8 Tips for Mastering The Art Of Price Action

mastering art price action

A lot has changed in the world of Forex trading.

Yet certain fundamental principles remain unchanged.

A good example is the reversal candlestick pattern like the shooting star. It no longer works in a trending market but it is still essential when it comes to market sentiment.

Beyond identifying trend reversal, candlesticks reveal a lot about momentum and trend direction.

There has been so many price action patterns and strategies to date. That it’s become almost impossible to determine which ones to stick to and which you can ignore.

Is trendline a thing of the past?

Should you devote your time and energy to identifying support and resistance levels?

How can you trade forex with price action that gives you high probability trading setups?

Where do false breakout and trend following intersect?

And what are the best price action trading tips that’ll give consistent profits?

Price action trading is still overhyped and underused.

There are over 50 books in Amazon selling price action trading. And over a million post on how to trade price action in the Google search engine.

Is price action trading is the next holy grail in the forbidden fruit of making money online?

Most retail traders think so

Mastering price action trading is an art form. There is an endless number of tips and tools that we can use to avoid confusion. And unnecessary headaches that can come with this misunderstood form of naked trading.

I want to show you the 8 most important price action trading tips that you need to know right now.

If you focus on these techniques alone. You’ll definitely understand what to look for in a chart and improve your odds of hitting home runs.

Let’s get started:

1. Trend Structure Determines Trend Direction

Trend structure is a critical factor to determine trend direction.

In the past, trends tend to stay longer for weeks or even months. But now trend tends to stay for days before it gets stalled.

What Is Trend Structure?

It’s a series of lows and highs defined by price action. The higher the high the higher the low. This is an up trending market.

The same can applies to a down trending market. The lower the low. The lower the high.

But what about this?

When a new low is formed. You are looking for momentum. And that momentum is a lower low.

But now you are present with a higher low and a higher high. This is the sign that for a trend reversal.

When the market presents to you with conflicting lows and highs. The easiest way to determine the market’s next movement is the higher time frame.

If the higher time frame gives you conflicting interest. Go higher.

If the trend isn’t well defined. I’m not sure what is.

2. Reversal Candlestick Patterns Don’t Work

They don’t work in a trending market.

Proprietary firms are employing a high-speed algorithm to fleece the market. So reversal candlestick like the pin bars have not been showing consistent results.

Candlestick patterns like the shooting star are a dead giveaway for a false signal.

When I trade for the first 3 years. I’m always looking to trade against the trend.

My favorite reversal candlestick is the hanging man.

Even that doesn’t stand a chance against momentum.

3. Support and Resistance Levels Don’t Work

They don’t work during major news releases and key personnel making a speech.

In the image above. You can see the market ignores all resistance and went straight to the top.

After breaking 2 levels. The market slows down.

News releases are a quick way to make a fast buck.

Momentum trading is best to trade when the breakout occurs in the direction of the trend.

4. Trend Reversal Doesn’t Work Without Momentum

How many times have you watched the market does a run up only to have your position caught at the end of big candlestick?

How many times have you taken action on the market after it does a reverse? Moments later only to realize it’s too late to enter because it has gone too far out to take the risk?

I’m telling you. It’s easier to chase a runway market if you know what to look for.

Let’s recap.

An uptrend is a series of higher high and higher low.

Is this correct?

A downtrend is a series of lower low and higher low.

When price does a big reversal, what we are we looking is a series of uptrend if it does a breakout or a series of downtrend if it falls.

You can reduce your risk by improving your entry.

As you can see in the image above. If you wait for the price to do a pullback. You would have lost the opportunity to ride on the momentum.

The momentum that comes with a successful breakout.

What you could have done is by observing the lower time frame. You could have spotted momentum long time ago.

Let’s start with the hourly chart.

If you would like a better improvement on your return the 5 min chart might give you that.

All in all this breakout plus momentum will give you more than 50 pips.

5. Chart Patterns Will Fail

They will fail sometimes. I don’t particularly trade patterns as they represent coincidences and not market sentiments.

What are the common price patterns

Flags and pennants. They are the hallmark of continuous trends gone slow.

They appeared after a big price move.

More patterns.

Source

How To Know If They Fail?

The question isn’t probabilities.

It’s fundamentals.

There is another resistance level above this resistance level. You can’t see it because it’s on the 4-hour chart.

If you take price as one chart to rule them all. The result isn’t that good.

There are several reasons why patterns don’t work 100% of the time. The obvious one is the formation of a double top.

How To Know If They Will Fulfill The Requirements

Day traders love to use breakout. They use breakout as a key indicator to identify the continuation of a trend.

The problem with it is the occasional false breakout. They occur because of the session, news or missing the momentum.

What To Look For In A Profitable Chart Pattern

The market will always provide opportunities for the patience traders. Even if you miss the first leg up. Consolidation follows.

This is where late buyers can join in and push the price even further up.

Price pattern like the flag or the pennant is market’s behavior of hesitation.

I thought this is their way of taking a breather. I’m wrong because it continues to another leg up.

It is not guaranteed but there will always be one or two occasions the 2nd leg will fail.

No Signs Of Resistance Or Support

When a support level is formed. The market tends to test the level again. This forms the classic double bottom. The same applies to resistance levels.

Once price tested the level it once visited. Two things might happen. Price gets stalled and reverse. Price gets stalled and breaks the level forming new levels.

Breakout That Doesn’t Fade

There is only one breakout strategy you need to master and it requires only 3 steps.

Step 1. Channels Or Consolidation

It has to start where the price gets to bounce around with no definite direction.

Step 2. Candle Close To Key Level

The reason why false breakout occurs is that of this. Price in the market breaks key levels support or resistance.

The problem is traders who had missed out on the breakout didn’t want to have anything to do with the direction.

The momentum dies and market reverse.

This is evident especially during Asian sessions and London or New York open.

The keyword here is momentum.

What Is Momentum?

It is a series of strength display by the price that looks like a chain of the same direction candlestick.

The same applies to weakness where pullback comes in the form of opposing candles. They appear in 2 or less candlestick.

The first pullback occurs before price breaks resistance. The next chance offer late buyers a chance to jump in.

Step 3. Strength Or Weakness

False breakout doesn’t carry momentum. It ends with a reversal candlestick like railway tracks or an abandoned baby.

The best type of breakout carries 2 or more of the same candlestick.

Price Display Strength

This is an example of a trade setup for trend following. Notice the pullback buyers have done to stop sellers from winning.

Let’s improve your entry by changing the time frame to a much detailed price action.

The first break results in a pullback while the second fits the 2 candlestick setup.

Price Display Weakness

Here we have an example of hesitation. The higher the time frame the less detail we can discern.

Let’s improve your entry by looking at the hourly chart.

This is one of the charts I’ve been testing. Notice the double bottom.

Even though the initial breakout resulted in a pullback. The uptrend stays intact. You can see this as the market forms the double bottom.

6. Breakout Doesn’t Work When It’s Against The Trend

After 2 years trading. I’m still wasn’t getting any good at reading the market. Whenever a big uptrend candlestick appears. I would jump in.

Little do I know it’s a trap as the market reverse. I had to close the position at a loss because the major trend is down.

This is what false breakout does. It pushes the price up. Forcing those who had short to close their position. Those who didn’t plan jump in.

The next thing the market does is a reversal back to the intended direction. Trapping those who buy when the breakout occurs.

Asia session and London open are notorious for a false breakout.

News releases related to Aussie or kiwi news releases are such example. They affect those were still in their position through the night before.

Trend Breakout

The breakout that doesn’t fade appears in the direction of the trend.

Downtrend

Uptrend

So far. You have seen a breakout in the direction of the trend.

I’ll update this once I’ve seen breakout appear against the trend.

7. Inside Bars Don’t Work In A Trending Market

Inside Bar in a market that broke up.

It continues to rise.

If you have been trading long enough. You would have encountered candlestick pattern like the engulfing candlestick.

This is including pin bars also known as inside bar.

You would have understood they don’t work most of the time.

In a trending market. These candlestick patterns only show the market weakness to continue. It doesn’t show the market intention to reverse.

This is what most retail traders have misunderstood.

If you want to survive and profit in the Forex market. You have to understand what market context and behavior through the market structure.

This structure lies in identifying the market is trending or in a sideway market.

Inside bars are the telltale sign of hesitation or weakness. But it’s not a representation of the market sentiment to change direction.

8. Risk To Ratio Work When It’s In The Direction Of The Trend

If you are new to trading. I bet you have tried your hands on scalping.

This is because it is the easiest and fastest way to make money.

This is an illusion as compared to the high stakes you have to put up with that is not to your advantage.

As a retail trader, the odds are not in your favor.

Stakes like bid and sell spread. Brokers often promote the lack of commission as the selling point of being with the broker. But the spread on this bid and sell quote can sometimes make some setups too risky to take.

Would you risk 10 pips to make 5 pips or would you risk 10 pips to make 50 pips?

Pip spread, in general, takes between 1 to 2 pips and any chart below 5 minutes give about 5 to 10 pips in return. It is very rare you get 20 pips before a pullback occurs.

Scalpers take the first risk when a breakout occurs. They take advantage of the momentum before it ends and bear the brunt of reversal.

My favorite setup. Its reward is obvious.

The risk is those small candlesticks that cannot make up its mind to fall.

Here’s a fun fact.

Do you know when a cat walks, the paws on its hind legs always land on the same footing as the front paws?

That means the cat knew that any path the front paws had landed is safe.

When it comes to trading. The reason couldn’t be further.

When a support level is formed. Buyers jump in and push price up. After momentum has died.

Sellers who came in late have to get out at a loss or bear the brunt of watching their capital shrink in size.

When buyers have run out and hit resistance. Sellers who had got out at a loss during the previous episode. They may try their hands again and watch as the market test the support line again.

Some got out at a profit. Knowing too well the support level might hold.

Others hold on to their profits and stay in the game.

Late buyers who had missed out on the run-up. Jump in at the same support level and pushes the price up again. Those sellers who never got out when price reverse cut their losses.

This pushes the price up and the support level became a pain and a state to which traders feel their wins and loses.

The same can is applicable when support broke and price return to find the level has become a ceiling. This ceiling is known as resistance.

Support and resistance levels are the bloodlines of professional traders. They determine the market sentiment and well-ridden path of those who had crossed it.

Conclusion

One of the top price action trading tips is the frequency to which price touches key levels. The number of times price touches support or resistance levels do affect how you trade.

Indeed, it’s crucial to your success.

The more touches these levels encounter the less effective it becomes.

For this reason, pick levels that have support line turn resistance or vice versa. They tend to have more weight than a level that has too many touches.

I’ve used support and resistance levels for over 10 years. It has never failed me when I need it to determine trend direction or identifying momentum.

If you have been trading candlestick patterns in the past. You could have spotted and traded this setup. The reversal candlestick pattern is known as pin bar.

You would have resigned this setup as luck . That can be changed if you learn to identify the market context first. Then trade it against the market structure.

Market structure is nothing more than drawing support and resistance levels.

If any of the levels crossed. You can tell the direction of the trend. And if it didn’t cross those levels. You can trade against the fade instead of hoping for a pullback.

Finally, learn to focus on identifying trend direction. Trade the setup with a high return low-risk ratio. Do not trade breakout without checking the higher time frame when it comes to trend following or counter-trend trading.

When it comes to price action setups, think of trend direction, not reward. Are you trading against the trend or with the trend? And, don’t forget to make the risk to reward ratio a key factor to justify exposing your capital.

If you pay attention to these important price action trading tips, I guarantee that you’ll look for better setups, stack odds in your favor, improve the rate of return on your trading capital.

Which other price action trading tips or setups do you think are most crucial for improving odds in your favor? Are there any commonly used price action setups that have worked against you?

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