What is Price Action?
Price Action is defined as the analytical study of price movement and the “language” of the market.
Price Action trading strategies can be used on any timeframe charts, so no matter what your trading style is it will suit your needs.
Why trade Price Action?
Price action traders can enjoy the skill of reading, understanding, and projecting future price movements without relying on magical indicators. Going back to the basics and learning to read the charts will result in steady growth and success as a trader.
Support & Resistance
- Using key support and resistance is a must with price action trading. Whether you eye the S&R levels in or use an indicator, this is the base of learning price action.
- Support is the lower level and Resistance is the upper level.
- Drawing in the highest highs and lowest lows will be our first start to learning S&R.
How Do I Identify A Trend?
Identifying a trend is one of the basics of reading a chart. To identify a trend, open your charting platform and zoom out a little bit. If you have loaded the template I have provided you for attending this series, then take a look at the zig zag indicator to see whether price is creating higher highs and higher lows or lower highs and lower lows.
Look at the BIG Picture
- When we look at the example below, what do we see?
- Lower highs and lower lows…this means that the EURUSD hourly timeframe is in an overall downtrend.
- In this scenario, we would want to short/sell high at the peaks in the market.
What Is Trend Duration?
Trend Duration is the projected time that a trend will last. You will find that looking at different timeframes and assets will produce different trend durations.
Calculating the projected trend duration will assist your trading confidence in knowing how long you may be staying in that trade and when to exit some of your positions.
Identifying Trend Duration
In the example below, we are using the USDJPY on an H1 timeframe. The vertical lines display the overall trend duration that has occurred over the past few months.
What we find is that the trend duration was 9 days, 19 days, 7 days, 27 days.
What can we tell from this? That there will be approximate weekly durations up to one month on our positions.
What I would personally do with this information is open 4 positions per trade with a 1/1 risk to reward, 2/1 risk to reward, 3/1 risk to reward and trail stop the fourth position until it is stopped out.
Stick To The Overall Trend
Once you can properly identify a trend and the approximate trend duration, one main thing to remember is that you should always stick to that trend.
Although you will experience moments of consolidation, you will also be able to follow much larger moves when the market is trending.
In an uptrend, buy low and in a downtrend, sell high
Risk to Reward
Creating a forex trading plan is one of the most essential parts of being a successful trader. If you go into the market knowing your set rules and risk to reward then you will be much more confident in the entry and exit of your trades. My game plan in this presentation is to teach you how to set multiple positions with a 1:1, 2:1 and 3:1 risk to reward, along with how to effectively trail stop.
1:1 Risk to Reward
Using a 1:1 risk to reward allows the trader to breakeven with a 50% win rate.
An example of a 1:1 position would be a 20 pip SL (stop loss) with a 20 pip TP (take profit)
The 1:1 position is usually my first position of 4 when trading and closes once my first and lowest TP is reached.
This is the one and only position that I do not trail stop.
2:1 Risk to Reward
Using a 2:1 risk to reward allows the trader to breakeven with a 33% win rate.
An example of a 2:1 position would be a 20 pip SL (stop loss) with a 40 pip TP (take profit)
The 2:1 position is usually my second position of 4 when trading and begins trail stopping with SL moved to positive 10 pips in case the position turns against me. From there, I trail stop every 20 pips or so, depending upon the strategy.
3:1 Risk to Reward
Using a 3:1 risk to reward allows the trader to breakeven with a 25% win rate.
An example of a 3:1 position would be a 20 pip SL (stop loss) with a 60 pip TP (take profit)
The 3:1 position is usually my third position of 4 when trading and begins trail stopping with SL moved to positive 20 pips in case the position turns against me. From there, I trail stop every 20 pips or so, depending upon the strategy.
Opening Multiple Positions
The reasoning behind opening multiple positions per trade, is to reach each of the risk to reward scenarios and to maximize and lock my profit to it’s highest potential.
By using a breakeven and trail stop, I ensure that I am gaining maximum pips with solid risk management.
What Is Trail Stopping?
Trail Stopping is an advanced type of stop loss order that reduces the risk of your trade as it progresses. As the trade moves in the trader’s favor, the stop is adjusted to a more favorable rate. Other than my 1:1 first position, I always trail my stops.
Ascending & Descending Triangle Patterns
Ascending & descending triangle patterns produce an approximate 72% win rate.
The triangle pattern usually occurs when the market is trending and acts as a continuation pattern.
An ascending triangle pattern is defined by a bullish trend with two or more equal highs following, along with a series of higher lows.
A descending triangle pattern is defined by a bearish trend with two or more equal lows following, with a series of lower highs.
The ascending triangle pattern is complete when price breaks above the horizontal resistance area, and is considered successful if price continues beyond the breakout point a minimum of the same distance as the triangle width.
The descending triangle pattern is complete when price breaks below the horizontal support line, and is considered successful if price continues beyond the breakout point a minimum of the for at least the same distance as the triangle width.
Pending Orders
When you recognize an ascending or descending triangle pattern, you can either A enter at market price once the breakout occurs or B set a pending order.
The pending order you would want to set would be just above the resistance area for an ascending triangle pattern or just below the support area for a descending triangle pattern.
In the example below, you see a descending triangle pattern. The support line is the upper line and the pending order is just below that support, for a short position.
Ascending & Descending Channel Patterns
Ascending & descending channel patterns produce an approximate 73% win rate.
The channel pattern usually occurs when the market is trending and acts as a delayed continuation pattern.
An ascending channel pattern is defined by a bullish trend followed by lower highs and lower lows, staying within a channel (2 parallel trend lines).
A descending triangle pattern is defined by a bearish trend followed by higher lows and higher highs, staying within a channel.
Ascending Channel Pattern
The ascending channel pattern is complete when price breaks above the upper trend line, and is considered successful when price moves from the outer edge and produces a distance of the initial move that started the channel.
Descending Channel Pattern
The descending channel pattern is complete when price breaks below the lower trend line, and is considered successful when price moves from the outer edge and produces a distance of the initial move that started the channel.
Pending Orders
When you recognize an ascending or descending channel pattern, you can either A enter at market price once the breakout occurs or B set a pending order.
The pending order you would want to set would be just above the upper trend line for an ascending channel pattern or just below the lower trend line for a descending channel pattern.
In the example below, you see an ascending channel pattern. The upper trend line is the break out area and the pending order would be set just above for a long position.
Double Top & Double Bottom Patterns
Double top and double bottom patterns produce an approximate 75% win rate.
This pattern is one of the most common price reversal patterns.
The double top pattern is defined by two almost equal highs and a double bottom pattern is defined by two almost equal lows, both with space in between.
Double Top Pattern
The double top pattern is complete when price breaks below the previous swing low of the first high, and is considered successful when price moves at least the same distance of the previous swing low.
Double Bottom Pattern
The double bottom pattern is complete when price breaks above the previous swing high of the first low, and is considered successful when price moves at least the same distance of the previous swing high.
Pending Orders
When you recognize double top or bottom pattern, you can either A enter at market price once the breakout occurs or B set a pending order.
The pending order you would want to set would be just above the previous swing high for a double bottom pattern or just below the previous swing low for a double top pattern.
In the example below, you see a double top pattern. The second trend line is the previous swing low and the pending order would be set just below for a short position.
Triple Top & Triple Bottom Patterns
Triple top and triple bottom patterns produce an approximate 78% win rate.
This pattern is another price reversal pattern.
The triple top pattern is defined by three almost equal highs and a triple bottom pattern is defined by three almost equal lows, both with space in between.
Triple Top Pattern
The triple top pattern is complete when price breaks below the previous swing low points, and is considered successful when price moves at least the same distance of the furthest swing low.
Triple Bottom Pattern
The triple bottom pattern is complete when price breaks above the previous swing high points, and is considered successful when price moves at least the same distance of the furthest swing high.
Pending Orders
When you recognize a triple top or bottom pattern, you can either A enter at market price once the breakout occurs or B set a pending order.
The pending order you would want to set would be just above the previous swing high for a triple bottom pattern or just below the previous swing low for a triple top pattern.
In the example below, you see a triple bottom pattern. The second trend line is the previous swing high and the pending order would be set just above for a long position.
Bullish & Bearish Rectangle Patterns
Bullish and bearish rectangle patterns produce an approximate 78% win rate and are considered continuation of price patterns.
The rectangle pattern is defined by a strong trending move followed by two or more nearly equal tops and bottoms where price stays within two parallel trend lines that are horizontal.
Bullish Rectangle Pattern
The bullish rectangle pattern begins after a bullish trending move and is considered successful when price extends beyond the breakout point by the same distance as the width of the parallel lines.
Bearish Rectangle Pattern
The bearish rectangle pattern begins after a bearish trending move and is considered successful when price extends beyond the breakout point by the same distance as the width of the parallel lines.
Pending Orders
When you recognize a bullish or bearish rectangle pattern, you can either A enter at market price once the breakout occurs or B set a pending order.
The pending order you would want to set would be just above the resistance for a bullish rectangle pattern or just below the support for a bearish rectangle pattern.
In the example below, you see a bullish rectangle. The second trend line is the resistance and the pending order would be set just above for a long position.
Head & Shoulders and Inverted Head & Shoulders Patterns
Head & Shoulders and Inverted Head & Shoulders patterns produce an approximate 85% win rate, the most statistically accurate of all of the patterns I have covered.
Head & Shoulders Pattern
The head & shoulders pattern is defined by two swing highs with a higher high in between. These are considered the head and shoulders. This pattern is considered successful when price extends at least the distance from the neckline to the head, following the price break.
Inverted Head & Shoulders Pattern
The inverted head & shoulders pattern is defined by two swing lows with a lower low in between. These are considered the head and shoulders. This pattern is considered successful when price extends at least the distance from the neckline to the head, following the price break.
Pending Orders
When you recognize a head & shoulders or inverted head & shoulders pattern, you can either A enter at market price once the breakout occurs or B set a pending order.
The pending order you would want to set would be just below the neckline break for a head & shoulders pattern or just above the neckline break for an inverted head & shoulders pattern.
In the example below, you see an inverted head & shoulders pattern. The second trend line is the neckline break and the pending order would be set just above for a long position.
I HOPE YOU ENJOYED THIS PRICE ACTION SERIES!
Hopefully you have gained some great insight to the market and have increased confidence in managing your positions.
Cheers to a successful future!