If you’re looking for the most effective
strategies to trade price action, I want your full attention, because I’m about to reveal
my most important tactics after over 10 years of price action trading. We’re not going to talk about support or
resistance, candlestick patterns, or chart patterns. I will share something more important: how
to read price action momentum and how to decode the market rhythm. And if you want to show your support, please
leave a like to help us with Youtube algorithm and turn on the bell, so you don’t miss
when new videos are released. Traders often have this big obstacle: they
aren’t able to recognize if the market, today, is trending or ranging. Here’s your first lesson. The moment you recognize what type of day
you are dealing with, then you can apply the appropriate methods for trading. If it’s trending, pullbacks are the best
choices. It doesn’t matter whether it’s the first
or second pull- back; a one bar pullback or complex pullback. If it’s a trading range day, you only enter
at the extremes of the range, wait for clear confirmation and stay out of the middle because
it can be very choppy. In order to read the market and to evaluate
the price momentum, I use price action. The main reason I prefer price action instead
of employing indicators is that indicators will lose their powers when the market is
not trending. They create all kinds of false signals on
a Range day. That is a big problem because market is rotating
in sideway motion over 70% of the time. One thing I discovered through many years
of trading is that trading ranges is surprising predictable! The reason behind this is because the market
is in a zone of “fair value of price”, where the buyers and sellers are somewhat
“passive”. Here are several strategies which can help
you to potentially tell what type of day is ahead. First we’ll talk about price action during
trending days. 1. Strength and follow ups
On a trending day, whether it’s an uptrend or a downtrend, the bar which initiate the
trend usually have decent follow ups. Market has a rhythm, like music. You can sense the urgency in tempo and strength
behind every bar when it’s forming. One side is dominating the other one and this
should be fairly obvious. In a strong uptrend, the chart is filled with
green trend bars with average size body, but closed high. Bars are slowly moving upwards which can create
a parabolic curve. Any pullback red bar is short lived with narrow
body and long wicks at the bottom. At a glance, there are just simply more green
bars than red bars! When a strong uptrend is in progress, it’s
very hard to make money selling. But for buyers, you should see profit not
long after you entered. The price is pushed up and nobody is taking
profit, until it reaches a fairly strong supply zone. Any countertrend attempt will fail and becomes
the most reliable setup to resume the trend. The wick of a candle is very important in
price action trading, it shows both rejection and strength. It’s the hidden truth about domination. In an uptrend, you should see long wicks at
the bottoms of the bars, not on top. It means any selling is being rejected and
pushed up. The same principles apply for downtrend. More consecutive red bars with average size
body and wicks on top of the bars. Any green bar pullback is small and short-
lived. Here we had a very strong downtrend. There are few green bars, and many bearish
bars. The close of each candle is lower than previous
close. It’s in parabolic curve rather than boxed-in. Ina trending day, a market controlled by bulls
is often characterized by the following bar patterns:
First, then obvious one is that we have more bull bars than bears bars. When he see this on our charts, this means
that the bulls have more power and are increasingly moving the market upwards
Also, we will see consecutive bull bars. Consecutive bull bars is a clear indication
of a bullish momentum In a bull market, the green bodies are bigger
than the red bodies. When he see this on our charts that’s a
signal that the bulls have more strength than the bears. Also, during a bull controlled market, we
will see the green bars closing near their highs. This suggests a good momentum on the upside,
because the bulls are trying to maintain the prices higher. We will also see a lot of wicks below the
green bars. This also represents a good signal that the
bulls are in control of the market and that are trying to push the prices upwards. When we see the green bodies getting bigger
this signals a clear bullish momentum. 2. The old-school Higher High & Lower Low
First, the follow-up bars should be breaking out previous bars. For example, each follow up green bar in an
uptrend should have higher low, higher high and higher close to the previous one. Vice versa for downtrend, red bearish bars
should be making lower low, lower high and lower close than the previous bar. Another interpretation is based on structural
pattern: The pivot point of each swing. Price never moves in straight line, it moves
in waves. And each wave will create pivot point on the
chart. These pivot points can often be found in pullbacks
of a trend. They are important turning points which represent
zones of the demand/supply. The best way to use these pivot points to
identify the trend is to create a trend line by connecting them with straight lines. You don’t need advanced knowledge to draw
complex trendlines. Just connect a low and higher low, you get
a simple trendline pointing in an up direction. For downtrend, connect any high and a lower
high. This trendline gives you both the direction
of the trend and great reference points for support/resistance for future price movement. 3. The dynamic support/resistance tool, namely
EMA (Exponential Moving Average). I personally use the 20-period EMA on my chart
when trading price action because it’s reacts to price quickly and follow the price action
closely. There are many ways of using the EMA, but
I found two methods are quite effective. First, I use the 20-day EMA to give me a broad
idea of what to expect for the day, whether it’s trending or ranging. For trending days, bars usually stay consistently
above or below one side of EMA, most of the time not touching the EMA for hours until
a deeper correction. For range day, it’s very obvious that price
interacts with EMA very closely. Another usage for EMA is to watch the price
action around the EMA when it’s touched, and based on the reaction, you find tradable
setups. EMA isn’t like trendline, a straight line. EMA follows the price and it serves as strong
support/resistance reference point. But it only works best when price is trending
in one direction. When price move sideways, EMA lose its efficiency
and does not produce any reliable setups. As long as price stays above the EMA, you
will only buy, never sell. The opposite is true for downtrend. One of the trade model I employ often is to
enter the “1st Deep Pullback”. In a strong trend, price goes too far away
from the EMA and not touching for hours, but when it does for the 1st time, this deep pullback
is a very reliable setup to resume the original trend. Some experts call the EMA “the Mean”. When price moves too far away from the “Mean”,
it can create a rubber-band effect, and price would stretch back to the EMA. Traders watching for the EMA, know that probability
of the 1st pullback of a strong trend to turn into a reversal is quite rare. So when price returns to the EMA, they would
enter, hoping the original trend will resume. Now let’s talk about the Trading Range (Sideway
price action). Trading ranges can be very tricky because
it’s very difficult to distinguish between range and trend. It’s understandable because they have some
similarities. The relationship between Trend and Range is
that they are interactive. One can’t survive without the other. Trend is essentially a breakout phase. Range is essentially a consolidation phase. And market is rotating between Trend and Range. So how do you actually read a price action
range. 1. Wicks
Trading range is filled with wicks especially more on top and bottom of the approximate
range parameter. The reason behind this is back to back failure. When price is being pushed up to the upper
boundary of the range, sellers are letting it go, to see how far price can go. The higher it goes, the more profit for sellers
when they sell into it. It creates a vacuum effect. When price becomes excessive, sellers will
jump in and sell into buyers, pushing the price towards the lower boundary of the range. Entering at the extremes offers great risk-reward
ratio for traders. You should try to embrace range days, because
they are somewhat “predictable”. And the first step, look for many long wicks
around the edge of the ranges. Wicks are failures. Top wick means buyers failed and bottom wicks
means sellers failed. Remember this: Range will have multiple failed
Breakout attempts before a real breakout. When the real breakout occurs, you can’t
miss it because it’s convincing both in volume and bar size! Any inferior breakout will fail within a short
time, generally within 5 bars. Look at the wicks within this range. Observe this area filled with Dojis and bars
that are overlapping. This bar shows the real breakout of that range. The bar is forceful, large in size, closed
high and with a minimal wick. 2. Alternation between bullish and bearish strength This shows both sides are active. There is no feeling of continuation of either
side. There is no consistency in strength from either
side. The red bars and green bars are somewhat equal
in quantity. The strength is weak, it shines and dies very
quickly. Often you will see a gigantic bar in a range,
it take over the whole space. Then the follow up is on the opposite side. So no momentum continuation, and traders trying
to trade the first bar are now trapped. Price moved in the opposite direction. Again: there is no sense of consistency. Range days can create a weird feeling that
market is not really active and it feels lazy. But actually both sides are very active, it
creates an balance between buyers and sellers. That’s why the price is not breaking out
to any one direction. All the setups which worked best in trend
trading are now losing their magical power. Remember this when trading range: Patience! Wait for confirmation and proof one side is
actually failing, then enter at the extremes!!! 3. Dojis and Overlapping price action. When you start to see lots of Dojis and bars
are overlapping (sideways action), market is probably ranging. The Dojis are the early signs for Range formation. A Doji is a one-bar trading range in essence
and it has many variations, “Gravestone”; “Dragonfly”; “Hammer”; “Hanging
man”. The names are not important, they all indicating
the same character: indecisiveness. Overlapping price action simply means the
size of the bars are either similar or inside of each other. Price is moving sideways, is not going anywhere. Sometimes, you will see two or more bars have
the same High or Low. Then you look to your left, and you will find
past corresponding price action that stopped at that level also. This means there is a strong supply/demand
zone for that level. So whenever you see two or more bars have
the same High/Low, mark that level, and watch for reaction when price revisit that level. Look for reliable setups of real breakout
or failed breakout. 4. The 20 EMA When price is trending strong and fast, it’s
hard for EMA to catch up with the price. Therefore, in a strong trend, there is distance
between EMA and bars. In trading range, it’s the opposite, there
is lots of touching. Because price movement in a Range is not very
volatile, most of the time it’s not going anywhere. The EMA cuts through the range, often in the
middle. The 20-day EMA is like an axis where price
is moving around it. There is one scenario to note here: when a
Range is about to break, watch the price action closely, and you will notice the EMA is somehow
holding the bars and push them out to the breakout direction. For an upside breakout, price will stop around
the middle of Range around the EMA. Vice versa for downtrend. Price will test EMA and will be pushed to
the downside. Being able to read a price action chart is
important to make the right decisions. The problem many traders have is that they
overcomplicate things and get easily confused – or they don’t have a process in the
first place and don’t know what they are looking for. Now, your job is to open your trading platform,
choose one market, and start analyzing price action using these techniques, just these. I could have mentioned chart patterns like
flags or triangles, but these are just ranges. I could have mentioned tens of candlestick
patterns, like inside bars or piercing lines, but again, these aren’t as important right
now. What’s important is to decode the market
rhythm, to distinguish a trend day from a range day and to read price momentum. This is the best price action approach. As always, if you got any value from this
and learned something new, leave us a like to help us with Youtube algorithm, and also,
make sure to enable notifications to stay in touch when new videos are released. Until next time.
