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PRICE ACTION(introduction)

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 Edinburg will be mostly cloudy, slight chance of a 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 to 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 risk. 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.

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, trendlines, 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 an example of what can happen when there is major forex fundamental news release:

Forex-Fundamental-News-Trading-price action trading

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 a 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 learnt 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 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 is colour coded in Red. That’s what you look for(see figure below):

price action trading

Here’s what you can do:

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.
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 start 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 work for you or against you. You need to know what you are doing during these times.
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 behaviour. Human behaviour 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 the 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 may 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 the 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:

Price action trading

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!):

price action trading

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 in 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 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.

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 help you to trade with an edge. They may not be exciting and probably you’ve heard of these before but hey…this stuff is what separates winners from losers

>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.”

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16 Jan 2019 4:18 pm Posted by admin