Category: Price action trading

Setups

What have you been working on recently?

My focus has been setups.

That is how to recognise better a setup—and how to enter from that setup.

As a price action trader, I’m looking at high to low timeframes to identify a trend and qualify my breakout trade entry.

Nothing too complicated. We look for trend setups utilising high/low-one entries and, more often, high/low-two breaks.

Practised knowledge of price action is essential too.

From the chart below, we can see how volume, when presented on the y-axis, affects the price.

GBP/JPY 4 hour bars with high volume consolidation. Areas of consolidation are often zones of high volume.

Currency pairings—unlike stocks—are decentralised.

The volume in this instance is a representation from a single liquidity provider.

But it is sufficient to show how high-volume consolidation levels are often formed and become a support or resistance zone.

A zone from which we can determine a setup and consequently an eventual breakout.

The reason we need a setup rather than just a break of a level is the propensity for false indications.

A setup and an understanding of the market structure and other traders’ probable intention strengthens our trade entry.

By determining where traders’ stops and targets are, we can anticipate the subsequent market reaction when the price hits those levels.

Even news events often follow a technical path.

We realise that we need to be focused and highly familiar with all aspects of a (single) pairing.

Even though we trade together—via Microsoft Teams—James as the analyst and me as the trader, we find more than one pairing to be too much.

Which will seem odd to those traders—and that was us not so long ago—that view a dozen or so pairings at a time.

My only reply is to try a single pairing with very selective setups and see if P&L improves.

It helps if the selected pairing has one currency that is open and the other closed.

For example, EUR/USD at New York open would have both currencies simultaneously active and therefore wouldn’t be a suitable pairing for us.

Moreover, like us, focus on a single volume session. Our preference is a couple of hours on either side of the New York open time.

Managing risk is a skill and needs—but is rarely given—as much if not more thought than the setups and entries.

Don’t forget awareness of over-trading. That is essential too.

Posted on by Day Trader 0

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’.

Posted on by Day Trader 0

Sterling’s spike down – from a traders perspective

You will probably have heard on the news that Sterling (GBP) spiked down massively.

The spike happened 5-minutes after midnight yesterday morning. The reason given for the move is speculative.

Technically, from a 50 year – or so – chart it is entirely expected for sterling to drop at this point. Indeed, we would consider a drop down to 1076, rather than 1118 that it did reach, appropriate. But it’s easy for the technical trader (or anyone) to say that after the event. And indeed it wouldn’t have been expected within a 2 minute period.

Here’s how it looked on a short-term chart for GBP USD.

Bars on a chart are relative to the most prominent bar. Here we can see the 5-minute bar chart before the dip.

snip20161008_1

In contrast, here is the same chart moved forward in time by about an hour. The bars in the reddish box are the same bars on both charts – and provides an idea of how far the dip extended from the perspective of the short-term trader.

snip20161008_3

If a (competent) short-term trader were trading this chart at the time how would the trader have fared? Okay, I think. Here’s why:

snip20161008_4

The red arrow (1) indicates a clear downtrend, and therefore only shorts (price going down) should be considered. Without going into price action talk the green arrows 2, 3 and 4 show that any significant attempt at a pullback is weak. The blue bar (5) is a definite trend bar short, not least of which it closes strongly down and lower than the previous two dozen bars. I would enter short here, or more likely, because of prior price action, before bar 5 formed.

Ten minutes later price dropped 1,400 pips in 2 minutes. However, it’s all meaningless because if I had traded the drop, I’d have made 30 pips (60 pips at the most) as short-term trading is precise and that is where my target would have been.

Posted on by Day Trader 0