What does it take to trade price action successfully, and why do traders struggle? You can improve your price-action trading by making a few small adjustments. This is not rocket science.
This article shares six of my best Forex price-action trading tips, which I have acquired over the past 15 years of trading price-action. These tips can help most traders stop making the same mistakes and achieve better trading results.
This article will provide you with a thorough understanding of advanced price action concepts. You will be able, by the end of the article, to look “behind the scenes” and understand the factors that drive price action.
ACCUMULATION INTO A NEW TREND
You will notice that a trend is characterized by impulsive phases (trending) and corrective steps (against movement). The trending step is generally steeper and longer than the corrective phase.
The screenshot below shows the beginning of a bearish market trend, which began with extreme selling to the left. Early on, the corrective phases of the movement were short and shallow.
The trend changed, and the price moved sideways for a long time. The movement did not continue as easily as it used to.
The distance between my two lows at the bottom of the chart is very small as well, which further indicates a loss in bearish momentum. In a healthy downtrend, you want to see the price making lower lows rapidly.
It is important to wait until the market gives a bullish indication before considering trading opportunities.
The screenshot below shows the price pushing through the blue resistance zone with strong momentum. This is the first time the price has been able to reach a higher high.
After the breakout, the price forms a pattern of correction with a horizontal level of resistance. Re-entering positions after this pattern’s flight is another common strategy.
Two horizontal arrows mark the import supply zones that formed during the initial downward trend on the left. These supply zones can act as resistance in the future, and traders may use these price levels to place targets.
- Reversals are often the result of long corrections
- Weak lows in a downward trend are an indicator of a power change
- First, bullish signals are higher lows
- Breakout signals are often based on a momentum break to higher highs
The breakout buildup is a part of all price patterns and acts as an addition, improving the pattern’s overall quality. The idea behind a breakout buildup is the same.
In the screenshot, you can see that the price has formed a triple or double top under the resistance level.
The breakout build pattern is marked by the slightly upward-sloping trendline to the right. The price used to be able to sell off aggressively when it hit the resistance level and move lower significantly. Still, during the breakout buildup, the price was pushing towards the resistance earlier and sooner.
If the resistance level is returning faster, it means that sellers are less willing to sell at that price. Buyers are also buying lower prices earlier each time. Both confirm a shift towards a market dominated by buyers.
The breakout from the breakout buildup pattern is often accompanied by strong momentum. The selling interest was consumed gradually before the flight, and the strong buyer surplus caused a strong reaction when the sellers disappeared.
- Most chart patterns can show the buildup.
- Adding information to the design can enhance its quality.
- The key to building up is to approach a level of resistance (or support) faster and faster.
- During the buildup, the selling interest will gradually fade, leading to quicker returns into the breakout level.
LIQUIDITY RUN – STOP RUN
Stop run is a pattern that many traders use to enter trend-following trades following an initial breakout. It can be beneficial when the breakout signal is a loss, but the price chart then develops positively and gives the stop-run indication.
The screenshot below shows a long-term downtrend where the price has traded sideways. This is the same as the first example of accumulation. The buildup is also evident as the price returns to the resistance level more and more frequently.
A breakout occurs, and the price is then pushed into a bullish trend. One tip I used to help me with my trading was to think about how an average trader might approach a breakout.
Forex trading books typically tell traders to place stop loss orders at this level, either just below the breakout or, at that point, for a breakeven order.
Shortly after, the price falls below the breakout zone into the stop area. As the market nears the previous breakout, the price is accelerating to the downside, and the red candle size is increasing. The price is likely to be hitting many stops placed by traders who purchased the market. In this case, the holidays are selling orders.
The screenshot below shows the result of the stop run. As the price moved into the stop zone, traders began to exit their positions, causing a great deal of volatility. Trading can be risky at this point because the price moves back and forth in an erratic manner.
The most common method is to wait until the price breaks into a new peak, as shown by the horizontal dotted lines. The price had already started to make higher lows and was pushing through the resistance.
Stop-run patterns can be dangerous if you get involved too early. Volatility increases as the price reaches the stop zone. Wait until the dust settles and you see that the bullish participants are in control.
- Where will most traders place their stop on a pattern break out?
- Wait for the market’s return to the stop zone
- The volatility should increase in the stop-run
- Wait for volatility to settle before investing.
- Watch for the price to break through resistance with strong momentum.