Price action trading www.investoune.com
Published on: Mar 4, 2016
Transcripts - Price action trading www.investoune.com
Did you know that the best strategy to trade any market is:
Price action trading?
Yes, it’s true
When I begin following trends I came to enhance my chances to win trades
Yes, I win 9/10 of my trades
Some months I get 100% of my trades right
In this article I’m going to show you how I do that step by step (I share
It’s very easy and clean also!
What is price action trading?
Trading trends is not like scalping the market, it’s a long run game
The price action trading is a strategy based on following trends
Until it reverses its direction from a down trend to an uptrend or vise versa.
After identifying the point where the price will probably change its direction
Price action traders enter the market trying to make the maximum pips
They can profit from the new formed trend until it finished.
Trading using price action is about the most profitable system that
honestly makes great results
Because it is a strategy where indicators are forbidden to use
Indicators will not give you the correct decision, as they just follow the price
They never predict the market movements
The price action is a strategy that expects the price without the use of any
It sounds like it is easy to trade using the price action
But only if you could define the current trend and identify the time where
the price will change its direction.
Then manage the new formed trend using methods that will allow you to
profit from it until it’s finished.
You must also be careful about every detail of the price action.
But once you understand how price action works, you will make profitable
Trend price action traders
Traders who use trends to trade the markets (Forex, commodities, stocks…)
keep things simple
They trade with clean charts without using any magic mathematical
Indicators are the last thing price action traders care about
The “trend is my friend”, this is how trend traders think
But naked trading is not easy as you may think now
It needs a lot of skills and a good understanding on how markets work
Among the advantages of this method of trading is that it can be used to
trade all of the financial markets you know (Forex, Stocks, Commodities,
Some price action traders known as “tape readers”
They even do not use charts to make trades
They just analyze the number of orders, bid & ask prices, order speed to
make market decisions…
Price Action trading advantages
You do not need to buy any indicators or softwares, it’s totally free.
Clean view of the chart, no messy indicators.
You can use price action strategies on all financial markets (Forex, Stocks,
No confused data, you need just to use the price history.
It’s fast, no need to wait hours to find trading opportunities.
Easy to understand, no mathematical formulas to use.
Trading with clean versus dirty Forex charts
In addition to the fact that indicators follow the price and do not predict it
Indicators spoil the look of your trading platform, this may lead you to take
some bad decisions because you take decisions according to different
I will give you an example:
We suppose that you use the following indicators to trade:
1. Momentum indicator.
2. Relative Strength Index (RSI).
3. Moving Average Convergence Divergence (MACD).
4. Parabolic Sar.
5. Volume indicator.
If you use these indicators you will notice that they will give you
The momentum, RSI and the MACD may display a buying signal
On the other hand, the rest of the indicators will display a selling signal
The decision you will take in this case will be like gambling, you have a
probability of 50% or less to win the position
Also the chart will show five indicators which makes the chart messy.
The image below shows that by using five indicators we have lost the most
important part of our trading that we must use to trade the market, it’s the
The indicators force you to reduce the image size of the price action
As a consequence you will focus on indicators instead of focusing on the
Instead of using five indicators that give you confused trading signals
You can use the price action trading strategies by using trends only
This will help you to trade the markets using clean and pure bar charts like
Understand What is a trend line?
The trend line is the general direction of the price.
Usually the price moves in trends, they are controlled by trader’s emotions
If traders are greedy they try to push the price up (bullish market), if they
are afraid they try to push the price down (bearish market).
A trend line must connect at least two bottoms or peaks.
A series of ascending bottoms in a rising market can be joined together by a
line called an uptrend line.
Otherwise, a series of a descending peaks in a falling market can be joined
together by a line called a down trend line.
There are three trend types:
Long term trend line: this trend is characterized by its strength, this is
about the most profitable trend type you should follow to trade currencies
or shares, a forceful trend pattern is a trend where the price fail to breach it
for at least three times.
Intermediate term trend line: this trend is not strong enough, it could be
broken by the price movements almost easily, it’s important to avoid
trading during this kind of trends, it is known as it touches the price fortwo
Short term trend line: these types of trends are trends that are easily broken
by the price movements, it’s necessary to not trade short term trends.
You should trade just the long term trend lines, avoid trading short and
How to Draw trends the perfect way
A perfect trend line must connect two points (peaks or bottoms) at least.
Some traders draw a trend by only connecting one point like you see in the
image below, this is not a real trend line and it won’t give you any technical
As I said above, you need to connect at least two points to get a true trend
In the Forex trading there are two types of markets the bull & bear market.
A bull market is a period of time where the price is rising and buyers control
the market (Uptrend).
A bear market is a duration where sellers control the market and the price
Drawing a trend line when you are in a bull market is different than drawing
the trend line when you are in a bear market.
An uptrend is a strong directional movement in the up, followed by
corrections (downward moves) that usually formed by traders that take
profit from the market.
An uptrend is constructed by connecting at least two rising bottoms (I
recommend to connect the first and the last higher lows like you see in the
A down trend line is constructed by a decreasing price movement Peppered
by some corrections in the opposite direction (upward).
A downward trend is drawn by connecting the first & last lower highs, it’s
simple just do it like you see in the image below and you will get a very
significant down trend line.
A trend is reversed when the price broke it.
Except the fact if you trade in a stagnant market
If you are in a down trend market, the trend will reverse its direction at a
Otherwise, if you are in an uptrend, the trend may reverse its direction
to the downward direction at a particular time.
To trade using trend lines you should focus on that moment where the trend
reverses its direction.
So you could make profitable trades.
How to distinguish trend line breaks
(Reversal or consolidating trend)
If a trend line is breached by the price movements from a down trend to an
uptrend or vise versa
The new trend can signify either a reversal or a resumption in the previous
How we could know that this new trend line is a reversal trend or a
There is a general rule that you should know about:
The penetration of a trend line with a sharp angle is more likely to result in
a consolidation than a reversal
An angle is known as sharp if it is between 0 to 90 degrees
As you see in the image below the upward trend is breached, but the price
continues its direction in the same direction of the first trend because of the
The trend reverses its direction often if the sharp angle is not constructed
As a consequence a +90 degree angle emerges
Price Action Candle Basics
The candle is the first tool price action traders need to maintain to trade the
market the perfect way
A candlestick chart is a visual summary of the price movement in a period of
time showing the opening and the closing prices, the highest and lowest
prices, and the upward or downward price action.
The candle combines all the information you need to know about a market:
The opening price.
The closing price.
High price reached (wick).
Low price reached (wick).
Describe the upward or downward price movement.
The white candlestick occurs when the price moves up
The black candlestick when the price moves down
A combination of multiple candlesticks constructs the price chart
You have to master candlestick charts in order to trade successfully using
the price action strategies
There are multiple significant candlestick patterns:
The hammer pattern is the most powerful, when it happens, there is a huge
probability that the price will reverse its direction for a while.
2. Engulfing pattern
The engulfing pattern is a reversal signal that the price will change its
Simply, it is a bullish candlestick followed by a bearish one, provided that
the body of the bearish candle is bigger than the bullish candle’s body.
3. Morning/Evening Star
This is a very strong pattern, it could reverse the market trend aggressively
It’s a strong candle followed by small candles, followed by a new strong
candle in the opposite direction of the first one, the new candle should close
at least at the half of the first candle.
4. Dark cloud pattern
It’s a strong candle followed by another candle that past the high or low of
the first, but can’t continue in that direction and closes in the opposite
Those four candlestick patterns are the most powerful according to my
experience in trading, they could reverse the price at least for a while when
What you need to do is to wait until a pattern is constructed then enter the
You can make profitable trades using just candle patterns
Support and Resistance Zones
S & R lines are zones where the price reversed its direction in the past
There are two types of them:
Major S & R lines: they are lines that are tested in multiple times.
Minor S & R lines: The lines that have not been tested yet, specifically they
are: the higher higher (HH), higher lower (HL), lower lower (LL), Lower
higher (LH) [ I will explain that better later]
The more a support or a resistance line is tested the more this line is strong.
Also, you should know that a broken support becomes a new resistance line,
and a broken resistance becomes a support line.
Support & resistance lines are important for price action traders
It’s easy to find them..
But I will show you something that the majority of traders doesn’t pay
attention to it:
It’s crucial to search major S & R lines not all of them
The S & R lines that will have a significant impact on the price action and
will probably reverse the major direction of the trend line.
Here is how to do it:
As a price action trader you are forced to trade higher time frames
We suppose that you have chosen today to trade the 4H time frame
To define support & resistance lines, do not use the 4H time frame chart
The key point is to use the next time frame – Daily TF – to determine S & R
First Step: Set the daily time frame on your trading platform, then define
the major support and resistance lines like you see in the image below.
Here is an example of two lines:
Second step: Switch to the 4H time frame, you will notice two major support
& resistance lines:
Those two lines are the most powerful support and resistance lines that you
should pay attention if the price closed to them, it could be a significant
reverse of the major trend line.
Price action trading strategies
There are a lot of price action trading strategies but the most strategy that
get results is the strategy that focus on trading the markets by following
[I have explained to you above how to draw trends the right way so I will
skip that now]
The impulsive moves with corrections leads to the formation of highs and
lows of the trend
In an uptrend the high is formed when the correction begins, otherwise, in a
downward trend the low is formed when the correction ends.
After the end of the correction, the trend resumes its direction
An uptrend is formed when you notice the formation of higher highs and
A down trend is formed when you observe the formation of lower lows and
There are multiple tools that you should master if you want to be a
successful trend price action trader
The correction is the first thing you must know
The correction happens when traders begin the collection of the profit from
It occurs also because of some traders believe that the price may reverse its
So as a result, the price goes in the opposite direction for a while after that it
resumes its direction
If the correction creates new small highs and lows, this is a signal that the
current trend is very strong, the trend will continue its major direction as
You can predict the trend changing using the high and lows
But you should pay attention to your analysis
If you are in an uptrend, you must wait until the last higher lower (HL) is
breached by the price
Then enter the market with a short position
However, if you trade in a down trend, you should wait until the price
breached the last lower higher (LH)
Then enter the market with a long position
But do not make the mistake to enter the market before the last HL or LH is
Look at this example:
As you look at the image above, when the price breached the last (HL) the
price change its direction targeting the first (HL).
Look, the general rule about corrections is:
To consider a move as a correction it mustn’t reach the last HL for an
uptrend and the last LH for a down trend
Like you see in the image above, we are in an uptrend
You could observe that the impulsive moves (Blue lines) are bigger than the
The last (HL) is breached by the price (trend changing signal)
The price line (A) is a new impulsive move not a correction
Because the price does not create a new (HH-HL) we can’t consider the line
(A) as a correction
The same thing for a downward trend, corrections are considered if the
price creates new (LL-LH).
Here are the rules to define HH, HL, LH, and LL:
Look at this image:
The first LH is confirmed because the first impulsive move breached the
beginning of the correction (LL1).
The second LL-LH is confirmed after another impulsive move is formed
that breach the beginning of the second correction (LL2).
The potential LL you see in the image is not confirmed by an impulsive
move, the price reverses quickly until it forms a new LL that is confirmed by
the second impulsive move.
Also the potential LH is not confirmed because the price goes up and
reverses quickly, if the potential LH pass the LH2 we can label it as the new
LH instead of the LH2 that we have defined.
So the rules are clear:
1. Define the first LL and LH.
2. Wait for an impulsive move to reach the beginning of the last correction to
3. Repeat the process.
For an uptrend:
1. Define the first HH and HL.
2. Wait for an impulsive move to reach the beginning of the last correction to
3. Repeat the process.
As you see the principle of finding highs and lows is simple, you just need to
wait for impulsive moves and corrections to confirm the validity of your
highs and lows.
You should neglect any unconfirmed highs and lows
You need to focus when it comes to the determination of them
Any mistake can cause you to form wrong price action analysis.
Now, I will explain to you another example:
Look at this image:
As you see we are in an uptrend market
The HH (A), HH (B), HH (C) and HH (D) are confirmed by impulsive
moves that surpass the beginning of corrections.
I will give you an example:
The HH (C) is confirmed after the price surpass the beginning of the
correction (the third white circle) with an impulsive move to the upside.
The potential HH (1) is not confirmed because the price doesn’t past the
beginning of the correction, the price goes up and quickly back down
You should disregard to consider Higher Highers like those.
The HH (E) – HL (J) are not confirmed as new HH-HL
Because the price do not surpass the beginning of the correction
As I said previously, to confirm the validity of a HH-HL or even a LL-LH
you need an impulsive move that surpass the beginning of the correction
But how can we distinguish an impulsive move?
An impulsive move to be a strong one it needs at least to equal
approximately 2 times the length of the correction
Let’s do the math:
To consider a move a strong one you need to verify the validity of this
Strong impulsive move = correction * K
K = Move / Correction
Here is an example:
As you see in the image above
We have an impulsive move length of 922 pips (527 + 465)
We have a correction length of 527 pips
We can consider it as a strong impulsive move, as we have:
So K = 1,75 and it is in the interval of 1,5-2
As a consequence the first LL-LH is valid
You do not have to do that each time you want to define swing highs and
Just focus on the chart, I do it every time just by observing…
I will give you another simple example:
As you see above
K=Move/Correction = 2, so this is a strong impulsive move that confirms
the first HH-HL.
The last HH-HL has not been confirmed by a strong impulsive move, this
why you should disregard them.
You see now how this is simple?
2. Degree, size, amplitude
You have learnt the right ways to identify HH-HL, LL-LH
It’s not over
There is something to consider when you define them
It’s the wave degree:
1Wave = 1Correction + 1Impulsive move
The waves must have slightly the same:
It’s very easy, look at this example:
Looking for waves that have the same size, amplitude and degree is hard to
Do not give much importance to this step
Just look for waves with slightly the same size
Make sure that if you could find waves with these conditions
Your swing highs and lows will be powerful, and you will make profitable
3. Trend rebound
The trend changes its direction when a wave in the opposite direction
It means that:
In an uptrend, the last HL is breached by the price
And, in a downward trend, the last LH is breached by the price
But pay attention to the major direction of the trend
The first step to do is to define the major trend you have:
I use one only indicator that helps me to define the major trend
It’s the 200 Moving average (Do not use it to enter the market, we don’t
We suppose you trade at the 4H time frame (it gets awesome results with
the price action strategies)
Switch to the daily time frame, then activate the 200 Moving average
There are two situations:
If the 200 moving average is above the price, then the major direction of the
price is down
As a consequence you should look for short positions.
However, if the 200 moving average is below the price, then the major
direction of the price is up
As a consequence you should look for long positions.
Do not enter against the major trend!
4. How to enter the market?
To enter the market, it’s almost easy to do using price action trading
After you define the major trend you are in, and the HHs-HLs for an
uptrend and LLs-LHs for a downward one
If you are in an uptrend:
Enter the market when the last HL is broken by the price movements
Otherwise, if you are in a down trend
Enter the market when the last LH is breached by the price
Do not complicate the process, it’s very simple!
Here some examples:
We are in an uptrend
The last HL is broken by the price
We enter for a short position (The major trend line must be in a
downward trend situation).
The other situation:
As you see above, if you are in a down trend
Enter the market when the last LH is breached by the price (The major
trend must be an uptrend).
4. How to monitor your trade?
To monitor your trades, you just need to establish a good risk management
strategy to limit your losses
I have talked previously about that in my post: 10 Forex risk management
rules to make money even if you lose 50% of your trades.
Do not worry if you don’t trade the Forex markets, it’s the same concept for
all financial markets.
5. How to exit a trade?
If you trade during an uptrend exit the trade when the first HL is broken
Like you see in the following image:
However, if you trade in a down trend
Exit the trade once the first LH is breached by the price movement
Exactly like you see in the following image:
This is nice, clean and super simple
6. Stop loss settings
Stop loss is an important tool to protect you against losses
Setting a stool is a must for every trader
Without a stop loss you will probably lose all of your money
When it comes to price action trading, like it is simple to make trades and
It’s also very easy to set a powerful stop loss to protect your account
Just set the stop loss at the last HH in an uptrend
Look at the high reward/risk ratio on this trade
The good thing about the price action trading is that your reward is at least
three times what you risk
… And set the stop loss at the last LL in a downward trend line
The price action trading or the naked trading is the most powerful trading
strategy that gets results
You just need to master the principles of this technique
Just follow the instructions above, you will make like those results:
I advise you to:
1. Define the major trend.
2. Define the swing highs and lows.
3. Wait for a trend changing in the direction of the major trend.
4. Enter the market.
5. Set a stop loss
6. Monitor your trade.
7. Exit the market at the right time.
Those 7 steps, I use them to trade the Forex market
I win 90% of my trades using these simple steps