
chart for trading setups, you need see andtrade the obvious.
What do I mean by that?
Well, if there is an
obvious pattern on the chart and you can see it clearly, then you should know
that there are thousands of traders out there are watching the exact same thing
as you are doing…because it’s so obvious.
Things like:
§
Trendlines or channels or bullish pin bar forming on major support
level, if you can see that, there are many that will be seeing the same thing.
§
All these traders will be waiting to see what happens at these
levels and say if a bullish hammer forms on a major support level, then guess
what will happen next? The most likely outcome of that is that as soon as the
high of the hammer candlestick is broken, price will shoot up!
Trade the obvious!
How many
times have you ever went over your chart and you are like:
“Goodness me! I should
have taken a trade here and look at how the market moved after that bearish
shooting star candlestick was formed after hitting the resistance level.”
When you trade the obvious, then you trade with what everybody
else is seeing and in essence you are really doing piggy-back, riding on the
market move created by all these orders that puts the odds in your favour.
See chart below for this: if you see a support major support level
and price is heading down to it and at the same time, that support level
is coinciding with an upward trendline…
What does this mean? That’s Confluence buddy! And then you see a
bullish Piercing line reversal candlestick form right at the area of
confluence.
Are you going to be undecided about this price signal and
pull up stochastic or CCI indicator to really make sure (give you confidence)
you need to buy???
Seriously???
NO need for that…Just Trade the
obvious!
CHAPTER
18: CLOSING REMARKS
Some things I have learnt:
§
Levels are not lines drawn in concrete, they get broken. You
see, the more a level is tested multiple times, sooner or later it will get
broken. From my observations, 2-3 times is the average, after that, expect a
breakout of the level.
§
Don’t listen to analysts. They can stuff up
your decision making process and cloud your judgement. For example: I see
a sell setup on my chart but because I’ve read the analysts report that says he
is bullish on this currency pair because of this
and that reason, I hesitate to pull the trigger . Later, I check the chart and
see that If I had sold, I would have made money. So use your own independent
judgment based on what you see on your charts.
§
Find your best timeframe to trade. Your
personality, work circumstances etc may dictate what timeframe you can use. For
me, I can trade from the 4hr, 1hr down the 5 & 1 min charts because I use
multi-timeframe trading. Yes, there will be people that will say “You are crazy
to be trading in the smaller timeframes like the 5min and 1minute because
there’s too much noise in the smaller timeframes.” Yes, I know that…The whole
point of me switching to lower timeframes is this: to
get better trade entries.You don’t have to do that, that’s my style. That’s
what I like.
§
If the bus leaves you, don’t chase the bus! In
other words… don’t chase trades. If you are late to get into a trade at an
optimal entry point and realized that you might “miss out”, then back off and
wait. There will always be another opportunity or wait for a retrace/retest/pullback
etc and then enter.
§
Be patient for the right trading setups to form.
§
If you are suffering from losing streaks, take a break. Take
a week off from trading to clear up your mind then come back with a clear mind
to trade.
§
If you have winning streaks, don’t get overconfident and risk
more. You streaks of losses may be just around the corner.
If you’ve enjoyed going
through my price action trading course, please don’t forget to
share, tweet, like and link to it by clicking those sharing buttons on the left
side of this page. I would really appreciate that. Thank you.