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Untold secrets of Price action Trading

Mar 15, 2021 07:30

Price action is one of the most popular trading concepts in today financial market. A trader who knows how to use the pricing process the right way can often improve his performance and the way he looks at charts. Whether you are a short-term or long-term trader, analysing the price of a security is perhaps one of the simplest, yet also the most powerful, ways to gain an edge in the market. However, misconceptions and half-truths that confuse traders and lead to failure are still circulating.

Here we are going to look into some of the untold secrets of price action trading concept. Let’s have a look on this.

1. Behavioural observation

A price action trader generally sets great store in human fallibility and the tendency for traders in the market to behave as a crowd. For instance, a trader who is bullish about a certain currency might observe that this currency is moving in a range from $20 to $30, but the traders expects the currency to rise to at least $50. Many traders would simply buy the currency, but then every time that it fell to the low of its trading range, would become disheartened and lose faith in their prediction and sell. A price action trader would wait until the currency hit $31.

In a modern-day market, the price action trader would first be alerted to the market once the price has broken out to $31, but knowing the counter-intuitiveness of the market and having picked up other signals from the price action, would expect the stock to pull-back from there and would only buy when the pull-back finished and the market moved up again.

Support, Resistance, and Fibonacci levels are all important areas where human behavior may affect price action. “Psychological levels”, such as levels ending in .00, are a very common order trigger location. Several strategies use these levels as a means to plot out where to secure profit or place a Stop Loss. These levels are purely the result of human behaviour as they interpret said levels to be important.

2. Two attempts rule

One key observation of price action traders is that the market often revisits price levels where it reversed or consolidated. If the market reverses at a certain level, then on returning to that level, the trader expects the market to either carry on past the reversal point or to reverse again. The trader takes no action until the market has done one or the other.

It is considered to bring higher probability trade entries, once this point has passed and the market is either continuing or reversing again. The traders do not take the first opportunity but rather wait for a second entry to make their trade. For instance the second attempt by bears to force the market down to new lows represents, if it fails, a double bottom and the point at which many bears will abandon their bearish opinions and start buying, joining the bulls and generating a strong move upwards.

Also as an example, after a break-out of a trading range or a trend line, the market may return to the level of the break-out and then instead of re-joining the trading range or the trend, will reverse and continue the break-out. This is also known as ‘confirmation’.

3. Trapped Traders trends

“Trapped traders” is a common price action term referring to traders who have entered the market on weak signals, or before signals were triggered, or without waiting for confirmation and who find themselves in losing positions because the market turns against them. Any price action pattern that the traders used for a signal to enter the market is considered ‘failed’ and that failure becomes a signal in itself to price action traders, e.g. failed breakout, failed trend line break, failed reversal.

It is assumed that the trapped traders will be forced to exit the market and if in sufficient numbers, this will cause the market to accelerate away from them, thus providing an opportunity for the more patient traders to benefit from their duress. “Trapped traders” is therefore used to describe traders in a position that will be stopped out if price action hits their stop loss limit. The term is closely linked to the idea of a “trap” which Brooks defines as: “An entry that immediately reverses to the opposite direction before a scalper’s profit target is reached, trapping traders in their new position, ultimately forcing them to cover at a loss. It can also scare traders out of a good trade.”

Since many traders place protective stop orders to exit from positions that go wrong, all the stop orders placed by trapped traders will provide the orders that boost the market in the direction that the more patient traders bet on. The phrase “the stops were run” refers to the execution of these stop orders. Since 2009, the use of the term “trapped traders” has grown in popularity and is now a generic term used by price actions traders and applied in different markets – stocks, futures, forex, commodities, cryptocurrencies, etc.

Trading steps for Price action

Many of the experienced traders following price action trading keep multiple options for recognizing trading patterns, entry and exit levels, stop-losses and related observations. Having just one strategy on one or may be multiple currency may not offer sufficient trading opportunities. Most scenarios involve a two-step process. First we need to identify the scenario of price moment. Like a currency price getting into a bull/bear phase, channel range, breakout, etc. Second one is within the identified scenario we can find the trading opportunities. Like once a currency pair is in Bull Run, is it likely to (a) overshoot or (b) retreat. This is a completely subjective choice and can vary from one trader to the other, even given the same identical scenario.

Some example of it

A currency pair reaches its high as per the trader’s view and then retreats to a slightly lower level (scenario met). The trader can then decide whether they think it will form a double top to go higher, or drop further following a mean reversion.
The trader sets a floor and ceiling for a particular stock price based on the assumption of low volatility and no breakouts. If the stock price lies in this range (scenario met), the trader can take positions assuming the set floor/ceiling acting as support/resistance levels, or take an alternate view that the stock will breakout in either direction.
A defined breakout scenario being met and then trading opportunity existing in terms of breakout continuation (going further in the same direction) or breakout pull-back (returning to the past level).

As can be seen, price action trading is closely assisted by technical analysis tools, but the final trading call is dependent on the individual trader, offering flexibility instead of enforcing a strict set of rules to be followed.

Conclusion

Do you want to earn a little extra income? The good news is if you know what to look for in today’s market you can achieve your goals with just a few hours a day. But you need to know how price action trading works, and how to analyse order flow like professional traders. Even if you see the best price action signal, you can still greatly increase your odds by only taking trades at important and meaningful price levels. Most amateur traders make the mistake of taking price action signals regardless of where they occur and then wonder why their win rate is so low.

Most of those tips are probably not considered price action secrets by advanced traders, but amateurs can usually improve the quality of their trading and how they view the markets by just picking a few of them. Price action trading is a powerful tool and is the basis for numerous strategies used by traders all around the world. Is it time for you to incorporate it into your trading with our Platform Winstone Prime. We have a complete education platform ready for you, including all the guidelines for new traders, live support and application for mobile, Updated articles and Daily market updates. You can use the instruments and grab your profit.

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