Price action trading has been touted as one of the best trading strategies in the forex market but without some hard set of rules, it is almost useless. In this educative piece, I will take you through six tips that will assist you in becoming a better price action trader. Some of the tips could even be used in other trading strategies.
I presume you are here already because you are a price action trader who is looking towards improving some aspects. However if you are new to price action trading, check this course out.
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Avoid trading within consolidations.
A consolidation is otherwise known as a ranging market. In a ranging market, neither buyers nor sellers have the upper hand so the sentiment of the market turns into a neutral one. You make money when a currency pair trends up or trends down; and it is never so in a consolidation.
Be patient enough to wait for the breakout of the consolidative area to take advantage of the explosive moves that breakouts are known to bring. This way you would be able to avoid the unfortunate situation of getting locked in a trade that moves nowhere.
With this price action trading tip, there is an exception. There are a set of traders who trade within consolidations and they are the range traders. Range traders look towards price respecting the support and resistance levels and taking advantage of it.
The marked areas are consolidative areas and as you can see, price make explosive moves when they are outside those areas.
Candlestick closing is very crucial in price action trading.
A candlestick comprises of four elements; the highest price, the lowest price, the opening price and the closing price. The closing price is mostly overlooked and that could be a very costly trading mistake. Candlestick closing helps you avoid some stress in trading and I will show you why below.
You already know that a single candlestick is correspondent to the timeframe you are in at a certain moment. For instance, if you are in the daily timeframe, every candlestick took 24 hours to form; in the 4 hour timeframe, every candlestick took four hours to form and so on.
The timeframe you trade will determine which candlestick close you should wait for. Candlestick close is used to confirm a breakout without necessarily going through the stress of chasing price and wondering when to get in.
If you saw a triangle consolidation in the 4 hour timeframe, you would simply wait for a breakout of the support or resistance of the consolidation. The 4 hour candlestick that closes out side of the zone of the triangle would confirm the breakout.
It is also worthy to mention that in price action trading; this does not always work as there are false breakouts too. This is when a candlestick closes outside of the consolidation but fails to remain outside and goes back to trade within the range.
In this 4 chart of the AUDCHF, pay attention to the blue arrowed bearish candlestick which was the first to close outside the area of the triangle. That close on the 4 hour timeframe confirmed the breakout for a sell position which was would have ended up in profit if you traded it.
Plot support and resistance with reason in pure price action trading.
If you have been in the markets for long enough, you know the traditional way of plotting support and resistance levels where every turning point in the market is a potential support or resistance level. This style may leave you confused as every forex chart has numerous turning points. Turning points in this context mean swing highs or swing lows.
The traditional way instigates you to plot those keys levels blindly, hence without reason. The refined way of plotting them is to consider time together with the price action. That way you focus on the most previous periods to anticipate what will happen in the next period.
Price and time’s strategy of plotting the key levels give you simple monthly, weekly and daily levels. It can even be taken a step further to get yearly and quarterly levels out of it. Since this concept is very broad, watch the video below or see this post for utmost understanding.
Line charts are helpful.
Price action trading is mostly dependent on candlestick charts but they may be complicated for the inexperienced trader. Candlesticks tell the full story of what happened within a particular period of time and line charts simplify the views.
Whenever you are uncertain about a market structure or even if you are looking for key levels; line charts will be there to help you out. Line charts record only closing prices so they do not tell the full story but they still give a simplified view in the form of a wave line.
The trick is to revert to candlestick charts after you are done simplifying things on the line charts to capture important wicks.
A simplified line chart view of EURUSD which easily captures the uptrend.
The candlestick chart view of the same EURUSD which may look a bit intimidating to the inexperienced trader.
Wide breakouts are not your friend.
Breakouts are explosive, breakouts give the best profits, breakouts this breakouts that! Forget about all the positives of breakout trading if the margin is very wide. Wide breakouts do not give the best risk to reward ratios in trading; hence if you see one, jump onto the next setup.
You may get away with one or two wide breakouts trade profitably; but the one which would go wrong could make you lose more than necessary. If you are impatient enough to overlook the wide ones; simply reduce your usual lot size in order to risk small and it will not affect you badly if it does not work out.
The blue arrowed bullish candlestick which signifies a change in trend is a classic example of a wide breakout. As you can see, the stop loss would have to go below the broken level; and that would cause you to risk more than usual.
False reversal is a thing in price action trading.
There is too much hype about false breakouts to discourage traders from adopting the breakout trading style. However much has not been said about false reversals which I see are arguably common than false breakouts.
This is when you are patient enough to wait for price to get to a key level to trade your reversal style. You set up the trade and come back to it; after a period of time only to see that price has shot through the level. That is you in a false reversal right there.
Why is this a trading tip? I only feel that you have to know and there is not much you can do about false breaks and false reversals; other than manage risk. You will get to win in the long run with risk management.
Focus on the rectangular area and see how price broke through 1.09828 level. This happened days after a supposed reversal on the same level.
I hope the price action trading tips help in improving your trading even as you put them to use judiciously. Let me know what you think about this lesson in the comment box below; also, you can add to the tips if you have any helpful ones.
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