Price action trading with pivots: Live example with chart

Dear traders

Here I will share my price action trading strategy starting from very basics.Initially,I thought rather than putting lengthy boring details,I will directly share core strategy to the point.Then,I decided against it realizing it will not help anyone in long run.So,I will share holistic trading journey right from the beginning to sharing signals which involves hourly to daily price action trading strategies for forex training purposes.

For now,it should be enough to disclose almost 80% of weeks are positive since last 26 months of my pure PA trading.

I know there are already some great PA threads and I also have followed them in past.But somehow down the line they have become a bit lengthy and tedious to be followed by a newbie.The main core strategy has been dug deep down.
The strategy I follow is mainly intra-day though I trade long term signals.
Here we go!!

Believe me the core strategy can be described in 2 lines but that will not take you anywhere. So, newbies are advised to read through the below carefully.
This is not bla-bla
You must be thinking you know all this bla-bla about psychology,money-management, patience might be important and you already know it.
Show me the real stuff!!
I also used to think same 5 years back;when I first began trading.Desperately searching for trading methods, questioning forum posters about their strategy believing someday someone will share his secret the way to consistent profit and ignored anyone saying boring stuff like psychology,patience,odds, money management as BS.Please mark my words carefully in following posts to reduce your learning curve from years to months. Whatever be your strategy or some statistical pattern!!

To be continued...


PS:I am aware of the fact that we have got many old guys here who might find the initial build up repetitive or boring. But, I will try to make this thread complete in itself so that it can be followed by a beginner.So,bear with me in initial stages.

Trading is most probably one of the most difficult profession to be successful in life.At the same time it is also one of the most rewarding.A top trader earns more than a top surgeon and many examples of billionaire traders.
http://www.financialexpress.com/news...urgeon/737274/

But,it is so easy to put a winning trade or profit for a couple of months.You must be saying yeah it is so easy, what is this all fuss!!

But then give it all back to the market.It must have happened to you many times.Compare this to calling heads or tail in a toss!!I am sure you have called right several times.Does that mean you know the future of toss or bet your money on that!!!

Being a successful trader is not about putting 2-3 big successful trades or making profit for couple of months. It is about having a steadily rising equity/money curve for years..days in days out..Yes,you will have losing streaks,losing months but they will be in minority.

Do not get disillusioned by your beginner's luck

Most novice traders have beginners luck, they have few streaks of successful trades. This makes the matter worse as out of ignorance they start trading bigger lots and give market everything back In all likelihood then began a journey of ups and downs, resulting in your account being in minus or if lucky break-even.
You tried this system and that methodology. Each new one raised your hopes 'this is the one hell of system! I have finally found the answer!Why I did not know this before'. You implement it and it may work for a while but gradually you slip back and you yet again begin to lose money on a regular basis. The more you learn, the less successful you are.
Some say trading is 20% skills, 80% psychology. I think it is 10%-90%. But have you really thought about what the psychology aspect encompasses? Yes we talk about emotions and you know all about those..having patience, self-discipline, self-control, consistency etc etc. Blah blah. You have thought about them, perhaps made up a trading plan, perhaps even followed it sporadically. You keep yourself under control for a while. But eventually it all breaks down and you can't seem to stick to anything.
You get angry, you get tired, you revenge trade. You start to feel helpless and hopeless. WHY oh why does this cycle keep repeating itself over and over?
Success at anything does not come by chance. It is a process and it requires hard work on your part.

The bottomline is
You have to be prepare for a long hard battle.

Misconception 1: Forex trading is risky

Leverage is risky not forex or trading.
(In lay man's term leverage how big lot you play in each trade.In general risk to your account should not be more than 1-3% at any time..no matter how many trades you put.)


Every investment with high leverage is risky.It can be gold/silver,real estate,cattle,house or trading.
Basics of leverage is how much money you put upfront and how much money you borrow to make an investment.

Example: (Only for people who are new to concept of leverage)
Say,you want buy a piece of land in Mumbai worth 2 million as an investment hoping the rate will go up to 6 million in 6 years.But you have only 0.5 million money with you.So,you talk to a Banker friend who will lend you rest of 1.5 million in return of modest return of 10%(just assume).
Suppose after end of the 6 yrs you are right and property is worth 6 million. Out of the 4 million profit you will pay back 2 million( 1.5 million principal and 0.5 million interest) and keep the rest of 2 million with you.

So,you invested 0.5 million and got 2.5 million.

In the other case say property price comes down by 0.2 million due to economic slow down. But,you have to pay the loan back to the bank anyway after 6 years.
After paying interest of 0.5 million interest + loan 1.5 million,you are left with 1.8million-1.5million-0.5= -0.2 million

Net 0.7 million loss.


Remove the interest component and apply the same to forex or any kind of option/futures trading with leverage.(Actually there is interest component in forex called SWAP)

Forex,Futures,commodity even stocks options (Call/put) have high leverage has same degree of risk.
Forex is not different from any other kinds of investment as such.

Only thing is forex brokers allow kids to play(over leverage) with 10$ which others might not allow.

Leverage magnifies gain/loss. It is a double edge sword.
All kind of return depends on leverage so without knowing leverage any idea of assessing return is meaningless.


Ref:
http://en.wikipedia.org/wiki/Leverage_%28finance%29

http://www.investopedia.com/terms/l/leverage.asp

Misconception :
Focusing too much on either of the two (winning percentage and risk-reward ratio) without understanding the trade-off dynamics.


Risk reward ratio says how much risk we are taking to gain how much while initiating a trade. Say, we put 50 pips stoploss aiming for 200 pips.
Our risk reward ratio is 1:4. Some people also report it as reward/risk ratio which is 4:1.

Generally, for any kind of system
Winning percentage and reward per risk is inversely proportional

Example:
A trading strategy can be correct 90% of time and yet be loser. Say you take 100pips risk to take profit at 10pips.
For 10 trades
10*9=90 profit
100*1=100 loss
net=-10 pips loss

At the same time a trading strategy which wins only 30% of time and has risk /reward 1:4
Say you take 50 pips risk and Target profit of 200 pips
For 10 trades
3*200=600 profit
7*-50=-350 loss
Net= 250 pips profit

Generally, newbies focus on winning percentage alone and from the above example it should be obvious why winning percentage alone is meaningless without knowing R/R ratio.

But on the extreme, intermediate level traders focusing too much on R/R ratio and not taking a trade/ taking profit unless a certain hard R/R is not achieved. This is also harmful as market does not move according to your R/R but according to its own fundamental/technical dynamics.

So, there should be a balance b/w risk/reward to probability based approach.Hence, not taking profit even if you see market is reversing since your R/R is not achieved is not wise.

See the market in probability kind of prism rather than some magic R/R machine

Hey Mate!

very good words so far!

count me in, keep it going please!!


have a good one!

In the early days of learning how to trade, we spend most of the times to search for a magic set of rules (especially technical traders) which will lead us to consistent profit.

Let us assume that such a system/set of rules do exist. If it is definable it can be written in a code.
That code would be money machine!!!
If something is a money machine; can you imagine how dangerous it can be if it is unconditional.(We might have a global imbalance of money supply.lol)
So, most of the times it is not unconditional in real life.There have been "money machines" but most of them are with unpredictable expiry date.You can take the "turtle system" for an example.

So, Why technical rules have an expiry date?

Take any particular time window for testing be it one year or 3 months. There bound to be a particular trading rules( certain combination EMA crossover, stochastic,BB, RSI ) for which the system will have an excellent profitability.With so many traders around the world it is bound to happen that some trader will be profitable by pure co-incidence of choosing that set of rules which works good for particular time.

(Sorry, if you have already read Taleb many times over!!)

Most of the time, the window of opportunity of certain magical rules working till you become millionaire is very low and it is as good as playing for lottery, if you keep on changing your RSI/EMA/BB settings hoping someday you will strike gold.


What can we do, then?

In my opinion what an serious trader can do is invest time to learn the logic behind development of "money machines". Why the thing is supposed to work if it works at all!!


Many times, I have read people saying as a chartist you should get everything from your chart. Hence, you should not care about fundamentals.

Now, imagine a scenario , you have a NZD/USD long open and you are expecting for NZD GDP figures to be out at 8.Around, 7 o'clock prices move violently as if GDP figure is leaked .Eventually, you lose all your profits overnight.Then, you know there was a horrible earthquake.

Similar, scenario can be drawn for high-impact euro-zone events.

If I say, I will get everything from chart without considering event-risk fundamentals , that does not make much sense.Certainly, avoiding events/news is not the best solution.Please note that I am not talking about trading the news or something. I am just saying do not dig your head expecting some magical rules will take care of your profit.

Understand each and every rule you follow.

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Sure, combining chart and fundamentals can be a difficult ball game!! If we wish to rule the world by clicking the Red/green buttons; it is not a such a big ask.
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PS: Thanks Rohule

What causes price to move?


Of courses,changes in demand and supply but what causes that?

1.Any news which gets most of the market by surprise ie different from what market expected. in forex economic announcements,macro-economic news, politics

2.Change in bias in the mindset of people due to fading of memory or looking for fresh perspective at the new price.

It is like bargain hunting. You thought potato (Pound) is overpriced at 30 so you did not buy but when price reaches 10 you start buying feeling it is cheap

3.Manipulation by big market participants in thin market (possible in forex in asian/pre-asian session, quite common thing in gold/silver market).

4. Unwinding of big position in thin market/ market close

1 and 2 are major factors.
3 and 4 are minor

"1.Any news which gets most of the market by surprise ie different from what market expected. in forex economic announcements,macro-economic news, politics"
Analysis of such events and their effect on prices is called Fundamental analysis.

Let us take an example

Suppose, a grain is trading at 10 $/kg in market.You got a news from a villager that due to lack of rain potato harvest has been spoiled.So, there will be lack of supply so prices will go up.This news will go around and people will start buying that grain (expecting price will go up) like crazy.Suppose after 3 days prices reach 18$/Kg.
Then a big grain dealer will asses the situation.As per his calculation, there is shortfall of X tons of grain and price should have reached P Rs rather than 18 (from calculation assuming some X).
He further knows that a neighbor state will export the grain and it will hit market within Y days. So, price will fall after y days mostly.

Now, the question is how will he estimate the value of X ,Y, and P.
He will use the estimated data from the field,people and experts.---------------------Fundamental analysis

He will ask his father about his experience when such kind of situation occurred in past to reach value of Y and P.
Finally use his own judgement--------Technical analysis


Relationship between fundamental and technical

The key is not what is fundamental/technical analysis is.Everyone knows it.
Key is to understand the relationship between two.

As we saw in the above potato example even if he knew price will go up when he heard the news of drought he is not sure how much it will go up.Apart from his analysis of present data he looked for past data to estimate the future.

The bold part is the premise of technical analysis

The idea is when we observe price action we should know what are we seeing!!

PS: I am not sure why this thread was moved from trading systems to journals. Though, I named it as live example with charts, idea was to show the strategy with some example.

very interesting pal!

as my experience says, there are not fixed rules in this business, but there are some kind of behavior that we must know.

react, not predict!

There are 2 ways to look into past of price ie technical analysis.

1.Look into the past price/chart to predict the future-- Art of charting/ Naked trading

2. Use derivatives of price like stochastics,EMA,bollinger band known as indicators to predict price.

As most people do, I began with 2 and used various methods and had some kind of success then I was introduced to price action trading which is a kind of chart reading.
Initially I tended to use combination of 1 and 2. Then I realized I can almost know where the indicator is by just looking at price. There is no use to have an indicator box. So, I deleted all indicators.

Probably.The only thing that gives an edge to indicator trading is it is easier to be discipline if you use hard-fast rules for entry/exit.


Then I realized to have an edge in trading I need some kind of prediction. What Indicators are saying same as blank chart but sometimes indicators are late/lagging. So, I dropped them from my chart.
Till that time I was making some money and losing some. Hardly consistent.

It took almost close to 8months to 1 yr to realize me that magic is not in method but the maths, probability and my mind.Then there was a peace and consistency which I cherish and thankful to the people who made me realize that.


Some general points to keep in mind

Like any business,
Revenue: Positive pips/trade
Cost: Negative pips/trade.

If there is a business there has to be some cost; In our case it is losses. So, do not get intimidated by it or get panicked.

You must have heard golden rule in trading is

"Cut your losses short and let your profits run"

Prices do not go from one point to the other in straight line, they will be zigzag.So, it is important to stay in the trade in order to have a bigger profit and watch the painful event of watching your profits evaporate.

You should understand you will lose your balance
Not only by taking big losses but also by taking small profits.Taking small profit is as harmful as taking big losses. Worse part is by taking small profits you stay happy but at the end of the month you almost give back whatever you gained.

If you understand the above things; you should have realized that

"The most important part of trading is not entry signal but how you manage a trade after you enter a signal or exit strategy."

Give more importance to trade management than entry signal itself

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MUST READ

1)And to realize which trade management suits better to your "whatever" trading style is to keep all records of your trade just after you take a trade and keep that updating as trade progresses.


2)Maintain a record of all what if scenarios.
You many want to open 3 demo accounts to test alternative trade management strategy.

Sure, the strategy that comes out to be winner after 1 year of live-testing may be good only for the past period, which may or may not hold good in future.
But, I assure you it will be 10 times better than 'out of blue' trade management strategy. You will learn a hell lot!!!!!


I know the above process is extremely boring and difficult to implement unless you are required to that under your boss's pressure.What you can do is keep live trading as you do; but keep all records live (Not after exiting a trade)!!

Just for people who are new to price action.

Understanding support/resistance zone: The bread and butter

This topic is the most important aspects of trading and perhaps the only aspect of technical analysis that works and widely recognized by even most fundamental analyst. Even by the almighty central banks. (See the support for USD/JPY given by Bank of Japan at 80 level).

Support and resistance are basically prices/zones where the probability of prices finding a temporary stop in a ongoing trend is quite high.
Remember, there are no certain line of S/R; they are basically zones which may range from 10 pips to 100-200 pips depending on the time frame we are looking at.

Here is a bookish definition for the same:

"In their classic book Technical Analysis of Stock Trends, Edwards and Magee define support as buying, actual or potential, sufficient in volume to halt a downtrend in prices for an appreciable period. While we are on the subject of definitions, resistance is selling, actual or potential, sufficient in volume to satisfy all bids and hence stop prices going higher for a time."

In order to price become a support zone, there must be force of demand. The force needs to be emphasized, because at every price demand and supply must be equal ie for every buyer there has to be a seller.But,the point is who between the two is more enthusiastic ie who has the force.

So,A support zone is one in which sellers become less enthusiastic or less willing to part with their assets and buyers, at least temporarily, are more strongly motivated.

But,now we got to know which support and resistance zone is of more importance given that there is almost S/R zones everywhere.

How to identify important S/R zone?

Some guidelines to find important S/R zone is

Zoom the chart and observe how frequently an asset changes hands at a particular level, the more significant that level is likely to be as a support or resistance zone.

How it works?
Whenever we see a large number of people buying and selling at a specific price, they remember their own experiences and price levels
Buyers like to break even after suffering a loss.
Sellers, on the other hand, may have bought lower down and now recall that prices previously stalled at the resistance area. Therefore, their motivation for taking profits is that much greater.

2)
The more times a support or resistance zone has been able to pause or reverse a price trend in the past, the greater its significance is likely to be in future.
The more times a price has been hit but does not penetrate, the greater the implication when the floor finally does give way.


3)Longer the period that has elapsed between the time a support or resistance zone was last challenged, the less significance it is likely to have.
This means that a zone, which is 3 months old, is likely to have greater potency than one established 8 or 12 months ago.
Even so, it is almost uncanny how support and resistance levels can repeat their effectiveness time and time again, even when separated by many years.

Do you know silver hit 50$ resistance 30 years back as it did weeks back this time?

Why price levels should work?

Any tools (S/R,Pivot,Fibs,Trendline) are not any magic lines/wands where the price should stop or reverse.Of course there are not any!!

Then, why are they supposed to work?
Prices we see in chart does not represent what is their value is.
It shows the psychology of crowd and people all over the world trading. They typically tend to look at each other for finding clues for their trades.
Since price level,swing high/lows are visible to naked eye; it is same for all around the world and hence the consensus.

Only reason they might work is self-fulfilling prophecy

http://en.wikipedia.org/wiki/Self-fulfilling_prophecy


Surely, EURO should be sold or bought is decided by mostly big bank's traders depending on fundamental news and their perception of situation but till which level and till when there can be no definite consensus.
Here technical price level gives some clue hence any use of TA.

Now consider pivot,trendline,

Though, they are price level they are derived ones from the original price.

Pivot: Daily open ,close,high/low might vary depending on which time you chose as open/close in forex since it is 24 hrs market.Though NY close is considered as end of session generally.


Trendline: Unless they are very obvious, which generally does not happen, you know how many variation possible

Fib: Depends on which swing high/low you consider.


Contrast this to some indicator.Thousands of people use hundreds of type indicators.
Think, how many people cares RSI has crossed 50 or 20 ema crossed 50 or price is above 50EMA!!

If it should be EMA or SMA!! And many parameters we see of common indicators!! So, hardly any consensus for creating sufficient evidence

Prices rather than going straight,it tends to go zig-zag with pullbacks. When prices pullback before continuing in previous direction, you may say prices got support for some magical dynamic X ema/sma. If you analyse, you will realize X is only a random number. People around the world will not use same X. Hence,lesser the chance of that X working.

Using EMA crossover for trend direction.You can always know the trend with naked eye with experience.If it is not obvious, market are sideways. Waiting price to cross some magical SMA/EMA is again random. Hence,again it should be a weak predictor.


But all over the world people see price has touched 1.6000 which was previous high at which price reversed. This info is same for all. Hence,there is stronger chance of people reacting to that level.

Now, if indeed that level is respected is gauged by watching the movement of price near that level hence judging the conviction of market. To make this job easier all candle stick pattern like Pinbar,inside bar is used. But again they are derivatives of price action.

Understand the fact that using price to predict price is not exactly a great idea but the best in absence of any other superior method.(Like inside news/front running).
Again using derivative of price (indicator) takes us another step back.

Public fundamental events can be used as a guidance for price action trading only with suitable experience or judgment. I am not talking about news trading here. I am talking about knowing what cause is moving the market helps a lot in trade management.

To sum it all, at the end of the day most PA trading or trading itself is discretionary and that applies for most of the great traders.Else so many great traders have written books about their strategy.

But we do not have any money machine computer code yet!!

If you are saying big banks have it and then think again why they pay astronomical bonus/salary to their star traders. Sure, they do algorithm trading,But it is always under human supervision and humans decide which algorithm to use under what market condition!!


So,the key is to prepare for learning from the market rather than searching for definite 1,2,3 strategy .

PS:From next week, I will try posting some live charts

After all the warm-up, let us see a live chart.
In any chart based trading support/resistance is the king. But, let see some not-king but kingmakers first in live chart.

By king maker I mean levels that is predicted to make future support/Res.

Pivot is one of them. It is calculated from open,close,high/
low. You can see a formula here

http://en.wikipedia.org/wiki/Pivot_point


Now see today's EU chart. I am not suggesting entries now, just watch how price reacted to central pivot.

Bold blue line is pivot calculated from NY close value

great thread Zentrader99, pivot point post is just what i was looking for! thankyou!

Watching 1.4420-1.4440 level (swing high of Friday trading session and 20th june high) in EU for long retrace entry with PA confirmation.

Otherwise 1.4400 area .

PS: This is not a pivot trade

Look v. promising, zent.
Continue pls.
Cheers

Hi Zentrader99,
Why don't you continue this thread? I see very good stuff here.

Hi Zentrader99,

Excellent explanations, definitions!

Heaps of useful basic knowledge needed for novices like me.

Thanks!

Yes, what happened to this thread, I was searching for PIVOTS trading, any special methods or anyone using them!

Hi guys,
Thanks for all the PMs and posts.

Basically,my trading strategy has evolved since I opened this thread. Though pivot remains one of the central part of my entries/exits,I look at medium/short term fundamentals for directional bias. Though,I have seen overall consistent results ,my style has become more discretionary than purely mechanical. So,it is a bit difficult to explain trading strategy. Hopefully,I can summarize my thoughts/trading ideas with some examples in coming months. All I can say for now is keeping an eye on fundamentals helps even if you aim to be chart reader. At least in my case,it has helped.

Long EU from 1.3210.