You can also find details of my price action trades together with some general thoughts/opinions by following my on twitter.
A bit of history…
I spent approximately 4 years jumping from price action method to method across various public forums like this one; before it suddenly dawned on me that this was completely the wrong approach to trading and that I needed to start by taking a look at myself and figure out what type of trading style would suit me.
It was only then and being fortunate enough to be able to follow other professional traders that the missing pieces of the puzzle started to fall into place, I realised that the professionals view price action differently to how retail traders view it and all that I had learnt previously were all derivatives of the same thing - the standard ‘retail’ approach to price action trading.
It became clear that there was a whole world of information to digest, learn and understand if I wanted to be able to trade like the professionals.
In short, I learnt to understand:
- The characteristics to look for at Supply / Demand and Support / Resistance areas which highlight the order-flow that is present and how to interpret this price action to produce reliable trade setups.
- How the FX market is inter-linked with Equities, Bonds and Commodities and how to use this knowledge effectively as part of price action trading.
- That the professional price action trader has a good awareness of news / fundamentals and the effect on the market and how they use this knowledge as part of a price action strategy.
- How professionals look at trading setups in terms of probabilities and adjust their risk according to these probabilities and are constantly looking for signs from price as to where it is heading and what it must do to confirm or dis-prove this ‘sign’. This opened up a whole new sense of logic when assessing entries, stop-losses and trade management.
- That price action trading should be mostly objective and not subjective – it shouldn't be a case of a setup being open to many forms of interpretation depending on an individual’s style.
- That price action trading should not be time-frame or asset class specific.
What is Price Action Trading?
Being a ‘PA Trader’ is quite a generic term these days and doesn't tell you much about the underlying trader.
If I had to describe the type of trader I am it would be the following ‘an intraday momentum trader’.
I look for instances where there is a) a strong imbalance on one side of the market (e.g. buy-side demand strongly exceeding sell-side supply) and b) space for price to move into – which creates a momentum move.
I look to exploit this expected PA through finding the ‘logical route’ price should take on a lower TF through reading the SD structures e.g. a H1 strong momentum move (straight line) will lead to logical break and retest of SD zones on a lower TF, say the M5.
This of course allows me to maximize my %R from a trade without affecting the probabilities of the trade itself.
How do I achieve this?
Simply through using what I would term ‘raw’ price action knowledge.
The problem in my opinion with price action traders today is they want to focus on trading repeating patterns with a mechanical/rule based mindset. It is completely understandable as to why, but most don’t realize that pattern trading and/or trading with a rule based mindset is a low positive expectancy approach to price action trading.
Simply put, patterns are a derivative of price action and not price action itself.
What I do is utilize supply/demand and order-flow dynamics concepts together with a logical ‘thought process’ to find price action setups in line with the style outlined above (momentum trades).
The Missing Link - Mindset
The other key ingredient is the mindset approach. I'm a firm believer that price action trading should be time-frame and asset class independent and to be able to call yourself a good price action trader you should be able to:
- Find multiple good expectancy opportunities per day.
- Across any TF / asset class.
- Be ‘right’ a lot more often that you are wrong.
- Focus on trading according to expectancies and not probabilities / win-rate (a very common trait of a retail trader).
I fail to see how someone can call themselves a good price action trader when, despite the number of FX instruments (and other asset classes) available to watch these days they can ‘only’ find a handful of trading opportunities per week/month.
Lastly, I'm also from the school of thought that if you are ‘reading’ the price action correctly you should be right a lot more often than you are wrong.
Some will counter this and say that it depends on you %R - a higher %R equates to a lower win-rate and vice versa.
For me I don’t see them as correlated variables in the expectancy equation. Why can’t you have higher %R and higher win-rate – only a system based approach to price action trading has win-rate and %R that are inversely correlated to one another.
You can listen more to my views on the ‘correct’ mindset approach to trading through my webinar recording.
My Current Setup
I tend to change what I watch every 4-6 months or so as a way to keep myself interested and motivated.
For example until recently I predominantly focused on trading USDJPY in isolation whereas now I focus on 6 FX pairs – EU,AU,GU,UJ,AJ and EG.
The way I look for setups is that I use fixed HTF’s to establish a) current HTF SD ‘picture’ b) current HTF areas of interest and c) the current useful or developing price action – these are H1, H4, Daily and Weekly (of course being an intraday trader I’m more focused on H1, H4 unless I have a ‘direct’ bias on the other 2 TF’s).
Note: A direct bias is one where I expect a momentum move for that period (e.g. weekly – that week). A false breakout setup is an example of a direct bias.
I then use a lower TF (anything from M1 to M30) to find the logical route price should take to play out the expected HTF move.
When I was trading USDJPY in isolation my ‘reference’ HTF’s were anything from M2 upwards and I was using predominantly M1 to enter trades. There is no ‘right’ approach it just depends on an individuals preferred style.
I actively trade the European session but tend to focus more on the morning session as a) US data tends to make the afternoon session slow or choppy b) concentration tends to start decreasing during the afternoon and c) I’m no longer in the position where I ‘have’ to spend 10 hours per day in front of my screens – when I've made a certain %R for the day I tend to wind down or make sure I at least head outside for a couple hours.
A list of the abbreviations / terminology I often use:
TT = Touch Trade
PA = Price Action
FTB = First Time Back (note - not an immediate retest - an arc like first retrace)
FLR = First Line of Resistance
FLS = First Line of Support
TL = Trendline
TP = Take Profit
SL = Stop Loss
%R = Risk / Reward Ratio
S/R = Support / Resistance Zone
SD = Supply / Demand Zone
TF = Time Frame
HTF = Higher Time Frame (Daily and upwards)
LTF = Lower Time Frame (H1 and H4)
VLTF = Sub H1 Time Frame
FB = False Breakout
RBR = Rally Base Rally
RBD = Rally Base Drop
DBD = Drop Base Drop
DBR = Drop Base Rally
LS = Liquidity Spike
CP = Compression
HL/HH = High Low / Higher high etc