Here’s a potential trade from the middle of this week that, for one reason or another, I did not take but one that I think illustrates the potential of Price Action Trading when done well:
This is the EUR USD 5 minute chart for Wednesday 25th November. The red square was at 8 am (UK time). For the watchful this showed itself as a major trend reversal (MTR) or a lower double top. (There is nothing major about a MTR because in a higher time frame, say the daily chart, this is just a medium-sized doji bar of no spectacular context).
However, on the 5 minute chart a good sell (or short) position was shown at position ‘A’. MTR’s, such as we have here, have a probability of about 40% in working. Therefore it is more than likely that we will lose our money. With this in mind, we need to manage our trade accordingly. That is, trade an amount that we can afford to lose. Placing a trade at ‘A’ we would have a stop (a position we will get out with a maximum loss) just above the highest bar. About 20 pips away. Lets say our maximum trade in this situation is £9 per pip, therefore we have a 60% chance of losing £180 – plus the spread so we’ll call it an even £200 risk.
We have to be confident with our read of the charts. At position ‘B’ we are provided with an opportunity to add to our trade. If we do so we could place an additional £9 trade with our stop now for both the ‘A’ trade and the ‘B’ trade at the opening (original) position of our trade at ‘A’. That is: we have a break-even stop for our first trade and again about a £200 risk for our second, or ‘B’, trade.
We then follow the same sequence of events at ‘C’ and possibly again at ‘D’. We would exit the whole lot at the blue circle. To be fair I would probably have managed the trade on the way down and exited some of my trade earlier, just below ‘C’. However, you probably get the message.
Trading a MTR is only one of many strategies. A MTR is high risk, no better than a 40% chance of success, but the reward compared to the risk is high. In this case the reward was 4 to 1 for the initial trade. The potential return from this trade, if managed correctly, and with entries as I’ve suggested, was in the region of £1700. That is assuming that the trades were held all the way to the blue circle and that the trade at ‘D’ was exited at break even.
Not a bad return for a mornings concentration.