Price action strategy – the whole chart

To trade the price action of a chart rather than the price action of the bars is an assured strategy.

Take a look at the chart below. Individual bars in this strategy are secondary to the context of lots of bars. Maybe 600 bars on one screen from which we can identify price channels.

A price action chart strategy identifies channels, support and resistance levels and trends.
A price action chart strategy identifies channels, support and resistance levels and trends.

The chart above is hourly bars, but the same is achievable with any timeframe. Hourly bars provide a trade lasting from a few hours to a few days.

We need to check for scale-in opportunities at the close of each bar, in this instance every hour. In the chart above the lower blue arrow represents our first entry short point; this worked well in the previous two touch points marked by the green circles to the left.

However, this strategy is not always plain sailing. As we can see, the price climbed some 60 pips above our initial entry. Stops have to be at least the width of the channel and ideally beyond a significant premise point.

A trader also needs to be comfortable being out of the money for most of the trade. From the initial entry to the final scale-in entry we went £2,702 out of the money with a marked increase in our usual margin outstanding.

We had a maximum of three entries in each of the pairings, GBP/USD, AUD/USD and EUR/USD. USD links each trade; we, therefore, have to expect that a failed bet in one could result in a fail in all three.

Each pairing provided a different momentum. GBP/USD, once it turned our way dropped to target rapidly. AUD/USD having stayed in the money for much of the trade duration casually moved to target but tempted, which we took, an early, albeit profitable, exit. (The only part of the overall trade that was poor on my part).

EUR/USD, on the other hand, went out of the money more than the other pairings and took longer to turn. Holding all pairings until target would have provided a profit more than £4,000. Or 67% above actual risk.

However, we exited EUR/USD at breakeven. That is when the aggregate position of the trade went positive we exited. Eventual price of this pairing went some 40 pips below our breakeven position but as we write has not made our original target.

As we had a lower than an ideal entry point for EUR/USD in debrief we consider the decision to exit at breakeven was correct and within our criteria. Our actual profit was £1,782. Or 34% below actual risk.

A well-understood strategy, trading in such a way is not without its issues, trade management being high among them.

(1) Stop positions being too close is probably the principal reason for failure. Moreover, (2) trading above our means makes the inevitable loss occasion far exceed many win opportunities. (3) Not scaling-into a trade, or trading at maximum from the initial entry; either due to a limited trading account or entering from the outset at a maximum bet size. And finally, (4) exiting too early due to fear or too late due to greed.

Below is the outcome of GBP/USD.

Target against the trend, so profit taken before the trend line.
Target against the trend, so profit taken before the trend line.

As we are against the trend, our pre-planned exit was at the yellow arrow. Price did hit the channel line at the red circle.

The European regulation coming into force within a couple of months and thereby significantly increasing margin rates will exacerbate the usual reasons for failure mentioned above for the retail trader. For example, stop positions will be shortened rather than positions reduced.

Retail traders may thus be encouraged to move from a ‘price action chart strategy’ to a more difficult ‘price action bar strategy’.

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