Profitable Price Action

The purpose of this artice is to teach you my price action strategy. If implemented properly, this strategy can give you consistent profits in the forex market.

What is a price action strategy？

This trading strategy is a trading technique that allows you to make subjective trading decisions based on price movement. As an example, I look at a candlestick chart and base all trading decisions solely off of that candlestick chart. If I were using a price action technique while trading stocks, in theory I would not even need to know the name of the stock or anything about the company behind the stock in order to decide if I was going to make a trade. The candlestick chart tells me everything I need to know. So when it comes to the forex market, when using this strategy you can ignore news events, interest rates and whatever other fundamental information is out there.

I recommend you make an account on trading view (its free) and open up some candlestick charts.

PREPARE YOUR CHARTS

Now that I gave you a little bit of information on what price action is, lets start getting into my strategy. The first step is to prepare your charts. On whatever website or broker you are using, open all of the charts that you want to potentially trade. i have the AUS/USD listed below. As you will see, this is a naked candlestick chart on the DAILY timeframe.

Quick fact for beginners: Being on the daily time frame means that each candlestick correlates to one day. Look at the picture below. Since each candlestick is one day, the chart shows you many months of price movement. You can set the time frame of your chart to any time frame you would like, but I stick to the daily timeframe for setting up my charts. Now I wont go into details at this time, but when making trades I do look at 4 & 8 hour time frames. It should be noted that price action signals are more reliable when they are seen on longer time frames. For instance, a signal seen on a 1 minute chart is no where close to reliable as the same signal seen on the daily chart.

So now you have your chart open and you are on the daily time frame. It is time to add support and resistance lines. Im going to assume anyone reading this knows what a support and resistance line is. If not, a simple google search or the Baby Pips school can explain it. I use both horizontal support/resistance lines as well as diagonal support/resistance lines. From my personal experience, I do believe that diagonal support/resistance lines are more reliable than horizontal lines. The combination of both together is more reliable than either of them by themselves. Below is my AUD/USD with support/resistance lines placed. This ideally should take you only a few minutes to add these lines.

So go ahead and put these lines on all of your charts. We will go to the next step.

BEFORE YOU LOOK AT PRICE ACTION

The next step in my trading strategy is to make sure you are following some simple rules.

#1. Trade in the direction of the trend. NEVER EVER trade against the trend. Its that simple. Looking at the AUD/USD chart from my last post, you are only looking to buy the AUD/USD.

#2. Do not trade when a major news event is coming up. I will do a separate post on this at some point, but for now just understand that major news events cause volatile and unpredictable markets.

Daily FX has a great economic calendar that tells you all of the major news events that are going to be occurring. They rank each news event as having low, medium and high importance. Making a trade involving a currency that has an upcoming news event labeled as high importance is a big no no for me. Just as an example, the US Non-Farm Payrolls is a MAJOR news event that occurs on the first Friday of every month. Large price swings can occur during this event. Therefore, I dont get into a trade involving the USD before that news event occurs. Also, if I am in the green on a trade but it remains open as the non farm payroll news approaches, I consider cashing out and taking profits. Its never any fun when an unexpected piece of news information causes your winning trade to go shooting in the wrong direction and you get stopped out.

#3. Risk/Reward.You should know that the minimum risk:reward you should aim for is 1:2. Meaning if Im making a trade that is risking $5, the minimum goal for winning that trade is $10. Preferably you find chart setups that allow you to set your take profit at 1:3 or 1:4.

Ive been thinking of the best way to explain my trading strategy. I think the best way will be to post example trade setups as they arise.

There was a recent setup on the NZD/USD a few days ago that looked like a good entry point. So lets go through it. I will say that the first few weeks of the year I havent been trading so I did miss this entry.

Here is the chart

This is the Daily chart for NZD/USD.

#1. As you will see it has been in an uptrend since the beginning of November. Therefore we would only be entering a BUY order. I ABSOLUTELY DO NOT trade against the trend.

#2. I placed my support and resistance lines on the chart. I have 3 horizontal support/resistance lines and 1 diagonal support/resistance line. The support/resistance lines are a key component of this strategy. I only enter a trade when price action setups occur at a support/resistance line. And from my experience, I have had a better win percentage when the trade is performed on a diagonal support/resistance line rather than a horizontal.

#3. Once I have my support and resistance lines drawn, I am waiting for price action to occur at those lines.

So what happened on the chart above. Focus on the last 8 candles. Price got to a high and then it started coming down. It just so happened that the 3rd red candle down approached not only the horizontal support line but also the diagonal support line. I really like when this happens as I have had good success when I end up entering a trade in this situation. Now I just need a signal from a candle to enter a buy position.

When looking for that candlestick signal, I will look at the DAILY, 8hr and 4hr time frames. By looking at time frames as low as 4hrs, it can allow me to catch the trade at the absolute best price, allowing me to make WAY MORE MONEY on the trade than if I waited for the signal to occur on a daily chart. But beware, price action signals on a 4hr chart will have a higher loss rate than when taking the signals on the DAILY chart.

So on this specific trade, a signal appeared on the 4hr chart as shown below. Look at the candle with the “X” below it.

This is called a “hammer”. And it occurs exactly where it needs to occur in order to be considered a valid signal. Now if you want more information about a “hammer” candle you can read about it in the baby pips school as they describe all the different candles. But basically this candle is a BUY signal. I always like to see that the filled in portion of the candle is above the support line with the tail extending through the support line. That is exactly what occurred here.

So to recap, we have an uptrend with a price action candle (the hammer) that gives a BUY signal and it occurred at both a horizontal and a diagonal support line. This would be an entry for me. But wait, there is more…

I am not big on using indicators. But the one indicator that I do use is the Fib Retracement indicator. Lets add that in to the daily chart.

Look at that. The .5 Fib retracement occurs basically at the same place as the horizontal resistance line. This is just another piece of information that says to enter at this position. The Fib retracement levels that I like to see are the .38, the .5 and the .61 levels.

I like to use a point system, just to track if my higher point trades actually are more profitable or not. This trade gets scored as the following

WITH THE TREND: Yes

At Horizontal Support Line: Yes = 1 point

At Diagonal Support Line: Yes = 1 point

At Fibonacci Retracement Support Line: Yes = 1 point

Price Action Candlestick: Hammer = 1 point

Volume: will discuss this later. Can get 1 point from this as well

Since I didn‘t discuss volume, we won’t count that point here. So this gets 4 points out of a possible 5 points. I do think this trade has a high probability of success.

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