Price Action at work: here are some examples

What is Price action Part II

The price action signals that I use, including trend continuation signals, inversion patterns or operational inputs for trading range operations, are not many, my main ones are five:

Pin Bar

Inside Bar

Inside Fake Out Bar

Double minimum higher & Double maximum lower

Indecision Bar

Pin Bar

Forex trading is very fascinating, being a very liquid market it tends to have a certain technicality, that is, it responds well to the "naked" analysis of prices. I have been using Price Action Naked for many years and I can say that the main thing that needs to be done is to reason when doing price analysis and, above all, when we are given clear information: Price Action patterns (our signals / trigger) on certain areas of interest in clear market “environments” (trend-trading range).

The "pin bars" are the most important Price Action signal of all and, if obviously contextualized in the right way, the most profitable.

PinBar

One cannot think of automating a system based on any Price Action signal, this is because it is in the nature of the method: Price Action is not finding a price signal, but operating on that defined price signal in certain market levels in a context of trend or trading range. So, once again, let's not try to automate Price Action, because we would be making a big mistake. The reasoning every time we find a signal is to do Price Action Trading.

The pin bar is a signal formed by a bar with the following characteristics:

His body is usually much smaller than his spike (at least a third)

Must have shown a rejection of a level of support or resistance

The price starts and follows a direction. to then reverse during the market session.

Usually, it is clear and simple to see, since it has a large spike (shadow) It often forms swing highs or low swings on the market.Opening and closing are usually very close It must have a volatility greater than or equal to the previous movementIt is formed after a movement opposite to what it indicates to usThe pin bars can be used in trend and trading range markets, but also as a signal against the underlying trend, therefore as an inversion.

Example of trending pin bar

In the example above, we find a pin bar with a daily and weekly trend. Before the pin bar, we have a reverse pull back movement with the pin bar forming perfectly by testing the 1.1950 area marked as important on the weekly bar chart. Very simple as an entry strategy you can try to go on sale of EUR / USD (through a sell stop pending order) a few pips below the pin bar minimum with a stop loss programmed on the platform of a few pips above its maximum, thus having a maximum loss well calculated from the beginning. The target of the position can be the next level of support, always taking the levels we marked in the analysis carried out over the weekend (in this case the key area 1.1600). Entry then at 1.1920 - stop loss at 1.2005 and target at 1.1610. In this way I will have a position of 85 pips of maximum loss and 310 pips of possible target of profit taking.

As you can see from the negotiation ticket, I will program my trade in this way to also understand what I am doing in economic terms:

10,000 euros of capital for trading

Risk € 200 (85 pips)

Target just over 800 euros (310 pips)

Example of pin bar against trend:

Another example always on the EUR / USD pair.

The pin bars against the trend must form on very important levels marked on weekly or even monthly charts and, in general, it is preferable to use my improvement entry: I place a pending sell limit order on half the total range of the pin bar with one protection stop loss always a few pips above the setup bar (pin bar). The target should always be sought just above the main support level, marked on the weekly chart. Another beautiful operation with an optimal cost-revenue ratio, as can be seen in the image.

Example of pin bar in trading range:

Even for the pin bars in the trading range, my entry is often sought after around 50% of the pin bar, this is to improve the ratio between the cost of the operation and possible profit. The position in this case is a purchase of euros and a sale of the Japanese yen (cross EUR / JPY). The stop loss must always be inserted just below the minimum of the bar and the target sought around the next level which, in this case, is the high part (resistance) of the trading range. The ways in which I best paint the pin bars are therefore these:

Trend pin bar with entry below its minimum (per sell position) above its maximum (per buy position).

Pin bar against the trend and in the trading range with entry sought after around 50% of its range.

Inside Bar

One of the easiest Price Action patterns to see on the chart are the so-called "inside bars".

In Price Action, the inside bars, also called "inside day", are those candles that are totally enveloped by the previous maximum and minimum: therefore they form a compression of volatility in prices that can lead to directionality in the following groups.

Often, an inside bar in the daily timeframe results in a triagolo in the smaller intraday timeframes.

Some examples of inside bars:

The inside days therefore indicate a sort of indecision or price stall before a continuation of trend or inversion. Often, they are created on important levels at the end of a directional movement, but other times they are created just before a strong break out which confirms the strong directionality of the prices of a certain market.

In general, it would be more correct to trade them at the break out of the maximum / minimum of the bar preceding the inside, or the bar called outside or mother bar, this is because it would confirm the violation of the compression that it kept inside for one or more candles the market.

I only use it on clear price levels, both in trend and against trend, but it becomes much more interesting when we find ourselves in front of an inside bar created on weekly bar timeframes, since this can allow us to wait for the break out and follow, both on the weekly timeframe and on the daily chart, the evolution of the market by optimizing entry, stop loss and profit target.

Here are some examples:

The AUD / USD pair on weekly timeframe is showing us that a directional movement can occur at the break out of the mother bar or outside bar before the inside bar), so I can opt to enter directly on the weekly timeframe or wait for confere of signals from the same direction on daily chart in the following weeks.

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Please note: if we operate on the daily chart, we should not operate on the Sunday evening bar, because that, for me, is not an inside bar, but must be inserted in the Monday session.

I therefore prefer to trade or get information from inside on weekly bar charts, very useful information for the following trading days.

I tend to trade in trend when the price is in trend, using the EMA 21 in a very simple way, then looking for the minimum break, if we are in a market that shares below the average, and looking for the breakout instead at most, if the market is above the EMA.

Example of EUR / USD on weekly chart:

The last inside is always to be traded only if the mother bar minimum breakout occurs and always only short given the trend.

I will look for the trade against trend only when I have a very extensive price and far from EMA 21 and that it touches an important static (horizontal) key level.

Here, an example always on the EUR / USD exchange rate which in the key area 1.2500 had shown a basis of consolidation with an inside: in this case I will go to look for the break out of the maximum of the mother bar for a bullish operation.

Inside Fake Out Bar

Another very useful Price Action signal for trading is my "Inside Fake Out". This price signal was born from experience on the markets over the years: inspired by the Hikkake pattern, it uses the inside bar as a primary source of information for our trading.

The characteristics of the inside fake out are these:

Outside bar followed by inside bar and bar that violates the maximum (for the short) or the minimum (for the long) of the outside bar

The bar that violates the maximum / minimum of the outside must have the closure that falls within the maximum / minimum of the outside

The pattern can be used both in the direction of the trend and against the trend on important levels

As you can see from the second image for both short and long positions, the inside fake out can also be of two candles or: breaking of the maximum / minimum of the bar outside and subsequently the following day there is the return of the closing prices within the outside bar range.

The method of entry is usually done through pending orders:

For the purchase, there is a tendency to place a buy stop order above the maximum of the fake out bar

For sale, a sell stop order is placed below the minimum of the fake out bar

Below are some practical examples of how to use this excellent Price Action trading signal.

The proposed trade is on the Gold market. As you notice our signal, the inside fake out is formed against the trend of the daily chart but on an important level previously marked on a weekly chart.

As the rule says, the entry must be bought above the maximum of the bar that violates the minimum of the outside and therefore confirms our signal making it become an inside fake out.

Being against trend, it is always very delicate and profit must be sought on the previous level, which in this case corresponds with the areas where EMA 21 passes.

The next one, on the other hand, is a clear example of a beautiful inside fake out in trend on swing level in the EUR / USD exchange rate.

As per the pattern, you can opt to place a buy stop pending order a few pips above the "fake out" coffins, that is, the one that has the lowest minimum of the mother bar minimum. The stop loss should always be placed a few pips below its minimum.

Double Maximum Lower & Double Minimum Higher

signals that I consider better are the "double maximum lower low & double minimum higher high".

Even today I use it and I consider it a perfect trigger for operations in line with the trend, but also to look for reversals of the current trend.

The main characteristics of the double minimum higher high signal are these:

The second candle is the one that indicates the direction of the pattern (in this case, long)

The second candle is always an outside of the previous one, i.e. it incorporates with its maximum and minimum totally the previous maximum and minimum

The second candle has the closing greater than the maximum of the previous candle

The main characteristics of the double maximum lower low signal are these:

The second candle is the one that indicates the direction of the pattern (in this case, short)

The second candle is always an outside of the previous one or it incorporates with its maximum and minimum totally the previous maximum and minimum

The second candle has the closing less than the minimum of the previous candle

The entry on this signal is almost always done through limit and non stop orders.

As you can see in the figure, I have shown an example that shows well how to place the order once we create our double maximum or double minimum signal. In practice, a sell limit / buy limit pendant is created in the 50% area of the last signal bar (the outside bar).

Now we could see clear example situations in the forex market. Here, we are on the AUD / USD pair in the daily chart, which shows us a double higher minimum on the support level also marked on the weekly timeframe.

To create our order, we can use the Fibonacci extensions on the IG platform. In this way, it will show us perfectly 50% of the setup candle range. Here, I will opt to place a limit buy order with stop loss a few pips below the low of the outiside bar.

Here we are on the GBP / USD pair in the daily chart which shows us another double minimum higher which, traded at 50% of the signal, would have created a trade with a ratio between the cost of the operation (stop loss) and possible very important profit since, as you can see, our signal triggered a GBP rally against JPY strong and almost without pauses.

Here, however, we are on the USD / CAD pair in the weekly chart, which shows us a double lower maximum traded at 50%. Then set a sell limit with stop above the maximum of the pattern. Given the type of advantageous entry, the interesting thing is that you can often have trades with a risk / profit ratio clearly in favor of the latter. Often, looking for a 1: 2 or 1: 3 risk ratio: return is difficult in trading operations, with this signal it is clearly easier to obtain these ratios between stop and target.

Indecision Bar

As you can see, the characteristics of the indecision bar are:

Opening and closing on the same level or almost

Similar shadows in terms of pips

Low volatility

This signal of Price Action is therefore indicating a sort of calm, of indecision before a future directional movement. It differs completely from the classic bullish or bearish bar with a lot of body and almost no shadow that has provided information such as the great directionality of a trading day. Based on the volatility of the day which narrowed and did not give a clear purchase or sale approach, it is clear that, compared to a very directional day, the next day or the following days, it could bring more direction to prices. Here its strength.

The type of pending order that must be used to operate with this pattern is the buy stop / sell stop order: a "break out" buy stop order will then be placed above the maximum of the bar or sell stop below the minimum of the bar. The stop loss always set on the opposite side keeping some pips as tolerance.

Let's see some examples on the charts.

EUR / USD forex exchange, indecision bar on horizontal key level of support, exponential moving average of 21 periods tested, non-violent pull back before the setup bar. Excellent signal, therefore, to be able to trade with a buy stop order a few pips above the maximum of the indecision bar and stops below its minimum.

Another example, AUD / USD forex exchange rate, always indecision bar in the daily trend, in this case, after a pause for reflection given by the previous inside bars. If you notice just before the movement in the short direction, the market had drawn a bar of indecision. You could therefore opt to place a sell stop order below the minimum of the bar with the stop loss placed a few pips above its maximum.

Another example, GBP / USD forex exchange, this time, against the underlying trend. We are on the weekly chart, key level, indecision bar with a high higher than the previous highs (false break), distance from the EMA 21. There is therefore an excellent opportunity to operate with a sell stop below the bar minimum and stop above its highs or, being a weekly, in the following weeks, through the daily chart, look for a Price Action signal in the short direction.

The advantages of the price action strategy and naked trading

My experience tells me that trading must be kept simple, complicating things only worsens our emotional environment, our approach to trading and the result will be that we will find ourselves having probably not positive results.

The market is very rich in financial instruments and trading strategies and often we are led to try, especially at the beginning, to find the classic trading method that never fails. Instead we should focus on "trading well" respecting our trading plan because it will be respect for our rules and our analyzes that will bring the profitable and constant results that we want over time.

Instead I often find myself seeing new traders who have charts full of technical analysis indicators and oscillators, 10 different sites concerning different online trading open on their computer, trying to analyze thousands of different variables during the day through the study of a lot of different financial instruments and which, therefore, know little about each other.

So do not waste your time looking for the infallible system, the holy grail, the robot or infallible expert advisor, you must not exchange trading for an ATM. The only thing you need is a computer, an internet connection, a serious and reliable broker and nothing but yourself, your eyes, your plan and analyze the market by always thinking in front of all possible opportunities offered by financial markets and forex trading.

Clean chart VS Dirty chart

One of the best features of price trading naked trading is its graphic "cleaning". Nothing should interfere in reading the real RE of the market and that offers us a lot of information or the price. Below we see an image of a price action trader chart.

The advice I would give to every novice trader is to start by trying to learn how to read the clear price map in the charts, learn to listen to what the market tells us by interpreting his message. When it comes to technical analysis, I often notice confusing graphs with a thousand indicators and oscillators and, sometimes, it is even difficult to understand how much the market we want to analyze is quoting.

The things you need are:

A chart of a time period of at least six months

Draw the most felt key levels

Mark any obvious price action naked trading signals.

High time frames: Daily & Weekly

The price action is based on the study of price dynamics only on high operating time frames, this improves the operation because there is a more precise selection without "dirt" and "noise" given by the intraday and which, even at a purely emotional level , improves your results.

Trading in this way therefore also helps to maintain the right mental state for a serene and effective operation, helping to achieve that discipline that is often poorly developed by losing or novice traders.

Finally, therefore, we can say that trading the price action has many advantages that range from the more strictly operational aspects up to the more mental and behavioral aspects of the trader.