Price action
This strategy is based on trading price action. What is price action? It is combined of many things, like support and resistance areas, trends, price momentum, patterns, etc. By successfully reading current price behavior traders can predict its future behavior.
Ultimately price action is just representation of what other traders are thinking, feeling and doing. As you can learn to predict people’s future by their current actions, you can predict future price action by its current and previous behavior.
Price action is the only indicator you need. Indicators are
made calculating price action with various formulas. Thus then there are
lagging. Price however, moves in real time and the way that it moves is
represented in candles size, form and patterns.
Candlesticks
Candlesticks indicate what price was doing over given period in time. Candles show who is in control of price, bulls or bears. Reading candlesticks can give you much information needed on what price will be doing in near future.
Bull control
Strong bull control candles are green and bigger than average candles. They have no or very small shadows. This clearly indicates that price is going up.
When green candles become smaller it still indicates that bulls are in control and price is going up. Shadows may get longer, however, it’s slowing down.
Bear control
Strong bear control candles are red and bigger than average candles. They have no or very small shadows. This clearly indicates that price is going down.
When red candles become smaller it still indicates that bears are in control and price is going down Shadows gets longer. However, it’s slowing down.
Indecision and reversal
Indecision candles indicates that no one has complete control of the price. These candles has small or no bodies and a lot longer shadows then the bodies. Overall these candles are pretty small.
At support and resistance area this could indicate possible reversal, while during strong trends it indicate continuation.
Reversals are indicated more by sharp V candles like hammers, while continuation is indicated by spinning tops where price don’t have that sharp moves.
Fundamentally these candles don’t indicate reversal, just indecision. By taking factors like trend, support and resistance and price momentum it gives us clearer picture.
Trend
Price are constantly moving, up, down or sideways. Price considered trending when it moves in a particular direction, up or down. Basic definition of an uptrend is consecutive higher highs and lower highs, while downtrend is the opposite – lower highs and lower lows. In trading as well as everywhere else Newton’s law applies – object once set in motion remain in motion. Price is more likely to go into direction of current trend.
This is important, because when taking trades we would me much more comfortable taking trades in the direction of the trend.
Trends can differ. For example on 1 hour you can see uptrend, on 4 hour chart downtrend and sideways action on weekly chart. Which one to follow? IF you are trading 4 hour chart then follow trend of 4 hour chart. If you are trading on 1h chart, then follow trend of 1h hour chart.
Trend Following
Most of the time trend following is the most profitable strategy, but when trend is exhausted and you can see reversal patterns developing counter trend trades can offer profitable trades as well.
I recommend to stick with the trend, and take counter trend trades with less risk. This is why it’s important to write trading journal. As you analyze your trades you can see not only overall winning percentage, but also setups that win more than others.
After a while you can see which setups makes you the most money and trade only those. 20/80 rule states that 20 percent of your trades will result in 80 percent of money made. In trading less is more.
Trends start with a huge explosion in price and end in a
big parabolic move. Longer term trends are caused by fundamental factors, most
of the time they begin and end during important news releases.
Price momentum
Price momentum is another important factor in your analysis. Simply put momentum is just speed of price. Same rules apply in trading as in physics.
We are only taking trades at support and resistance areas.
These areas are like brick walls, and price is like a car. If car is moving at
5 mph it is very likely to bounce of the wall and go back. If car is moving at
100 mph at the same wall it is very likely to go through that wall. Considerate
that when you are trading.
Support and resistance areas
Identifying support and resistance (SR) areas is crucial to your success. These are the areas where you are going to enter and exit trades, because it is easiest to get the best price to enter, determine direction of the price, and know where to exit.
SR areas is where the price is more likely to change its current direction.
We determine SR areas by looking at previous price action. Areas where price has stopped and changed its direction are likely to be the areas where it’s going to do that in the future. It might not be the exact number, but it can be.
The stronger SR area are, the more likely price is to reverse. There are two ways to determine strength of SR area. Timeframe and number of bounces. The higher the timeframe the stronger are the area.
More bounces price has had in the past of this are the more important it is to traders.
However beware certain patterns that can indicate breakout
of that area. For example if price is constantly hitting support while
continuously making lover highs it indicates that price is likely to break SR
area. After the breakout this support turns into resistance and becomes
profitable area to go short.
When not to trade
Knowing when not to trade is as important as knowing when to trade. Remember that your goal here is to consistently make money trading. If you want to play a lottery go buy a lottery ticket. Trading is a real business and must be treated as such.
Avoid taking trades 30 minutes before and after important news releases and speeches. In forex markets news that impact prices are released every minute, but most of the time their impact are minor and only affect traders trading small timeframes. However there are news that can change prices really quickly.
In Addition
These are important speeches, elections, interest rate decisions, and non-farm payrolls. Other news releases are not that important and most of the time act as catalyst for trades to make money. Funny thing is when you are good and have the feel for the market the outcome of these news releases can be predicted by looking at price action way before release. Insider trading? Maybe.
Other news releases can be unexpected and very volatile. Recently Swiss national bank abandoned its 1.2 euro cap and many traders lost their accounts. Even my favorite broker got out of business. Good that it happens very rarely.
Also avoid trading during holidays. Markets rarely makes
profitable moves, so it’s better to keep money in your pocket.
