In Price Action Trading Strategy

Today we had one of the largest ranges ever on the S&P index, and its affect on EUR/USD was an initial selloff, followed by a huge spike in price. For this trade, we took a short at the high of this trend, when price hit confluence of the major diagonal trendline and horizontal resistance.

Most of the questions I get surround knowing when its safe to fade, and when its not. For the other areas marked up on the chart, I hope to explain why they weren’t good areas to take shorts.

Marked up in orange in the chart below are possible price turning points when EUR was in its heavy uptrend. The most significant of these is marked in blue. Price started off where the “x” is on the chart.

1.2650 was a heavily watched number, for good reason. It was the lowest low on the last cluster of price before price finally broke through it. Here’s why we didn’t fade here, and instead could have bought into it instead:

This pattern is very, very common. Price will approach a low made in a previous wave, and bounce off it (short). Alternatively, buy stops always reside above these areas as well. If price doesn’t fade it, there’s a good chance its going to keep moving if it’s broken on the first approach. It happens all the time.


Important, something I stress all the time and where many traders go wrong: there is a good amount of time here for the area to get noticed and for stops to get accumulated. This won’t work as steadily on smaller timeframes because of the lack of time passing in between these areas. But this one has been sitting there for a couple of days, so there’s more than enough opportunity for traders to take attention. When I discuss this system with other traders they make this common mistake of trying to force trades when there has not been enough time passed. How much time is necessary for each trade varies, and can be discretionary…..I use the ‘reasonable person’ standard when it comes to this, and just use good judgment and common sense. We’re looking for ‘no brainer’ levels; if you have to think hard about it, chances are something is wrong.

Now we scroll down to a 1 min timeframe of the same chart. You can clearly see that in all instances of the key areas, price blasted through them quickly and without haste; especially our 1.2650 level. When that 1.2650 area became violated, it’s a very good sign that price has a ways to go before it starts to seriously fade. That indication alone tells us to take a back seat on any shorts for a moment and if you’re not long already, sit to the side. When you see this pattern, and price taking out a low like that, take it easy on shorts is the bottom line and wait for something really good. As I say chances are you’ve got a ton of buy stops above it, and, based on common sense and seeing momentum leading up to it alone, tells you to back off.

So up to the entry point. Price finally reached 1.2840, which was taken out by about 10 pips or so, because price was ‘reaching’ for the diagonal trendline in order to entice buyers. This happens all of the time, as well. You’ll see horizontal resistance (or support) surpassed slightly so that a diagonal trendline can get hit. There’s your queue to go short. Price had a massive run, and is ready to kneel down at a key area.

What about profit targets? A good initial target for this is 1.2665 area, which is visible from a 15 min chart. It’s the low created on the first retracement after price broke through 1.2650. Secondary target could be 1.2630 area, or the high in this last cluster. A shorter term trader could have used 1.2725, the first major high made on the way up.

For a stop loss, I tucked it above 1.2885, which is the ‘bottom of the bucket’ and former resistance, on the last leg up. A break of that area and I would be concerned. I could also consider 1.2925, though unlikely as my risk:reward becomes skewed, and at that point, I’m already down over 70 pips. Not worth it. Better to start off new.

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Showing 24 comments
  • Anonymous
    Reply

    Excellent analysis as usual, however the pictures are way too small to be readable, and nothing happens when I click on them (with Internet Explorer and Opera). Can you repost them, or make them links to larger versions?

    Thank you very much.

  • Anonymous
    Reply

    As always, excellent explanation, Steve. Thank you! Please keep them coming.

    Happy Trading!
    linalm

  • Anonymous
    Reply

    You may consider these as requiring No Brains. I would suggest your charts are hard to read, almost impossible to understand and your evaluations not on a beginner level at all. Therefore, you may want to reconsider the “No Brainer” label. It is misleading!!

  • Kyle
    Reply

    I think the meaning of "No Brainer" is more lending to it being dumb not to take the trade based on the fundementals and market conditions and of course the simplistic s&r approach, so in a sense "No Brainer" I think means "high probability."

    Steve, you are the man!!….thanks for your continued guidance, insight, and education into this incredible market.

    "He who has ears to hear, let him hear."

  • Anonymous
    Reply

    No pleasing some people. Steve, the charts are fine, the explanations perfect and your evaluations enlightening. Keep ’em coming!

    triphop

  • Mary Pippins
    Reply

    I like your new logo, it reminds me of Lucky Strike, which is kinda poignant 😉

    Al

  • Moxy
    Reply

    I’m loving the blog and this last post is a great example of how your system works. S/R is is the basis of most good trading strategies and yours is one strategy that is clean, easy to understand and from what i see… very successful. Keep up the good work.

    I love the videos. Have you thought of doing a quick video with each post? That would be something that I and i’m sure many others would love to see.

  • James SoDak
    Reply

    Yes his analysis is not necessarily at the beginner level, however, if you read the pdf and the full blog and follow the blog daily for a time it will start to make sense and will become a natural thought process when trading.

    Whenever I have spare time I study my strategy over and over (and over) again. I analyze my past trades to see if my thought process was in harmony with the rhythm of the market. I trade demo and live simultaneously (I play with big money on the demo, haha). But sometimes I just trade on the demo if I am feeling out of sync with the market (preservation of capital).

    More importantly, with every day that goes by I am learning more about how the market works and how this strategy fits, and therefore I am getting more confident and comfortable trading which is an ABSOLUTE NECCESITY to be a successful trader in my opinion. Otherwise we are just throwing darts at a board.

    I’m leaps and bounds a better trader than I was just 4 months ago having followed this blog.

    GREAT STUFF STEVE! KEEP IT UP!

  • BASSAM
    Reply

    thankyou very much for your input. it is very important to me to see how you see things. Most of the time you effortlessly blow the straws away so that we see things in a clear view. it is second nature to you but to me it is exciting discovery, thankyou Steve.

  • Anonymous
    Reply

    hi
    i cant find anymore the levels you used to post everyday. did you change the page where it used to be or you are not posting it anymore. if you dont post it anymore ,please bring it back it was so important for my trading
    regards

  • Anonymous
    Reply

    BRV thankx a million times, one can learn a lot following your steps, just I must agree since the last couple of posts, the images are too small, when you click them nothing happens, so the charts are kinda hard to read. Well let’s say this makes understanding even more challenging… 🙂

  • amir
    Reply

    Great analysis, I also think that you have to link your pictures to a larger image because it is hard to see the level and time frames.

  • Steve W.
    Reply

    Hi guys I’m working on the chart issue and should having working fine by the next post. Thanks a million,
    Steve

  • Anonymous
    Reply

    Hi Steve,

    Thanks for all your efforts mate! I just wanted to ask, do you ever use Options to trades these levels at all? Thanks!

    Bluesbrother.

  • enoch benjamin
    Reply

    Just curious – how does the trade mentioned in this post compare to today’s action is GBPUSD?

    Thanks in advance.

  • Lane and Gina
    Reply

    Thanks for the web page and the straight forward and simple approach to trading… the fact that you would post your thoughts and give insight during your hectic schedule life is awesome!! I know I have become a better trader, thank you, thank you, thank you….

  • Anonymous
    Reply

    Hi,
    do you look at the bounce after the 1min bar is complete or “intra bar”? Because with a strong bounce you easily loose more than 20 pips after the close of the 1min bar.
    The slip for a market order is also very high with a strong bounce.

  • Steve W.
    Reply

    Hi, I just monitor it for an immediate clue, more or less. If I take the trade to begin with, I already have a rather high conviction of the level, so I am prepared to get in. I use the 1min chart to monitor the immediate reaction from the level, and I have no real rules in terms of whether or not I’m waiting for it to close, more or less, I’m just looking for that initial push in the direction of my trade, using my predefined area.

  • Eirean
    Reply

    Hi, glad to read your words. And thank you for sharing. As for the pictures, I think they are OK. Your indications are so clear that I can work them out on my chart.
    Thanks again Steve!

  • Anonymous
    Reply

    Hi,
    Would you take a second bounce like a double top/bottom as a entry?

  • TD
    Reply

    Hello Steve,

    Do you close your position if the price (after the initial bounce) comes back to the bounce level a couple of minutes later and starts to “wiggle” around? What about double tops and bottoms?
    Thanks Steve.

  • Steve W.
    Reply

    Hi TD,
    The initial identification of the level I find to be of the highest importance, in regards to your first question. If I’m taking a trade off of a level which I have identified as a major potential market turning point, smaller fluctuations on lower timeframes, or retests of the level, typically won’t be enough to shake me out of the trade. Double tops and bottoms can and do typically occur if the weight from contrarian traders’ positions aren’t initially strong enough to keep price below the initial level. They are undesirable, for sure, but they happen regardless and I look for a break (if a short trade) above the double top, then the top used as support as a bad sign, and usually indicates an opportunity to go long rather than remain short.

  • TD
    Reply

    Hello Steve,

    how much pips in a one miute bar would you describe as a bounce? 10 between high and low (for EURUSD) and close in the lower third of the bar? Or is it just intuition?

  • TD
    Reply

    Hello Steve,

    You mentioned the main difficulty/problem – identifying major potential market turning points. That’s more than true.
    E.g. EURUSD has levels (I hope I’m right) at 1.2800 and 1.2850. Which one is major? Are both major levels? Both broke today (altough 1.2850 with a minor bounce). And price went up to 1.2916. My level was 1.2926. The two other levels were used more often than the level were price finally turned.

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