In Price Action Trading Strategy

Trend trading can be an extraordinarily difficult thing to master, and indeed, most people rarely do. Buying low and selling high is programmed into our brains from such early days of trading to the point that when it comes to shift gears on heavy-trending days, doing so is nearly impossible.  From a personal standpoint, trend trading was the very last thing I learned to do, because it was just that hard to figure out.

I was missing confirmation in my entries. Google “trend trading strategies”  and you're likely to come up with a host of pages telling you to sell at pullbacks to fixed-number exponential moving averages, etc., but you have no meter for consistency. These moving averages or other means of trend support or resistance are derived from specific instances and I can tell you, at least from a systematic standpoint, this type of method has a low win rate.

It's because as symmetrical as the market can be, it changes, and can become entirely asymmetrical when any form of fundamental stimulus is introduced……and this happens all the time. “V” tops and bottoms occur, and the trend itself can exist at any angle. You could have a slow and steady trend at a low angle, or a sharp, parabolic trend at a steep angle. A fixed-number EMA will not work in both circumstances, on the same timeframe. On the lower-angle trend it's going to break. That's just common sense.

Now there are ways to perfect this, of course, and many people have, but the underlying problem isn't solved: what specific levels are truly going to act as a launchpad for price acceleration?

So in my search, I turn to the obvious: diagonal trendlines. These suckers are common culprits of just about anything on your chart, and using them is heavily misunderstood, as I discovered later in my career. But before we get too involved, let's talk about the first thing we should know about any trend:

How Do We Know A New Trend Is There In The First Place?

A newly-developed trend has one indisputable major characteristic: a broken trendline from a previous trend.

Contingent on the timeframe, the length and seriousness of the move is going to vary. A trendline break on a 1 minute chart can't come close to touching the significance of a trendline breaking on a daily chart. And when this happens, everyone pays attention. It's a very big deal, so don't underestimate it.

Next, as I've explained before, trendlines can be “fanned” to show progressively steeper angles of the trend. This is an old term/technique, explained below that serves a variety of purposes. The “norm” is 3 progressively steeper trendlines prior to a break of the last.

EURUSD Daily Trend Line Fanned

You can see that the lower the angle of the trendline breaking, the more significant the move becomes. And depending on the interval of the break, you will see more and more activity shifting in that general direction.

Once the trend is underway, you can become overwhelmed with reference points. Our job today is to help clear up a large portion of that.

Find Those Strong Turning Points

Below is that same chart, zoomed in to an hourly timeframe with horizontal support/resistance levels added. I want you to notice three things here:

1. Not a single major high in this trend bounced directly off of the bottom of a previous range, “to the pip”. Every single one of them intersected the previous wicks of the candles in a failed attempt to beat out the previous trading range.

2. Every single one of these highs shows some form of confluence (others not marked up on this chart).

3. The red arrows, which I would like you to pay particular attention to, that use the trendline itself as a launchpad for momentum.

EURUSD Hourly Trendline Highs and Lows

Now as easy as this is to show after-the-fact, trading these highs can be an extremely difficult process. Most traders would have a hard time finding a couple of these, never mind all of them. And while we have short-term methods to find these highs, not discussed in this post, knowing they exist after-the-fact is still enough to help us out tremendously when it comes to riding the wave.

On point #3 above, I said to pay attention to the backward retests on these trendlines. These movements became my short answer for years of struggling with trends. While simply impossible to catch all absolute highs and lows, I needed another means of entering once the move was underway.

Reference Point Gold

Your charts are basically made up of….

…ranges, with sharp movements in price. On that hourly chart above, you have a sharp move lower, a range, a sharp move lower, a range,  etc etc….and this is what happens in trends. What this gives us is gold in the form of reference points, when the sharp move is underway, derived from the previous range.

Let me explain:

Each one of these “ranges” in a trend are usually made up of flags or pennants (normal or inverted).  And knowing this fact alone gives us yet even more to work with once the next sharp move is underway. Let's take one more look at that chart (now broken down to a 15 minute version to retrieve more detail) from yet another perspective:

Flags and Retests on Trendlines EURUSD Forex Chart

So now we're starting to get closer in terms of working with these.  You'll notice several things happening:

1. All of these formations are CAN be pennants, but I choose to disregard the initial drives lower and draw them as flags. The bases of the flags become relevant for backward retests on these trendlines (green arrows), as price uses them as an intraday launchpad for acceleration. This allows you to look forward and get in on the move earlier.

2. The upper (blue) trendlines are also commonly used as launchpads to take price higher, but not by much. This is a very common occurrence, and not just within trends. Take note.

3. When the red trendlines break, they all retest on the back end. When the do, price accelerates, breaks the upper flag line and heads lower.

So right out of the gate, we have 2 possible entry points: 1. a break / backward retest of the upper diagonal trendline (red trendlines) or 2. a break of the base of the flag.

But wait, there's more (and hopefully I haven't lost you yet – if I have, please go back)

Remember how I said that I can draw these as pennants, but chose not to initially?  Well, the market doesn't forget about those lines either. The reason they come last, in my book, is because they're literally the last ones to get hit, but you should still use them when you're trading intraday. Take a look:

Pennants EURUSD Forex Chart Drive Lower

What I did here was just change the lower trendline (now highlighted in red) to move in the direction of the trend, as opposed to against it. You'll see that in one of these instances, it was used as support, and the last two, as launchpads for drives lower, in the direction of the trend.

Inside the Channel: Adaptive Entry Points

Now that we know how to determine if a major move is underway (and have points of entry at the top and bottom of the flags or pennants) what about all of the activity in between these lines?

Let's go to a recent example, on a 5 minute chart, to show what happens once all of these downward movements are underway.

The high on this chart is the backward retest on the daily chart (last leg lower in the examples above). This alone is a very big deal. It is a descending triple tap, which in and of itself is a strong reversal indication.

The green arrows on this chart show all possibilities for intraday entry using this method. In a nutshell, price breaks through a previous trendline with confluence, and uses it as a launchpad for the next leg lower. There's a big question with my basic methodology here though, which I'll explain in a second. First, just take a look at the chart:

Trend Trading Entries EUR USD Forex Chart

So what' that big question I was talking about? Well, if you were to try to do this live, in real-time, you're might be asking yourself: “How do I know which lines to use? There are tons of them!”

The answer is as follows and as basic as everything else we do here:

First, look for the historical hits, aka confluence. These trendlines are buried everywhere in your chart and most people don't even see them. Do you remember those paintings you had to stare at long and hard before you saw a 3D image appear? They're called 3D stereograms, and you basically had to relax your eyes and stare at one central point in the picture and voila, it starts to pop out at you and you're able to see the “hidden image”. Finding these lines can in a way, be very much like that. Just start drawing, and you'll start to notice them everywhere, acting as reactionary points in the future. Practice makes perfect – be relentless.

Second, work your way backwards.

My few words of advice for successfully finding the ones that matter is to start at the right side of your chart, and work your way backwards. People like to see things clearly, and in the heat of the moment, flipping back through tons of history is no help to you at all. Any trader on a desk is going to think the same way. It as to be right there in front of you.

Start with the legs on the previous moves up. You'll notice that on all of the examples in this post, at least one touch came from the last move higher before the fall.

Third, if going in right at the point isn't you cup of tea and you like more confirmation, you can use simple bar patterns to confirm the reversal. Let's take yet another look at that chart, this time observing basic bar patterns:

Candlestick Pattern Entries EURUSD Forex Chart

The big take-home here is that the engulfing bars with downcloses inside the range of the previous bar (1 and 4) provided much better immediate follow-through as opposed to dojis (which generally represent indecision) being present. I've overall found this to be true when it comes to these retests on inner, or just “hidden” trendlines.

Side note: for those of you that have been following me for a while, you notice that I've traditionally used bar charts – same premise here. I've switched to candlesticks in recent posts to help provide more confirmation for these entries. Just like anything else we do, if it helps, it helps, and I plan on covering much more of this going forward.

Let's take a look at one more example of this, using the previous drive lower in this trend:

EURUSD 5 Minute Trendline Restest Launchpads

Once Again, All the Crucial Points Are Here:

-Every trendline used for a retest has at least 3 previous historical hits. Any others (2 previous hits) are only used for confluence.

-Every trendline used uses a point on the last move higher as a reference

-Wait for these to break, and anticipate them being used as an acceleration platform in the not-so-distant future

-Reading individual bar patterns at time of entry is one of the best ways to confirm a trendline that sticks.

-When price enters the median of the previous range, pullbacks tend to get deeper.

So no order flow, no secrets, no magic, no nothing. Just trendlines. When your 8 EMA crumbles to little bits you can thank these trendlines for doing the dirty work. So start drawing them, and observe what's happening along the way. Nothing else can help you out more than your own personal application.

Yes, I know it's a lot for one day, but please take it in, and most importantly, start drawing. Thanks as usual for stopping by and see soon.

-Steve

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All charts courtesy of https://www.tradingview.com/

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Showing 61 comments
  • Sean La
    Reply

    Steve,

    I’m just gonna put it out there. Hope my wife doesn’t know about this site because this might get a little embarrassing…but …what the Hell…I LOVE YOU!!! I know, it’s a little uncomfortable, but I had to get that off my chest. Lets never bring this up again…K.

    But on the real…again thanks for the sharing your knowledge.

    Sean La

    • Steve W.
      Reply

      Thanks Sean, haha – just between you, me, and the thousands of people that read this blog – that will be the inner circle. Something tells me your wife isn’t a reader though, so I think all’s well.

  • Nathan S
    Reply

    I agree with Sean. This is a great article.

  • Vinni
    Reply

    Steve,
    I don’t know why you take the time to share, and post like you do, but your material is incredible. Thanks, you are always at the top of my reading list.

    Vinni

    • Steve W.
      Reply

      Hobby – I really like writing and getting it all out here, no different than any other industry, except in this one everyone wants to make a business of it. Thanks Vinni.

  • Alex Mentes
    Reply

    This is another great article. It’s getting clearer and clearer to me on how to do price action. Thank you very much Steve for sharing you ideas to us for free. May our Divine Providence Bless You!

    • Steve W.
      Reply

      Thank you Alex much appreciated.

  • matt
    Reply

    As they have said above me, another great article Steve. This alone is a strategy one could adopt and master to become a profitable trader. I don’t know how, but I hope you keep coming out with gold like this Steve.

    • Steve W.
      Reply

      Yeah the river has to run dry at some point right? Well we’ll see. Lots still not posted to that’ll be a ways.

  • Pete
    Reply

    Steve, I note the time frames you have used here being the Daily, 60min 15 and 5 min. For intraday trading do you stick with these 4 using the trendlines? I pressume the 5min would be more for candle confirmation as I suspect any obvious trendline would show up on the 15 min anyway? Pressumably also you must account for the touches of the trendline being more of a bounce i.e with some momentum away from the line before returning, rather than a little dribble along it multiple times? Thanks

    • Steve W.
      Reply

      Hi Pete yes. So:
      Daily, sometimes weekly if needed for the broad stroke only. Rarely will you be able to pinpoint anything using them though, and work your way down. People say looking at smaller timeframes is stressful – to me that comes off as a huge red flag for them and their abilities. It isn’t if you understand what you’re doing. The bulk of my work is done on a 15 or sometimes 10, which you can also use for candle patterns. The 5’s use is primarily for pinpointing. But I look at whatever is needed – many important levels are hidden in from larger timeframes, as you can see above. So you need to scoot down and use a smaller one. Just that simple.

  • kate
    Reply

    best thing i’ve ever read.
    wow.
    thank you

    Kate
    x

    • Steve W.
      Reply

      Thanks very much Kate and glad it helped.

  • prunto
    Reply

    you should write a book….would be a best seller definitely……this stuff beats most of trading material that i’ve read and i’ve read A LOT.
    thank you

    • Steve W.
      Reply

      Thanks Prunto – Publishers have a lot of money and don’t need my help, I’m pretty sure :).

  • Nika
    Reply

    Let me just say thank you very, very much. I have only recently come across your website and I must say it is an absolute gem. Especially diagonal trendline aproach has dramatically improved my trading. Thank you again and God bless you.

    • Steve W.
      Reply

      Thanks and yes as I say most of it is right in front everyone’s nose – but they have a very difficult time explaining it – and I was worried about this article actually because there’s so much in one shot. Thank you Nika.

  • Ariel Korber
    Reply

    Thanks Steve, this explains a lot, v useful info. Just one question:
    “So no order flow, no secrets, no magic, no nothing. Just trendlines.” – do you still find Fibs useful?

    • Steve W.
      Reply

      Short answer is yes, with a major caveat: there is simply too much ambiguity surrounding their application. Confluence only these days. Fibs alone and in the standard application, I’m fairly sure will drain your account after a long or short while.

      • David
        Reply

        Can’t agree with you Steve on the fib part, just using fibs on their own can create a huge edge.

        Great articles Steve, may God bless your heart.

        • Steve W.
          Reply

          Thanks David – edge, yes, but I what I meant is more contextual. Circumstance has to be there, which is many times loosely interpreted. Not easy to explain in one sentence but plan on doing more in the future.

  • Anna
    Reply

    Thank you for this excellent, detailed and consummate article. It provides a fresh approach and valuable secrets in trend trading.

    • Steve W.
      Reply

      Thanks Anna no secrets – been there all along :). Thanks.

  • Tom Strom-Wedege
    Reply

    Excellent !

    • Steve W.
      Reply

      Thanks Tom and thanks for stopping by.

  • pippadoc
    Reply

    Something very close to my heart at the mo; many thanks for the great explanation; possibly omitted for clarity – your first chart – http://my.jetscreenshot.com/demo/20130227-03ad-49kb.jpg

    • Steve W.
      Reply

      Yes, omitted for clarity but I was thinking about it. Thanks for sharing PD.

  • Ariel
    Reply

    Another GREAT artcicle ! Thank u veeeery much for saring your knowledge whit us, simple mortals ! lol
    A question: Can this strategy be used for trading a set and forget style?. I’m strugling with finding a good strategy that yields good returns trading part-time. I have a small account and can be profitable scalping support and resistance teached by you but knowledge I have a J.O.B. ! lol

    Thanks again !

    • Steve W.
      Reply

      I really only trade “part-time” too. The rest is spent on digging through research or anything else – as long as you have any time of day with decent liquidity you should be able to adapt with enough knowledge.

  • Gaz
    Reply

    Fantastic.

  • Nicolas
    Reply

    Hello Steve,
    Thank you to take of your time to advise us.

    • Steve W.
      Reply

      Thanks Nicolas – no worries – if it helps, it helps.

  • Kevin
    Reply

    Hey good stuff Steve,

    • Steve W.
      Reply

      Thanks Kevin – much appreciated.

  • thomas
    Reply

    steve, thanks a lot for posting this fantastic article and sharing your knowledge.
    kind regards, ts

  • Qun
    Reply

    Thanks Steve….Really appreciate it!!

  • Jags
    Reply

    Thanks again Steve. Another fantastic chapter in my desktop book from NBT.

  • Daniel
    Reply

    Excellent advice. Helped my trading this week considerably! What hours do you trade? I live in NM MST. Do your hours vary with each day of the week?

    Thanks Steve

    Daniel

    • Steve W.
      Reply

      It varies but the norm now is to start up around 530-6am and just go for New York. Most of the time I’m digging through stuff about an hour before bed, too. I like to keep the afternoons open and flexible for just about anything – this way I only have to spend a few hours each day actually trading.

      • Daniel
        Reply

        Thank you.

        Daniel

      • Paul
        Reply

        Interesting…I thought I read on earlier posts that you traded London. Why the switch? Market related or not?

        Btw…this article was one of the BEST I’ve ever seen on TL’s. Your info is so….how do I say this? NoBrainer!

  • edward teresinski
    Reply

    Hi Steve
    Thanks for sharing this. Would it be possible for you to record short Basic instuctional teaching videos to draw these Trendlines. So your students would know they are doing it right? I use screencastomatic recorder the pro version. Just the basic concepts keep it simple. Thanks so much.

    • Steve W.
      Reply

      Hi Edward, At some point I would really like to get around to more videos – I’m definitely more of a writer but thanks for the encouragement!

      • Paul
        Reply

        I know you enjoy writing…but many people absorb information better visually. I am one of them. Just my vote! Not that I don’t ENJOY your writing though! Great stuff!

  • Jan
    Reply

    Awesome. Thanks a lot!!! I’m just demo trading for the time being. After blowing so much you got to draw a line 🙁

    • Steve W.
      Reply

      Thanks Jan – glad to have you around.

  • Alfredo
    Reply

    Hi Steve

    As always great work, thanks alot. Glad you are still keeping this blog alive. As i say the best place in the web for forex lovers.
    A hug from Portugal

    Alfredo

  • Luis
    Reply

    Hi Steve,

    I have readed tons of forex content on internet in that last years to become a profitable trader and haven’t seen such a great article, thanks for sharing all of these, I’ll be reading all this web content in the following days and looking forward for more; I really appreciate it.

    Luis

  • omran
    Reply

    hi,
    I’m sure you are a very successful trader unlike me
    but I’m pretty sure too that if i draw random lines they will act as good as your lines
    no offense !!

    • Steve W.
      Reply

      None taken. If I was frightened by criticism, I wouldn’t post this much information for all to see. I also realize that many people don’t read these posts, rather skim them, so a lot of information gets lost in the process.

      Like anything else, it is a matter of time and getting used to it. If you go back to the charts and reread the post, you’ll notice that I’m as objective as possible when it comes to these kinds of interpretations. For example: you’re always moving against the direction of the trend, as well as seeking major points of confidence, not simply absolute highs and lows.

      Also, it’s absolutely impossible to hit every single one of these on a consistent basis. There’s no way I would assert this otherwise. The general framework is: different people will become better accustomed to certain environments, and you exploit your ability while in that comfort zone. That’s the goal. So for instance, my own personal comfort zone falls at the peaks of these downfalls. Towards the end, I am always much more resilient to take action. This post really had one purpose and that is to simply outline the nature of these behaviors, that’s all. I’m well aware having dealt with a range of traders over the years that many people aren’t even aware of these commonalities. Highlights come in handy. Trust me 🙂

  • vitrerie
    Reply

    Remarkable issues here. I’m very happy to look your post. Thanks so much and I’m having a look forward to contact you.
    Will you kindly drop me a mail?

  • Haile
    Reply

    Hey Steve,
    Greetings from Addis Ababa ,
    I’ve to apologize first for ‘assuming’ this blog was one of the ‘rest’.It’s not.After an hour, I’ve downloaded Every Single article here for reference. 😀 . This is a great post. What I really like about Trend lines is the flexibility to play around with them,Got to Keep drawing them. This is the only way that makes sense to me and I’m a beginner.Thanks for taking the time to write this in detail and keeping it simple too. well got to read the other posts now ..Cheers

  • Michael
    Reply

    Dear Steve,

    Wouldn’t it be more appropriate to call these “inverted penants” expanding triangles (ET)?
    Perhaps I am missing the point though. I have drawn the expanding triangles in below:

    http://i60.tinypic.com/29zx8hf.png

    We are talking about the same thing right? (ET == inverted penants)

    All the best,
    Michael

    • Steve W.
      Reply

      Hi Michael, Apples to apples so yes, the same thing. Just a term I have always used.

  • dexterous
    Reply

    Can I have an indicator that draws it’s like that?

    • Steve W.
      Reply

      There are, in fact, quite a few indicators that draw trendlines based on the density of consecutive hits. Can become a rabbit hole looking for them, but if you want one I have come across quite a few over the years.

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