How To Trade

How to Draw Pitchforks (Median Lines)

AB=CD Pattern

A look at how to trade the AB=CD Pattern. There are a few key steps:

1. Identify the start of the trend (point A to point B)
2. Once the market begins to retrace at Point B, use Fibonacci lines to measure a retracement
3. Point C is the Fibonacci line where the retracement ends
4. Point D is the next top in the trend. The distance from Point A to Point B is equal to Point C to Point D.

Forex Price Action Trading: Strategies and Examples

Basic Set-ups and Stop Placement

Most price action traders place buy or sell stop orders with a pre-determined stop loss level, and a take profit or target level. The buy or sell stop sets the level that price much reach for the order to be filled; the stop loss level sets the margin of loss that a trader will accept before closing the position; the take profit level sets the level at which to automatically close a successful position.

Basically, you determine risk based on where you are placing your stop, and then determine your target with regard to this risk level; commonly, traders will aim for at least a 1:3 risk to reward ratio, although scalpers and those who trade on shorter time frames often have to accept smaller ratios.

The buy or sell stop, or entry level, is typically set at a significant support or resistance level so that it will only be filled when price has broken definitively in the desired direction; by setting strategic entry levels in their orders, traders can ensure that they enter trades with the momentum of the market.

Perhaps the most basic set-up is the pinbar, which, if you remember has an open and close within the previous bar, and a wick at least 3 times the length of the candle body, protruding beyond the levels of prior bars.

The long wick and short body implies that traders have made a strong attempt to push price in one direction, but price has returned to earlier levels, often indicating the possibility of a reversal in trend direction.

The basic way to trade a pinbar is to place the stop loss level at the extreme of the wick, and to place your entry level above the body in a bullish scenario, and below the body in a bearish scenario. the target is set relative to the risk level represented by the stop loss, often at a resistance level in a bullish scenario, or at a support level in a bearish scenario.

Another basic strategy is the inside bar, a bar or series of bars contained by the preceding bar; since the shrinking candle size implies consolidation, it can mean that a big move is on the way, either a strong continuation of the current trend, or a reversal. Because the price direction is uncertain, traders often place a orders on both sides of the inside bar, so that a downward movement will trigger a sell, and an upward movement will trigger a buy. A liberal entry point would be set just beyond the high or low of the inside bar; a more conservative entry point would be at the open or close of the preceding mother bar.

Inside bars are more effective to trade on larger time frame charts because they are so common on faster chart.

Two Examples

To conclude, we have two actual filled orders from trader Simit Patel. The first is a pin-bar style order placed on the Canadian Dollar/Swiss Franc pair on January 6th to sell at .85341, the black line, with a stop loss at .85995, both of which are historical resistance levels. the take profit level is set at .823333.

We can see that later on in the same day of simit's order, price reached the sell stop level at .85341, before dropping almost exactly to simit's target level of 8.23333

This second trade as in inside-bar style order place on the euro/british pound pair on December 12th. Simit sets his sell stop order at the black line, .84026, and his stop loss at the red line, about .84750, and his target the green line down at .80978. we can see that after his order was place, price did reach his sell stop order, just before a major reversal in price, allowing Simit to take profit when price begins to look bullish again, around .82800

Forex Price Action Trading: Terms and Tips

Basic Terms for Price Behavior:

Trend: 2 successively higher tops and bottoms (uptrend) / 2 successively lower tops and bottoms (downtrend)
Other names for a positive trend: run up/bull run/rally
Other names for a negative trend: run down/bear run/decline

Trading range: the market moves up and down within a consistent range without establishing a definitive trend in one direction

Consolidation: the range of price's movement constricts as the market becomes directionless

Reversal: the market moves in the opposite direction from the previous trend, implying the end of that trend

Retrace: the market moves some amount in the opposite direction from the previous trend before the trend is eventually reinstated

2 Attempts Rule: the idea that if the market attempts to do something twice and fails, the opposite will happen

Support and Resistance

In a trading range, or even within a trend, price action frequently seems influenced by or adherent to levels that have previously been significant turning points in its history; on the price action trader's charts, these levels are marked as lines offering potential support and resistance to future price action; lines drawn above the current price constitute resistance, while lines drawn below it are support. If either of these levels are broken, the function of the line is reversed, so, for example, if price breaks through a resistance line, that line can now be understood as a support line to future price action.

Support and resistance lines are typically horizontal, but when they are diagonal along a trend they are known as trend lines.

As an example (see video), I marked some significant support and resistance levels on this chart of the euro US dollar pair. This lowest level at about 1.34 is established as the point where the initial trend in mid September is arrested and turns briefly bearish. After the first bullish bear tops out at this level, the two bearish bars thereafter max out as though they are experiencing resistance from the same level before a break-through on September 16th. At this point, the resistance becomes support, and we can see that two months later, in mid November, this support level is tested and holds, as price rises back up for the rest of the month. If you recall the two-attempt rule that I explained, we can see that in action with this highest resistance level at about 1.383. We would draw this line in because it represents the height of the bullish trend extending from the beginning of this chart to late October. We can see that price returns close to this level in the next trend peak in mid December, and then finally tests it with the wick of this candle at the end of the month. Since the level is reached, but price fails to definitively break through, we can expect a reversal based on the two-attempt rule, and that's exactly what we've seen since the end of December.

So, the basic idea behind using support and resistance effectively in a trading range is to buy at the support level and sell at resistance in an uptrend, or to sell at resistance and buy at support in a downtrend; so, we're not necessarily hoping for a break-out through the established levels, because a break-out means that the market isn't behaving predictably enough to allow for safe bets on its future performance. Instead, the most conservative or reliable trades are those that occur as the market fluctuates between identifiable support and resistance levels, allowing you, in an uptrend, to buy when a retracement of bearish leg has brought prices down to a support level, and then sell when price returns to the resistance level, or, in a downtrend, to sell when price is maxed out at a reliable resistance level. The reason we are looking to buy in an uptrend and sell in a downtrend is that price action trading is all about playing the odds, so trading with the trend rather than against it is usually a better idea since a trend is statistically more likely to continue than to reverse

So, before we move on to some basic set-ups and stop placement, here are a few more important terms now that we have a sense of support and resistance.

Break-out: the market breaks out of a trading range or a resistance level
Clear-out: the market's break-out in one direction is quickly followed by its movement in the opposite direction
Throwback: retracement after a break above
Pullback: retracement after a break below

Forex Price Action Trading: Strategies and Examples

Basic Set-ups and Stop Placement

Most price action traders place buy or sell stop orders with a pre-determined stop loss level, and a take profit or target level. The buy or sell stop sets the level that price much reach for the order to be filled; the stop loss level sets the margin of loss that a trader will accept before closing the position; the take profit level sets the level at which to automatically close a successful position.

Basically, you determine risk based on where you are placing your stop, and then determine your target with regard to this risk level; commonly, traders will aim for at least a 1:3 risk to reward ratio, although scalpers and those who trade on shorter time frames often have to accept smaller ratios.

The buy or sell stop, or entry level, is typically set at a significant support or resistance level so that it will only be filled when price has broken definitively in the desired direction; by setting strategic entry levels in their orders, traders can ensure that they enter trades with the momentum of the market.

Perhaps the most basic set-up is the pinbar, which, if you remember has an open and close within the previous bar, and a wick at least 3 times the length of the candle body, protruding beyond the levels of prior bars.

The long wick and short body implies that traders have made a strong attempt to push price in one direction, but price has returned to earlier levels, often indicating the possibility of a reversal in trend direction.

The basic way to trade a pinbar is to place the stop loss level at the extreme of the wick, and to place your entry level above the body in a bullish scenario, and below the body in a bearish scenario. the target is set relative to the risk level represented by the stop loss, often at a resistance level in a bullish scenario, or at a support level in a bearish scenario.

Another basic strategy is the inside bar, a bar or series of bars contained by the preceding bar; since the shrinking candle size implies consolidation, it can mean that a big move is on the way, either a strong continuation of the current trend, or a reversal. Because the price direction is uncertain, traders often place a orders on both sides of the inside bar, so that a downward movement will trigger a sell, and an upward movement will trigger a buy. A liberal entry point would be set just beyond the high or low of the inside bar; a more conservative entry point would be at the open or close of the preceding mother bar.

Inside bars are more effective to trade on larger time frame charts because they are so common on faster chart.

Two Examples

To conclude, we have two actual filled orders from trader Simit Patel. The first is a pin-bar style order placed on the Canadian Dollar/Swiss Franc pair on January 6th to sell at .85341, the black line, with a stop loss at .85995, both of which are historical resistance levels. the take profit level is set at .823333.

we can see that later on in the same day of simit's order, price reached the sell stop level at .85341, before dropping almost exactly to simit's target level of 8.23333

This second trade as in inside-bar style order place on the euro/british pound pair on December 12th. Simit sets his sell stop order at the black line, .84026, and his stop loss at the red line, about .84750, and his target the green line down at .80978. we can see that after his order was place, price did reach his sell stop order, just before a major reversal in price, allowing Simit to take profit when price begins to look bullish again, around .82800

Candlestick Indicators in Price Action Trading

The basics of reading candles and charts:

Since candlestick and bar charts are the fundamental interface of the price action trader, the most basic unit is the candle or bar itself. Candles sum up the price action over a set period of time: on a 5 minute chart, each candle represents 5 minutes of price behavior, whereas on a daily chart, only one candle is produced per day. The body of the candle constitutes the range between the open price and close price, whereas the wicks or shadows of the candle indicate the high and low over that period of trading. Various color schemes are used to determine whether the price movement represented by the candle is bullish (increasing in price) or bearish (decreasing in price); bullish candles are usually white, blue, or green, whereas bearish candles are usually black or red.

Longer candle bodies demonstrate strong momentum and decisive market behavior in the movement from open to close; longer shadows, however, demonstrate increased volatility, since some prices were reached during the time period but ultimately excluded from the range between open and close.

Smaller candles can indicate the market's indecision, disinterest, or a balance between bullish and bearish forces

Similarly, a candle that is almost all wick implies that, regardless of the range of prices occurring in the time period, the open and close were extremely close; these candles are referred to by the Japanese term, doji

A doji or small candle with a very long wick in one direction is referred to as a pin bar, which is often interpreted as a sign of potential trend reversal

By contrast, a marabuzo candle has a large body, and almost no wick, implying that price action has been more definitive

There are two important, rudimentary patterns that play out over at least 2 candlesticks:

An outside bar is a bar with a higher high and a lower low than the previous candlestick, often with a body that also encompasses the price range of the previous bar's body; an alternative variation is the engulfing bar, which simply has a higher open and a higher close, regardless of the candle's shadows or wicks.

By contrast, an inside bar is a bar, or series of bars, with a high and low encompassed by the preceding candle; in this case, the variation is the harami, a bar or series of bars with an open and close within the range of the bar preceding it

Stochastic Momentum Index Indicator

KEY POINTS REGARDING THE STOCHASTIC MOMENTUM INDEX

• Introduced by William Blau in 1993 as a faster, less erratic version of the traditional stochastic oscillator
• Evaluates the Current Close relative to the midpoint of the Recent High/Low Range instead of simply the High and Low, and graphs this value along with a moving average (Stochastic %D)
• Helps predict turning points and duration of current price move
• Best used alongside a way to predict trendiness of market (like Chande Momentum Oscillator or R-Squared); like other oscillators, the indicator calculates the direction of an emerging trend, but does not generate reliable signals in a trending market

CALCULATING THE STOCHASTIC MOMENTUM INDEX

First select a period N; then, determine the center (C) of the range during this period by adding the highest high and lowest low within the period and dividing the sum by 2
C = (HMAX + LMIN)/2

Now subtract this C from the current close (CC) to get D, the "distance":
D = CC--C

The indicator smooths the distance value twice (DS1 and DS2) with a 3-period EMA:
DS1 = EMA(3)(D)
DS2 = EMA(3)(DS1)

Now smooth the difference between HMAX and LMIN twice (DHL and DHL2), using the earlier EMA, and dividing the second result by 2:
DHL = EMA(3)(HMAX -- LMIN)
DHL2 = EMA(3)(DHL)/2

We can now calculate today's SMI value:
SMI = 100 * (DS2/DHL2)

READING THE STOCHASTIC MOMENTUM INDEX

An extreme position (approaching -100 or +100) implies the likelihood of a reversal
Common trading level: Overbought (bullish) above +40 / Oversold (bearish) below -40

Basic turning point signals:

• Buy when the indicator rises above -40 from below
• Sell when the indicator moves below +40 from above
• Cross-over 1: SMI passes moving average from below = Buy
• Cross-over 2: SMI falls below moving average from above = Sell
• (Cross-overs that occur between -15 and +15 are often unreliable)

Divergences are uncommon, but can be used to check signals or produce strong signals: Buy for bullish divergence, sell for bearish

Thanks for the post. It really helped a lot for me to have an idea in trading business.

How to Unlock Your Full Trading Potential



It is my belief that anyone can learn to trade successfully if they really want it bad enough. However, most people fail at trading simply because their desire to become successful at it is not strong enough to force them into having persistent self-discipline. In other words, they simply cannot muster the will power to consistently behave in a logical manner each day in the market. If you really want something bad enough, you will do whatever it takes to achieve it, which is just as true for trading as it is for everything else in life. Do you ever sit there in front of your charts and think to yourself “If other people can make a living trading the market then I can do it too, but what am I doing wrong?” I’m sure you’ve had that thought before, and it’s a very logical thought to have, and it’s really the first step toward moving in the right direction as a trader. In today’s lesson, I want to give you some insight into how you can unlock your full trading potential, because I’m willing to bet that at this point in time you are not properly utilizing all the mental faculties you possess to pull consistent money out of the market…

Emulate successful traders

The first thing I want you to do in order to begin unlocking your full trading potential, is to have a vision of yourself as a successful trader, because you need to emulate those you most wish to be like. I want you to sit back and think about how you would feel and act if you were already a full-time trader or at the trading level you wish to be at. Close your eyes and really imagine every aspect of your personality and life as a successful trader, make notes of how you feel and what you see in your vision.

Next, I want you to begin to make changes in your life according to the vision of yourself as a successful trader. Did you imagine yourself as more relaxed and confident? Maybe you saw a nice clean and organized trading desk that you trade from? Whatever you saw, start doing those things NOW, because they aren’t going to magically rain down on you from the ‘trading gods’…you have to MAKE your own destiny. That means doing what pro traders do and thinking how they think, even if you aren’t ‘sure’ what that might be, use your vision to guide you and do your best, you at least need to try to make some positive changes in agreement with who you want to be and what you hope to achieve.

Mastery in ANY field is always first accompanied by a complete mental shift into the person you want to be…you have to be that person BEFORE the riches and wealth arrives…I know it can be difficult to ‘fake it ’till you make it’, but fortunately or unfortunately, it is a necessary piece of the puzzle to trading success, and to success in any other field as well.

Stop being afraid of failure



Anyone who has achieved anything significant in their life most likely failed many times on their way to finding success. If you Google any successful person, anyone, you will probably find they had many setbacks and failures before they finally achieved what they set out to achieve. Trading, is perhaps the only profession which involves failure both on the journey to mastery and success, as well as after achieving that mastery and success. You are always going to have to deal with losing trades, and the more you accept this and just think about it as ‘part of the game’, the less it will drag you down and affect you emotionally.

Thus, in trading we literally have a double-dose of failure and losing that we have to deal with. We have to struggle with failure as we learn how to trade and failure after we know how to trade, you have two choices in how you deal with this; face it head-on like a man, or try to avoid it and ignore it. Unfortunately, you cannot avoid losses as you trade, you will always have losing trades mixed in with your winners, if you try to avoid them by moving your stop losses further away or doing other silly things like hedging, you are really only delaying the inevitable…the losses will come, so it’s best to manage and contain them before they kill your trading account.

Thus, to unlock your full trading potential you have to really not be afraid of failing, because ‘failing’ is always going to be a part of trading. Stop thinking of a losing trade as a ‘failure’ and look at it as the price of being a trader…as the cost of trading. Your goal should be to contain your losses, not to cut them out entirely because it’s impossible to do so. If you contain them below a certain dollar amount that you’re comfortable with per trade, and try only to take high-probability price action trade signals, and do this consistently with discipline over a large series of trades, you should come out ahead. The main difference between successful and unsuccessful traders is that the successful ones have developed the mental ability to weather the emotional storm that accompanies both the ups and downs in trading. Whereas these same ups and downs will infect and destroy a weaker trader’s trading mindset, they may temporarily bend the successful trader, but never break him or her.

Learn from failed trades…don’t worry about them or try to ‘make back’ that money. Successful traders learn from failed trades and thus look at them in a positive light rather than a negative one.

Think, plan, make decisions and then take actions, with no guarantees…

In order to truly unlock your full trading potential, you have to do what professional traders do, (duh right?) But seriously, that means you have to think, plan and make decisions without any guarantees as to what is going happen with your trades. It is critical to remember that there are no guarantees with any one trade you take…your trading edge has random distribution of winners and losers.

Many people struggle with consistency and discipline in trading because they simply become too affected by their previous trade(s). They forget that trading is a marathon and not a sprint, and thus they start trading like the hare and less like the tortoise, as I describe in my Tortoise vs. Hare article. The most difficult aspect of successful trading is maintaining the ability to trade in a disciplined manner in the face of constant uncertainty. Most people have a very hard time acting disciplined with anything that has an uncertain outcome, so trading is difficult for most people. There really is no ‘short-cut’ to trading success…you have to stand in the ‘batter’s box’ and swing with confidence at every good pitch (trade setup), regardless of whether you hit a home run or a pop out fly. If you step into that batter’s box with low confidence and fear, you’re probably going to strike out most of the time from swinging at too many bad pitches (bad trade setups) and not swinging hard enough at the good ones.

The courage to begin and endure



The ironic part of trading is that there is no big ‘secret’ to trading success, most traders already know what they should be doing to attain long-term trading success, they just don’t have the motivation to do it consistently for a variety of reasons. If you want to really unlock your full trading potential, you have to persist, persistence over time and in the face of all obstacles you face in your trading, is key. You have to make the decision in advance that you will never give up, that you will persist in a disciplined manner no matter what, because this is what it takes to trade successfully.

One of my all-time favorite authors and motivational speakers, Napoleon Hill, said that self-discipline is the ‘master key to riches’. Self-discipline is the ability to make yourself do what you know you should do when you should do it, whether you feel like it or not; you have to force yourself to do what you know you should do. For many traders, their inability to maintain self-discipline over time, is thee reason why they are not profitable.

When you have persistent self-discipline, it builds your trading confidence and self-esteem, it’s like a positive trading snowball effect. The longer you trade with discipline, the more your positive trading habits will be reinforced, this will increase your confidence and the process will get easier and easier for you, until eventually you don’t have to ‘think’ about being a disciplined trader…you just ARE one…it becomes a part of you. Unfortunately, for most traders, making it to this level is something they never do, because they give in to the self-doubt, fear and temptation to trade in an undisciplined manner.

All Trading skills are learnable

Finally, it’s important to understand that all trading skills are learnable. Some of the mental skills that a successful trader must possess are easier for some people to develop than others, but if you want it bad enough you can develop them. I am not saying that becoming a successful trader is necessarily ‘easy’, but nothing that’s worth while in life is. You should take comfort in the fact that the only real obstacle blocking your path to trading success is YOU. Once you accept this and start doing the things you need to do to overcome it, you will be well on your way to unlocking your full trading potential.

The first big step to unlocking your full trading potential is emulating successful traders and learning the type of trading methods that they use and trying to get a feel for how they think about and trade the market. Price action trading is something that every successful trader understands and uses either as their main strategy or as part of their strategy, it is an essential component to any successful trader’s trading method. If you’re still lost in ‘indicator land’ and dreaming about some “Holy Grail” trading system, you are about as far away from consistently profitable trading as you can be. To truly unlock your full trading potential, you need to come down to reality and learn how professionals trade the market with price action strategies

Forex Trading: The Power of Risk/Reward & The Hedge