Priceaction — indicators and signals

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Price action trading strategies are dependent solely upon the interpretation of candles, candlestick patterns, tư vấn, and resistance, pivot point analysis, Elliott Wave sầu Theory, and chart patterns<1>. It is often confused with Volume và Price Analysis (VPA), where volume is interpreted with the price action to paint a clearer picture of the stock’s story.

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In this post, we’ll examine a handful of the best price action strategies & patterns khổng lồ help you develop your “chart eye”. We’ve also put together a short video lớn help with some of the advanced concepts we discuss. Please have a watch as a primer for the content below.


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Table of Contents


Overview of Price Action ChartsPrice Action Trading Strategy Basics6 Price kích hoạt Trading StrategiesHow lớn Protect Against the Head Fakes (False Setups)Benefits of Price Action Trading

Overview of Price kích hoạt Charts

When looking at some traders’ charts, it can be difficult lớn determine if you are looking at a stoông xã chart or hieroglyphics. When you see a chart with too manyindicators & trend lines, it is likely a trader trying khổng lồ overcompensate for laông xã of certainty. In other words, they may not underst& price action.

Here’s an example of some traders’ charts that look something like the picture below.


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Too Many Indicators

There are some traders that will have four or more monitors with charts this busy on each monitor.When you see this sort of setup, you hope at some point the trader will release themselves from this burden of proof.

Every trader has their own style, for sure. But at the over of the day, price is the final arbiter. And it would behoove sầu all traders to lớn learn how lớn read the tape.

Clean Charts

What if we lived in a world where we just traded price action strategies? A world where traders picked simplithành phố over the complex world of technical indicators and automated trading strategies.

When you remove all the clutter from the trades, all that remains is the price.

To see a chart minus all the indicators, take a look at the following image và compare it to lớn the previous one:

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Price Action Trading Charts

At first glance, it can almost be as intimidating as a chart full of indicators. Like anything in life, we build dependencies và handicaps from the pain of real-life experiences. If you have sầu been trading with your favorite indicator for years, going down to lớn a bare chart can be somewhat traumatic.

While price action trading is simplistic in nature, there are various disciplines. As mentioned above, the disciplines can range from Japanese candlestiông chồng patterns, tư vấn và resistance, pivot point analysis, Elliott Wave Theory, and chart patterns<1>.

From here on, we will explore the six best price action trading strategies & what it means khổng lồ be a price action trader.

Price Action Trading Strategy Basics

Before we dive sầu inlớn the price action trading strategies, you need lớn understand the four pillars of the price action indicator.

CandlesticksBullish TrendBearish TrendFlat Market

If you can recognize và understvà these four concepts và how they are related to lớn one another, you’re well on your way.

Pillar 1 – Candlesticks

Candlesticks are the most popular khung of charting in today’s trading world. Historically, point & figure charts, line graphs and bar graphs were more important.

Not khổng lồ make things too open-ended at the start, but you can use the charting method of your choice. There is no hard line here.

However, for the sake of not turning this inlớn a thesis paper, we will focus on candlesticks. The below image gives you the structure of a candlestiông xã. To learn more about candlesticks, please visit this article that goes into detail about specific formations và techniques.

Feel free khổng lồ tải về our candlestichồng reference guide:



The key point to remember with candlesticks is that each candle is relaying information, và each cluster or grouping of candles is also conveying a message. You have sầu lớn begin to lớn think of the market in layers.

Pillar 2 – Bullish Trend

This is a simple thành quả to lớn identify on the chart, and as a retail investor, you are likely most familiar with this formation.

A bullish trover develops when there is a grouping of candlesticks that extend up và to lớn the right.

Think of a squiggly line on a 45-degree angle.


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The key thing to lớn look for is that as the stoông xã goes on to lớn make a new high, the subsequent retracement should never overlap with the prior high. This ensures the stochồng is trending and moving in the right direction. In other words, higher highs and higher lows.

Make sense?

Pillar 3 – Bearish Trend

Bearish trends are not fun for most retail traders. Shorting (selling a stochồng you vày not own) is something many new traders are not familiar with or have any interest in doing. However, if you are trading, this is something you will need khổng lồ learn khổng lồ be comfortable with doing.


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This formation is the opposite of the bullish trkết thúc. The trover is right the opposite: lower highs & lower lows.

Pillar 4 – Flat Market

Get ready for this statement, because it is big. In general terms, the market is in a flat trading range approximately 70% <2> of the time according lớn author Heikin Ashi Trader, which is the pen name of a trader with over 15 years of futures & forex experience.

Rarely will securities trover all day in one direction. You will set your morning range within the first hour, then the rest of the day is just a series of head fakes.

If you can re-imagine the charts in these more abstract terms, it is easy to kích thước up a security’s next move sầu quickly.


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Flat markets are the ones where you can thua kém the most money as well. Your expectations và what the market can produce will not be in alignment. When the market is in a tight range, big gains are unlikely. The main thing you need to lớn focus on in tight ranges is to buy low and sell high.

6 Price kích hoạt Trading Strategies

#1 – Outside Bar at Support or Resistance

For those unfamiliar with an outside bar, an example of a bullish outside bar is when the low of the current day exceeds the previous day’s low, but the stoông chồng rallies and closes above sầu the previous day’s high.

The bearish example of this would be the same cài đặt, just the opposite price action.


Therefore, it’s not just about finding an outside candlestiông chồng and placing a trade. As you can see in the above chart of NIO, it’s best to lớn find an outside day after a major break of a trkết thúc. In the NIO example, there was an uptrkết thúc for almost 3 hours on a 5-minute chart prior to lớn the start of the breakdown.

After the break, NIO finished with an outside down day, which then led to a nice sell-off inlớn the early afternoon.

#2 – Spring at Support

A spring occurs when a stochồng tests the low of a trading range, only khổng lồ quickly come bachồng inkhổng lồ the range and kiông chồng off a new trover. According to lớn Jlặng Forte, “springs, shakeouts, & tests usually occur late within the trading range & allow the market & its dominant players lớn make a definitive test of available supply before a markup chiến dịch will unfold.”1.

Volume can help when confirming a spring; however, the focus of this article is khổng lồ explore price action trading strategies, so we will zone in on the candlesticks alone.

The one comtháng misinterpretation of springs among traders is the need lớn wait for the last swing low khổng lồ be breached. Just to be clear, a spring can occur if the stoông chồng comes within 1% to lớn 2% of the swing low.

Trading setups rarely fit your exact requirement, so there is no point in obsessing over a few cents. To illustrate this point, please have a look at the below example of a spring cài đặt.


Notice how the previous low was never completely breached, but you could tell from the price action that the stoông chồng reversed nicely off the low. Thus, a long trade was in play.

#3 – Inside Bars after a Breakout

Inside bars occur when you have sầu many candlesticks clumped together as the price action starts to lớn coil inkhổng lồ resistance or support. The candlesticks will fit inside of the high & low of a recent swing point as the dominant traders suppress the stoông xã lớn accumulate more shares.

In theory, it looks something lượt thích this:


To illustrate a series of inside bars after a breakout, please take a look at the following intraday chart of NIO.


This chart of NIO is truly chất lượng because the stochồng had a breakout after the fourth or fifth attempt at busting the high. Then there were inside bars that refused lớn give sầu baông chồng any of the breakout gains. NIO then went on to lớn rally the rest of the day.

Please note inside bars can also occur prior lớn a breakout, which may strengthen the odds the stochồng will eventually breakthrough resistance.

The other benefit of inside bars is that gives you a clean area of support to lớn place your stops under. This way you are not basing your stop on one indicator or the low of one candlestiông chồng.

This is popular strategy, & for good reason. These quiông xã pullbacks often forecast higher price movements.

#4 – Long Wichồng Candles

The long wichồng candlestick is another favorite day trading cài đặt.These are often called hammer candles, or shooting stars.

The cài đặt consists of a major gap up or down in the morning, followed by a significant push, which then retreats.This price action produces a long wick. Often times, this price action is likely to be re-tested.

The reason for this is that many traders will enter these positions late, which leaves them all holding the bag upon reversal. Once they are shaken out, the counter pressure will be weak comparatively, và the stoông xã typically goes up again. This usually leads to lớn a push bachồng to the high.

Let’s look at a few examples:


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Long wichồng price action trading example 2

Are you able lớn see the consistent price action in these charts?

Notice after the long wicks NIO printed a handful of insider bars in either direction before breaking out or breaking down. After this break, the stoông chồng proceeded in the direction of the new trkết thúc.

#5 – Measuring Length of Intraday Swings

Have you ever heard the phrase, “history has a habit of repeating itself”? Well, trading is no different.

As a trader, it’s easy to let your emotions, và more specifically – hope, take over your sense of ngắn gọn xúc tích. We tend to look at a price chart and see riches right before our eyes.

Well, that my friover is not always the reality.Let’s build on this thought.

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In the world of trading there are often dominant players that consistently trade very specific securities?

These traders live sầu và breathe their favorite stoông chồng. Given the right màn chơi of capitalization, these select traders can also control the price movement of these securities.

Knowing this, what can you vì chưng lớn better understand the price action of securities you are not intimately acquainted with on a daily basis?

A good place to start is by measuring the price swings of prior days.

As you perkhung your analysis, you will notice common percentage moves will appear right on the chart. For example, you may notice that the last 5 moves of a stoông chồng were all 5% lớn 6%.

If you are swing trading, you may see a range of 18% to lớn 20%. Bottom line, you shouldn’t expect stocks to lớn all of a sudden double or triple the kích cỡ of their previous swings.

Sure, the market is limitless & can produce outlier days. However, it’s better lớn play the odds with the greatest chance versus swinging for the fences. Over the long haul, slow and steady always wins the race.

Example

To further illustrate this point, let’s go to lớn the charts.


Notice how NIO over a 2-week period experienced many swings. However, each swing was on average $1-$2. While this is a 5-minute view of NIO, you’ll see the same relationship of price on any time frame.

As a trader, vì chưng you think it would make sense to lớn expect $5, $10, or $15 dollars of profit on a day trade? At some point, the stoông chồng will make that sort of run, but there will likely be more $1-2 moves before that occurs.

To that point, if you can trade each of these swings successfully, you get the same effect of landing that home page run trade without all the risk and headabít.

#6 – Little to No Price Retracement

Without going lớn deep on Fibonacci (we’ve sầu saved that for another post), it can be a useful tool with price action trading. At its simplest form, less retracement is proof positive sầu that the primary trkết thúc is strong và likely khổng lồ continue.

Smaller retracement

The key takeaway is you want the retracement khổng lồ be less than 38.2%. If so, when the stoông xã attempts to lớn test the previous swing high or low, there is a greater chance the breakout will hold and continue in the direction of the primary trend.

This is especially true once you go beyond the 11 am time frame. This is because breakouts after the morning tover to lớn fail. So, in order to lớn filter out these results, you will want to focus on the stocks that have sầu consistently trended in the right direction with smaller pullbacks.

Using Time to Your Advantage

Trading comes down to who can realize profits from their edge in the market. While it is easy khổng lồ scroll through charts & see all the winners in hindsight, it is much more difficult in real time. The market is one big game of cát & mouse.

Between the quants and smart money, false setups show up everywhere.

As a price action trader, you cannot rely on other off-chart indicators to provide you clues that a formation is false. However, since you live in the “now” and are reacting to directly what is in front of you, you must have sầu strict rules to lớn know when to get out.

With this in mind, in lieu of a technical indicator, one helpful tool you can use is time.

Just to be clear, the chart formation is always your first signal, but if the charts are unclear, time is always the deciding factor.

On a personal note, in a recent study of all my winning trades, over 85% of them paid in full within 5 minutes.

If you have sầu been trading for a while, go baông chồng & take a look at how long it takes for your average winner to play out.

How to Protect Against the Head Fakes (False Setups)

Let’s đánh giá a few head nhái examples to get a feel for what we are up against in terms of false setups.

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In each example, the break of support likely felt like a sure move, only lớn have your trade validation ripped out from under you in a matter of minutes.

Protection

There are many ways you can protect yourself against these head fakes.

For starters, don’t go hog wild with your capital in one position. Make sure you leave sầu yourself enough cushion. This way you don’t get antsy with every bar that prints.

Also, let time play lớn your favor. There is an urge in this business to act quickly. However, there is some merit in seeing how a stochồng will trade after hitting a key support or resistance cấp độ for a few minutes.

If you think back to the examples we just reviewed, the security bounced baông xã the other way within minutes of raiding stop losses và trapping traders.

Where to Place Your Stops

One thing to consider is placing your stop above sầu or below key levels. Since you are using price as your means khổng lồ measure the market, these levels are easy to identify.

Another easy way khổng lồ vì chưng this as mentioned previously in this article is to lớn use swing points. A more advanced method is lớn use daily pivot points.

You are probably thinking, “but this is an indicator.” Well yes and no. Unlượt thích other indicators, pivot points vì chưng not move sầu regardless of what happens with the price action. They are essentially tư vấn and resistance lines.

So, let’s see how you can use pivot points to lớn avoid getting caught in false signals.

Using Pivot Points to lớn avoid false breakdowns

Notice how the price barely peaked below the key pivot point và then rallied baông chồng above sầu the resistance level. In order to protect yourself, you can place your stop below the break down màn chơi khổng lồ avoid a blow-up trade.

Another option is lớn place your stop below the low of the breakout candle. Some traders such as Peters Andrew even recommends placing your stop two pivot points below. <4> This may not work for the risk averse trader, but it can work for some.

This is honestly the most important thing for you khổng lồ take away from this article – protect your money by using stops. Do not let ego or arrogance get in your way.

Benefits of Price kích hoạt Trading

Price action traders are the Zen traders in the active trading world.

These people believe sầu the human brain is more powerful than any machine.

Please vì chưng not mistake their Zen state for not having a system. The price action trader can interpret the charts và price action to make their next move sầu.

Processing Data

For starters, there isn’t as much information khổng lồ process, so you can focus on the chart action.

Secondly, you have sầu no one else khổng lồ blame for getting caught in a trap. Don’t bother emailing the guru with the proprietary trade signal that had you on the wrong side of the market.

The biggest benefit is that price action traders are processing data as it happens. There is no lag in their process for interpreting trade data.

Chart Patterns

By relying solely on price, you will learn lớn recognize winning chart patterns. The key is khổng lồ identify which setups work and khổng lồ commit yourself lớn memorizing these setups.

The next key thing for you to lớn vày is lớn traông xã how much the stock moves for và against you. This will allow you to mix realistic price objectives for each trade. You will ultimately get to a point where you will be able to not only see the thiết đặt but also when to exit the trade.

Some Challenges

Price action traders will need khổng lồ resist the urge to lớn add additional indicators khổng lồ your system. You will have sầu to stay away from the lademo holy grail indicator that will solve all your problems when you are going through a downturn.

The real challenge is that it’s extremely difficult to trade purely on price. It’s not something you can just pick up and start doing right away.

You need khổng lồ think about the patterns listed in this article & additional setups you will uncover on your own as stages in your trading career.

First, learn to lớn master one or two setups at a time. Learn how they move và when the cài đặt is likely to fail.

This, my friend, takes time; however, get past this hurdle và you have achieved trading mastery.

To further your retìm kiếm on price action trading, you may want to lớn look inlớn some courses lượt thích the ones offered at Wyckoff Analytics.

In Summary

Price action trading strategies can be as simple or as complicated as you make them. While we have covered 6 common patterns in the market, take a look at your previous trades lớn see if you can identify tradeable patterns. The key thing for you is getting khổng lồ a point where you can pinpoint one or two strategies.

To start, focus on the morning setups. The morning is where you are likely khổng lồ have sầu the most success. Avoid the lunchtime and kết thúc of day setups until you are able lớn turn a profit trading before 11 or 11:30 am.

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