One fine day while I was sifting through comments from readers in reaction to my various posts, one caught my attention. This comment came from a reader who simply called himself diet band wandwagon(same name as his youtube channel). He loved my What is Price Action Trading? post so much that he said,”Very energetic post. I liked it a lot. Will there be a part 2?” I thought to myself, “Do I really need to do a part II to this post.
But then I thought “Yeah it makes sense to do a part II to the original post. After all, you do need to know how to perfect your craft as a price action trader right?And besides, most movies have sequels these days.So I have come to the conclusion that my original post deserves a sequel “How To Ace Price Action Trading”. I think it’s an appropriate name for a sequel because you need to really hone your skills as a price action trader if you want to separate yourself from the chaff so to speak. So I’m going to share with you a few tips to help you be the perfect price action trader that you can be- or at least close to perfect. . So Mr diet bandwagon, this is for you.
Focus On The Hills and The Valleys
Focus on the hills and the valleys is my streetwise way of saying focus on the highs and the lows. It’s not for nothing traders say the trend is your best friend. The hills and the valleys provide valuable information about trend strength and market direction that you’d be crazy to ignore. And they can even drop clues on the trends losing momentum and impending trend reversals.
Here are a few things to consider when analyzing the hills and the valleys
- Do the hills and the valleys establish a wavy pattern with small pull backs?By that I mean do the hills and valleys establish protracted trend patterns with small pullbacks?If that’s a case this has all the makings of a strong trend, not to mention a huge opportunity to cash in.
- However, when price barely clears the scales making higher highs and higher lows, that should tell you that the bulls are losing momentum and that the bears have started bearing their teeth.
- If you see pervasive volatility or longer candlestick wicks while price generates new highs and new lows, be very worried. This could be a slippery turning point where the trend loses momentum.
- Another attention grabber you ought to pay attention to(for want of a better term) is where price fails to make a higher high on an uptrend. That should also tell you that the bulls are losing momentum. You can be sure the bears are salivating at this development.
Now let’s take a look at the EUR/USD.
The EUR/USD graphic is a classic illustration of the highs and lows that we’ve been discussing above. Higher highs and lows can be valuable when looking for signs of trend strength.If you’re not sure of your trend trading, refer to my Trade Trends With Price Action Analysis post.
Pick Trades That Have High Probability Of Success
You’d be better off to pick trades that have a high probability of success. Even if you spot the juiciest price signal you do your profit chances a world of good by only taking trades that have a significant probability of profitability. In other words, these trades should be located in zones considered important and meaningful. It does not make sense picking price signals,regardless of where they occur, and then wonder why they have such a low winning rate.
Some of you are probably wondering “How Do I detect trades that have a higher probability of success?” Well,you can start by drawing support and resistance levels on the chart.Then wait for price to touch those levels;and only take a price when a price signal lights up at your pre-marked price areas. Not only does this spare you from pulling your hair out, but the quality of your trading improves significantly. Let me show you an illustration of what I’m talking about.
This is an example of a trade with meaning. You have resistance levels that are well-defined. Once the price touches these levels, that should be your queue to enter your trade. If you want to know how to identify support and resistance levels, see my Identify Support and Resistance Levels With Price Action Analysis post.
Put Trades in Proper Context
If you want all your hair still in one piece, put your trades in their proper context. It flies in the face of trading common sense if you go on some candlestick treasure hunt to fit some template you’ve designed or just satisfy some candlestick criteria you’ve created for yourself. One thing you must understand about price action trading, is that the price action you see on your screen is relative in relation to what happened previously. In other words, there is a link between past,present and future.
For instance you may run into a situation where you find multiple pin bars. The first two pin bars may be tiny compared to the previous price action. Since these pin bars don’t tell you much with regards to trading signals,they eventually fizzle out. Let’s take a look at the NZD/USD graphic.
As you can see from the uptrend,there are multiple pin bars. But the first two are midget in size, and since their trading signals are mere whimpers,they just evaporate like meteorites. Notice how the pin bar at the very puts on a strong rejection and yet it was bigger than the previous candlesticks. Samesituation goes for the bears . They also have midget pin bars that don’t giveyou much to gon.Eventually,they also fizzle out. So if you see pin bars that look like they’re famished, FLEE!
Four Clues of Candlesticks and Price Action
There are four clues candlestticks you have to instantly recognize when trading with price action. Remember when I said you need to act like a sniffer dog when trading? You need to put on that mentality in this situation.You have to put the pieces together to avoid blowing your account into smoke. Lookout the following hints to avoid making disastrous and dangerous blunders.
Long wicks spell danger and uncertainty.
This so happens especially when the market is congested.In other words when the market is going sideways.
The long wicks in this graphic illustrate the danger that I’m referring to. They’re the skinny ends of candlesticks. Even worse,is the congestion in the graphic. This happens when the market is going sideways or where there is lack of clarity in the market. Unless a break out happens, DON’T TRADE.
Bullish vs Bearish Wicks
Anytime the bears generate long hicks going downhill, it suggests rejection and failed bearish attempts.
As you can see from the AUD/CAD graphic, there has been a major bear rejection resulting in a false break of some sort. You’d be wise not to fall for such a deception.
Position of Candlestick Body
You need to ask yourself whether the position of the candlestick body is closer to the top or bottom of the candlestick. Bodies that close near the top suggest strong bull activity-especiallyif the candlestick has a long wick.
The blue candlestick illustrates what I’m talking about. If it closes at the top, it means the bulls are on top, If it closes at the bottom, the bears are in the neighborhood. If you want to know about candlestick action refer to You Need To Know Ten of These Candelstick Patterns.
Ratio Between Body and Wicks
The ratio between the candlestick body and the wicks speaks huge volumes about who is on top at the market. Candles with large bodies and tiny wicks suggest humongous strength. Whereas candlesticks with a small body and tiny large wicks spell indecision among the trading actors. Let’s take a look at this ratio.
The black and white candlesticks(representing the bulls and the bears respectively) with long bodys and tiny wicks reflect the overwhelming strength of both the buyers and the sellers. notice the the two black and white candlesticks to the left of their larger brethren. Their small bodies and longer wicks reflect significant indecision on the part of the bulls and the bears.They’re losing serious moment and are not sure whether to buy or sell. They both looked famished if you ask me.
Keep The Noise Out Of Your Market Selection
I f you want to keep your winning streak going as a price action trader,you have to keep the noise out of your market selection at m You need to pick currency pairs that have the highest probability of making you a decent profit. This means cutting out all that congestion, consolidations and narrow trade ranges which bring you nothing but misery. Just sit down and come up with about 6-8 currency pairs that can ring your cash register on a regular and consistent basis.
Not only is it important that you adopt effective market selection,but you also need to select markets that can give you clear cut price action You want to stay away from markets that give you nothing but volatility and a nervous break down. You want straight out consistency and a healthy account. Also don’t get too stuck on specific pairs. I know we all have our favorites but please! Let’s have some variety here – rotate the selection and have some fun with your trades.
This is a classic illustration of a price action set up. You don’t see any congestion consolidation, or any other confusion. This is clear and unadulterated price action,and it is a high probability trade too. It’s a simple uptend with the bulls break through the resistance and heading for the hills as usual. You can’t miss on this setup!
If you want to learn how to spot trades that are straight forward and less noisy,don’t and make a lot of noise, refer to the following: Trading Chart Patterns Part I , Trading Chart Patterns Part II , and How To Spot High Probability Trades.
That’s a wrap on “How To Ace Price Action Trading.” Mr Diet Bandwagon, I hope this sequel was to your liking.On a serious note though, this post should arm you with enough ammunition to profit profusely from price action trading. With straight forward high probability price action setups, your forex account should put a permanent smile on your face. Just make sure you’re able to recognize these setups of course.
Til next time take care.
If you’re looking to open a live trading account sign up with EasyMarkets.