In Price Action Trading Strategy

Not all things are quite the same in trading. Some levels are unarguably much stronger than others, and stand a much higher probability for success. When we are looking to determine which levels are stronger than others, the key word is time. Generally speaking, support and resistance levels hold much greater significance when they can be viewed on higher timeframes. Your probability for success generally increases by taking trades found these higher timeframes, but higher timeframes can also hide many potential trades which can be found in lower timeframes.

Before we go any further, it is important to note the significance behind the clarity of these levels. In other words, the easier they are to spot, the more likely the level is to act as a price turning point. If a level has been “sloshed” around for sometime, its significance begins to fade, at which point the probability of the trade will as well.

Typically, when we begin our search for potential trades for the day, we prefer a 3 or 4hr timeframe, and work our way to higher (daily, weekly, monthly) or lower timeframes (1hr, 30min, 15min), depending on the uniqueness of the situation. We scan through the charts and mark up potential price turning points of support and resistance. When price is trending, it is generally easier to mark up higher probability trades than when price is in consolidation, as there will be less areas of support and resistance to be noted. When price consolidates, it starts to become more difficult to determine where price will actually react.

We open our 4hr chart and are looking to see where price has historically bounced. When a particular area has been used as both support and resistance, we make a note of it, and start looking for other clues that it will be a good reaction point, which will be discussed later. Oftentimes, from our 4hr chart, we will see a “range” of support and resistance, anywhere from 5 – 30 pips. In order to more precisely determine where to enter the trade (it is possible to enter trades with zero drawdown using this method) we will scroll down to a lower timeframe and look at the last few times price used this level. We look to find an exact price where price has bounced off of the most; that price will certainly hold the most significance to us, and it is where we will usually choose to enter our trade.

Weaker levels are found on lower timeframes, usually from 15 min to 5 min charts. We typically do not use these timeframes when originating a support and resistance level, as our probabilities for success decline. These smaller timeframes are used, however, for trade management purposes and defining exact entry points for levels found on higher timeframes.
Other technical factors come into play when determining a strong versus weak level, such as Fibonacci extensions or diagonal trendlines, which will be discussed later. Finding your strongest levels on your charts is the first and largest concern, and should encompass most of your daily routine. These are the levels which pay, and require the most attention.

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Showing 5 comments
  • Anonymous
    Reply

    Hi,
    I think it’s impossible to enter zero drawdown trades in the current environment (high vol). Almost all support or resistance levels are broken for sure. It’s better to take at least 20 pips over or undershooting into the calculation of entries. If not hit skip the trade.

    T.

  • Steve W.
    Reply

    We’ve had a few. They dont happen as often as we like but there have been a couple instances where they hit right on the nose. Performance section has a couple posted.

  • TD
    Reply

    Hi Steve,
    in EURUSD for example I found 21 levels between 1.3295 and 1.2322. There are 5 that coincide with major fib levels. They have a spacing of about 25-50 pips apart. Are there to much?

  • adewale
    Reply

    A forexnewbie is begging for an easier explanation of the terms; support,consolidation, resistance,strong/weak level and lower/higher timeframes.Thanks

  • Anonymous
    Reply

    looking at the 4hour timeframe, how far back in time should we look to create a relatively strong s/r line?

    currently i’m just sliding it back to about 2 weeks prior to the current date, is that enough?

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