In Price Action Trading Strategy

Office was quiet as a mouse today so carpe diem: made a video, answering a question that I have been getting from my early days of writing this blog. Key points:

  • Confluence rules above all. Confluence in identifying the level and especially, confluence in execution.
  • Wait for a natural movement in price. We want to see price completing a reasonable cycle prior to exiting a position or putting on new exposure.
  • Use the inside of the range, not ultimate highs or lows as taught by conventional wisdom.
  • Identification is relatively simple. Just seek multiple hits over and over again.
  • These levels are simply transition points for order flow and rarely go away over time.
  • The more the line is used the more it's “fade” value deteriorates.

Topics used: Basic support and resistance, measured moves on trendline breaks, triple taps / 5 point price structures (ranges)

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Showing 12 comments
  • ztopsmiles
    Reply

    I respect your perspective. This is an extremely informative site. But I believe to fade or not to fade has little to do with the area but more so the type of trend action approaching the area. Or the strength of the buyers and sellers at the area being approached. ‘

    Weak price will always bounce into a strong area. But strong price into a strong area may still breakout.
    What is driving price is just as important as the area itself. A strong area may become weak based on news.

    That’s the essence of price action. Strong buyers against strong sellers leads to consolidation. Buyers can breakout but only with difficulty. Strong buyers against weak sellers leads to breakout. Weak buyers against weak sellers could bounce, consolidate, or just hang around. But don’t expect it to go to far.

    The content of the trend and trending action helps determine whether price will bounce or not.
    One can predict price movements based on price action alone. The content of the trend many times
    tells you whether price can bounce or not. Never and I mean never trade against what I call ultimate trend price action.
    You will lose. Stacking offers the same results. The best counter trend trades are when the trend content shows weakness.

    This type of trading requires understanding how price trends. Strength and weakness.

    • Steve W.
      Reply

      And I definitely agree with you, though not explicitly stated. The movement leading into the level, as well as the price structure/context, plays into it as well. This was indeed just a quick overview of one topic yet there are a good fistful of things I take into account without even consciously thinking about at this point. And this of course goes without even mentioning anything in regards to the macro environments. What can be great reversal structures turn into nothing more than short pauses before price carries along its path, or what would seem like a breakout is nothing more than a carry into a major reversal zone, etc. Thanks ztop for the comment; great summary.

      • ztopsmiles
        Reply

        Exactly! What price is doing right now or a a few minutes before determines where price is going next.
        The questions I feel that are most important are “CAN THIS TREND CONTINUE”? OR “IS THIS STRONG OR WEAK TRENDING PRICE ACTION”? OR “IS THIS PRICE ACTION BLOCKING THE TREND”?
        I mark key rejection areas but to fade– it sure is easier if you have key price behavior clues that tell you “you better not counter trend trade me here”! or “YES! i’M READY TO BE COUNTER TREND TRADED!”

        Knowing where buyers and sellers are and seeing their strength and weakness in real time isn’t easy but it takes much of the guesswork out of trading. I don’t hear much on this subject but I wouldn’t trade any other way.

        I believe that one has to predict price behavior not guess. Knowing exactly how price behaves is the key.
        How it trends! The content of the trend! How it retraces! How price bounces! What defines strength and weakness! How it turns! How it stops a trend! All these behaviors help one to predict price.

        I don’t know anyone that teaches this but it is necessary to pinpoint entries and exits so you can use small stops.
        I’ve almost mastered it. It’s wasn’t easy. When you trade this way, you can use key rejection areas but you can also see behaviors that indicate weakness or strength and trade off the behavior alone

        What a great site you have. I love your articles on measured moves.
        Your trend line information is great.
        I just wanted to add some factors crucial to trading that few mention or teach.

        Thanks again for your good work.

        • dean
          Reply

          ztopsmiles,
          can you write an article about this skill that you are talking about? it seems it would take a long time for someone to learn the intuition that you have now about strengths and weaknesses of buyers/sellers.

          • ztopsmiles

            Dean,

            Sorry but it would take more than an article to explain it.
            But let me offer an outline of how you can learn it yourself

            Seeing strength and weakness on candle charts

            1. think is terns of buyers and sellers
            2. define them in terms of strength and weakness
            3. look for consistent and reliable behaviors. Why?
            You need behaviors that can be trusted. If they are reliable and
            consistent– YOU WILL KNOW WHAT THE RESULT WILL BE.
            Once you understand these behaviors, you’ll be able to predict price.
            The rest is just believing in what you know.
            4. Use whatever time frames that help you see strength and weakness
            more clearly.
            A five minute chart shows you the content of large time frame trends
            and when those trends weaken.
            5. I believe price is always trying to trend but at different times
            buyers block seller’s trends and sellers block buyer’s trend.
            Why? not as important as how.
            6. So define trends by content. Obviously a strong trend doesn’t bounce
            as much as a weak trend. Strong trends usually have more movement
            and momentum. Weak trends can set you up for a stronger trend.
            Weak trends end sooner than stronger ones thus gives you multiple
            trading opportunities.
            7. Don’t concentrate on trading but understanding price. Once you
            understand price you can create different ways of taking advantage of
            what you know.

            Price when you first start looking at it is chaotic but the more you watch it
            the more predictable it becomes. Well, that’s if you define its behaviors
            and learn how price moves.

            Most of my trades aren’t off of support and resistance but strength and weakness. If price is weak, where can it go? If its strong, do you really want to trade against it?

            Knowing when price is weak also allows for small stops.

            If price doesn’t do what you know it should do, you just get out.
            It’s that simple unless you’re as bullheaded as myself and hate to lose.
            LOL That’s the real mental issue in trading. Well for me anyway.

            Face it! What traders try to do is guess where price is going. They do it different ways. Many say that you can be profitable with a low win rate.
            It’s true you can but what does that tell you about the trader?

            When you have a guess win rate of 40% how much do you really understand about price? Thus you have a large degree of mental uncertainty. Trading with so much uncertainty is painful. Trading with clarity takes the mental pain out of trading.

            Learn consistent and reliable behaviors and you can increase your win rate substantially without all the mental ups and downs.
            Know price so well, YOU KNOW EXACTLY WHAT IT SHOULD DO.
            If it doesn’t act the way you know it should. GET OUT and find a trade that will.

            Is this easy? No. Is it doable? YES. Is trading easy? No. But it’s much easier when you understand exactly what price is doing and how it does it.

            Hope this helps.

            Rick

  • Zaf
    Reply

    Awesome as usual Steve.
    But next time could you use a cursor or pointer which is more visible?
    When you reference area on the chart it is hard to tell where you are looking.

    Thanks

    Zaf

    • Steve W.
      Reply

      Thanks Zaf – yeah I will look for it next time. I thought the same.

  • Mark
    Reply

    Sometimes clips like these make it easier to connect the dots between all the techniques you’ve written by now.

    I find this also applies when you post a complete trade at times (from target projection to entry, sensible SL placement and hence giving the trade a good RRR) which often clears things up which I wouldn’t have recognized by only reading the articles.

    Anyway…thanks again for your work. Very much appreciated.

    • Steve W.
      Reply

      You’re welcome Mark and thanks very much. It’s definitely appreciated.

  • Mark
    Reply

    Just rewatching the video and got a question. Isn’t it conflicting that on one side we look for those trendlines with the most hits but at the end you say the more hits a trendline gets the weaker it becomes? Thanks.

    • Steve W.
      Reply

      Hi Mark,
      I can’t argue with this, and you point out why I try to consciously to stay away from making general comments like this. It depends on circumstance of timing, and when the level is going to get hit. Yes, levels that have not been seen in a very long time have a high probability to hold when revisited in the future. But when that future comes and it gets used over and over again, it becomes weak.

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