What is price action? - Price Action in the trading

Part I

Price Action, a definition that is often confusing and that, in general, can include various operating modes, so let's see what price action means and what studies and observes who uses this approach to trading.

The naked price action is a trading method that studies the price dynamics that are created in certain key market areas through the study of the structure of high time frames with the final confirmation of one of my most important price action signals. The time frame I use is mainly the daily, but there must always be a contextualization of the weekly chart. Anyone who talks about price action strategy on charts below the 4-hour time frame will hardly be operating with the naked price action because the fact of having no other information other than the price is implicit. So the high time frame is convenient in many aspects and in this case because it automatically absorbs many factors such as very short speculations and news / fake news that can make the market move erratically in the very short term. Therefore, by using high time frames, you can rely exclusively on the chart in front of us and its price action, a clear guide for the "naked trader" like me. In fact, the price action that I use is never too tight on time frames precisely because it is important to contextualize the market environment I face, possible trends and key areas of interest to sell or buy. The price action is just that.

It is therefore necessary to operate from 4 hours onwards. Usually I operate on daily (the 4 hours is used only to support the time frame daily) precisely because the operation is in all respects "swing trading" or "reversal trading", and is maintained for a few days to a few weeks at most (short term trading). I Working on a daily / weekly time frame removes the intraday "noises" that can give false signals to the trader, in this way you have a precise vision of the trading day just passed, hence my style also called "End Of Day Trading ". We will have few but visible market entry set ups, nothing more. We will need nothing more than a reliable broker a professional platform and integrated by graphic designers to be able to operate use. "Trade on what I see, not on what I believe." In the market there are situations that happen in a very similar way and very often ... so we focus attention on a good analysis on the weekend and then go to trade during the days of the week on those most interesting tools that we have set precisely by the analysis of the "naked" price. The only tool that has to tell us if, when and where to enter a trade will be our chart!

What are the foundations of the Price Action Trader?

Trading is a wonderful activity in many aspects, one of these is the variety of methods, techniques and settings that can be given in dealing with financial markets in a serious and professional way.

A trader is like a person who must master his weapon, must acquire strong patience, know when not to shoot and remain "emotionally clean" in times of high stress. Mastering the weapon is essential. Creating self-discipline and not being tempted to "over trading" and "over leverage" are peculiarities that must be an integral part of your trading method, the strategies and the business plan to achieve a plan slowly, brick by brick, without the hurry to earn everything immediately. The market was there, there is and will be there tomorrow too. The price action trader who works seriously, in his plan has all the ingredients to minimize the negative characteristics that often become a "bad habit" in many traders, especially novice.

Below is a fundamental point that can help you face the most beautiful business in the world and which is also the basis of my work in the financial markets.

Daily & Weekly Time Frame

My trading plan, as mentioned above, does not allow you to enter into negotiations through price action signals given by time frames different from the daily and weekly. I do not find it profitable to be in front of the monitors 12 hours a day to trade constantly looking for opportunities on charts with low time frames. I don't like betting, I love planning things and making sensible and consistent trading. The higher the reference time frame, the better the photography we have available on the market. Today I prefer to risk 5% of my capital in the trading account in a negotiation that was reported to me by an analysis of the daily chart rather than doing 10 transactions today risking 0.5% of the capital on signals offered by a 5-minute time frame. The commission cost is the same, the possible cost (stop loss) of my operations is the same but various factors change which, operating on daily and weekly, significantly improve the results of the activity, including:

Better technical analysis, the higher the time frame and the greater the accuracy of the market situation I am analyzing.

Money management more thoughtful since my order is placed at times when liquidity is low, after the closing of the day or week

I do not feel the "fear" of placing orders because we arrive at the insertion of the order after a more calm analysis and with bowls still, therefore without the haste that often leads the trader, after entering into position, to think about the reason for which entered the market

Compliance with the plan with more ease which allows greater ability to remain disciplined.

Less concern regarding the operation, the stop losses are wider (in terms of non-euro points risked / invested in an operation) and allow you to maintain correct psychology, a fundamental weapon for trading

In the image below we notice a clear price action naked signal on the most traded forex pair or the EUR / USD and which would have led to excellent profits through the characteristics listed above. A signal only on the daily chart, but an excellent signal.

Price Action Signal

Price Action VS Trading with indicators: what difference is there?

Let's immediately dispel any doubts: there are no so-called "price action indicators" because in this trading method anything you add to the chart is "extra" and you don't need it. The true price action naked trader therefore bases his work on the simplicity of the chart clean, naked, clear that offers a clear view of the market situation.

Let's look at the example below in the image, a classic example of a price action trader's chart, white, clean and clear where the price must be the predominant element, in this way it is easy to understand the structure of the market and find price signals action

Price Action chart

In the example below, however, the classic example of those who trade totally opposite to a price action trader, full of indicators, 5 minutes time frame.

Time Frame

Obviously it is easy to understand how it is not possible for a price action trader to trade as in the example above since it is somewhat difficult to see what the price is saying. Unfortunately, I still see many charts like this and I assure you that I have no idea how it is possible to trade this type.

As you can see, given the indicators in the graph, less space is given to the price and it is not possible to focus totally on it because our attention can also go to something else, that is to the indicators / oscillators. I often hear that it is easier to wait for a "trading signal" given by an indicator. In your opinion, is it really useful? Is it performing? We are talking about an indicator that is formulated based on the parameters of the past price. So what more can you offer us? Nothing, if not more confusion and inability to move in the market with security and focus, fundamental elements for successful trading.

How does the price action work?

One of the fundamental parts with the price action naked is to rely for your analyzes essentially on charts with daily & weekly time frames. The lower the time frame where you will work, the lower the accuracy of your analysis and price signals to operate with my trading strategies. My trading decisions always occur when the American Wall Street stock exchange closes the daily session and are then reconfirmed early in the morning. This means that I will see if there are trading opportunities given by interesting price movements exclusively with the method that I call "end of day". My "end of day" trading becomes a life philosophy. We will not be looking for the opportunity but it will be the opportunity that is shown to us. In the forex market I do not have a real daily closing as it is open 24 hours a day, but we can understand that liquidity drops significantly when the stock market day closes. The minor time frames, below the daily, are less "clean" and do not have a real closure of that market: if you observe a 15 minute candle closure, in reality it is not a real closure because it is not really closing the market. So if I have the daily candle that absorbs me all day from yesterday's American closure to today's American closure, I will have a real and clear figure of what has been the day of trading also in the currency field. I therefore take my daily trading decisions for many reasons and one of the most important is precisely to remove the false intraday signals and give the trader a clear view of the market. In a daily candle there is everything: money that comes from all the day's transactions, news, speeches from some politicians, natural events, etc. this is absorbed into a single candle of a day that shows the truest price action.

In addition, trading the daily can be very effective to avoid the overtrading factor that you well know is one of the big problems of retail traders. Those who trade the daily inevitably make fewer transactions than those who work intraday and this increases the possibility of making profits because there is less needlessly to market, that is less risk and more balanced transactions. Quality comes before quantity. The daily, to look for our graphic setups to do operations on the market while the weekly to understand what kind of trends, key levels and volatility we have, what I call the market structure. Analysis is our constant training to then go and play the game prepared, so my analysis must prepare me to face the possible operations that I will do. So we work on the daily to look for our price action signals but always taking into consideration mainly the wider time frame, the weekly is perfect. Below is an image of a daily WTI oil chart.

While below the char of the same instrument on a 1 minute time frame.

It is easy to notice how in the time frame daily we have a clear view of the market on which we want to operate as well as offering trends of several days, very defined, without too many "dirtyings", which in the time frame above 1 minute obviously is not present . All the movement that can be seen on the intraday time frame shown has a range of about 2 and a half hours with a maximum in the area 6.150 and a minimum at 6.120 or approximately 30 points. The time frame daily shown in the first image instead shows around 4 market months from January to May with a range between maximum and minimum of approximately 1,600 pips. So where can I evaluate interesting operations with important movements that can last several days and have a relationship between the cost of the operation and possible interesting profit? The daily! In addition, trading the daily has the advantage of time. Time we know is important, I consider it our diamond: money comes and goes as time passes inexorably. Trading must be done to improve one's quality of life and not to make it worse.

I realized that, as far as I am concerned, the best trading method is to operate on the basis of a raw, naked graph with a daily / weekly time frame.

What are the operational supports of a price action trader?

To trade with Price Action Naked, we need to take into consideration some things that can support our operations and our analyzes. The tools I use are:

Horizontal support / resistance levels marked on weekly & daily charts

EMA 21

Fibonacci retracement

I do not use in my operation any oscillator or strange indicator, but only what is written above, that's why Price Action "naked".

1. Horizontal support / resistance levels marked on weekly & daily charts

Every weekend, Saturday or Sunday, I spend a couple of hours to create the work plan for the following week. I consider this very important to make a sensible, aware and well-planned trading, which then leads to a fundamental security that helps in trading, given that the emotional part is very important in everything and obviously also in trading.

At the weekend, as my trading method says, I analyze my main operational watchlist which forex includes the 15 most liquid and traded currency pairs, the 5 indices that I consider most important as well as gold and oil, all markets that have little spreads and lots of liquidity.

Here, the image where you notice that I mark the clearest and most evident static levels in the weekly chart which are then shown to me on the daily chart.

2. EMA 21

The exponential moving average of 21 periods is that indicator that I have been using for over 10 years and which is often showing me a confirmation of my idea on the market. It tends to be a thermometer that confirms a trend or not. Here I always check how prices are positioned with respect to EMA 21: if the market is quoting above or below it and the distance from the current price to the average. As you can see from the graph below, the USD / JPY exchange rate has returned below its EMA 21 in the last few days. This will entail, for my part, a shorter than long vision and, therefore, the search for sales signals if I want work in the short term trend.

If the price, however, were to move away clearly and with a strong hyperextension from EMA 21, then it would form what I call "light". Therefore, if I find "light", I would be very careful in looking for a continuation of the trend and would opt to look for signs of inversion (always for trading and only if we are on key levels marked on the weekly chart) or retracement closer to the ema for a continuation of trend.

Below, the Gold daily chart.

4. Retracement of Fibonacci

An interesting tool that provides us with IG's trading platform are Fibonacci retracements. These are used in some strategies to enter the trade on the price signals that I use, but also to calculate the percentage of price retracement after strong directional movements.

As noted in the example above of the USD / JPY exchange rate, the price stopped on the 50% retracement of the previous bullish movement, forming a signal that I use to trade, therefore, giving further confirmation of the possible positioning.

As you can see from the chart above, I will try to follow the market by going to buy (in the case of the long example) only the Price Action signals that form on the high swings close to EMA 21 after a movement contrary to the trend and possibly on levels of previous support / resistance.

In this way it can be seen how on price signals on the daily chart with stop losses ranging from 40 to 130 pips at most on the major forex pairs you can, however, obtain profits of 2 or 3 times our risk: this is a point essential to be profitable over time and which we will discuss in future articles.

In the chart below, we find a Price Action signal on the USD / JPY daily chart which has a stop loss of about 50 pips posted above the signal highs. The signal indicates a sale of American dollars and the purchase of Japanese yen. The target of the operation could be entered on the next key level or following the trend by moving the stop loss above the maximums of each day only after its closure.

In the operation, it was sold in the 109.45 area with a stop in the 109.95 area. Without following the trade during the day, an interesting risk / return ratio of just over 1: 2 could be obtained with profit taking on the main key level, all in one day.

If we give an example of what our stop loss was and our profit in euro terms we would have had:

Trading account 10,000 euros

Risk for the operation 2% or 200 euros (stop loss - maximum loss) with 50 pips

Target on the level of about 430 euros.

Range Market

The structure of the market, however, sometimes invites us to do "range" trading, due precisely to the lateral environment that can occur in the market.

In theory, the trading range is a "box" or "box", in which prices are enclosed with a high band that acts as resistance and a low band that acts as support.

As can be seen in the image above, the price is inside a box and tends to bounce just when it arrives in the lower and upper part.

Personally, this type of configuration I use it trying to find one of my Price Action signals inside the side box, but only in one of the two extremes: buy if I have my signal in the lower part (support) and sell if I have the my signal at the top (resistance).

As can be seen from the above EUR / JPY cross chart, we are in a trading range structure.

The price is in a box between 134.00 and 131.80, so it can give me trading opportunities where I marked the highlighted rectangle, i.e. in the lower or upper part of the trading range.

By rules of my trading plan, I never try to enter the market within the trading range, because it can be dangerous: you must try to enter only at the two extremes or, if the price should come out at the close of the candle above or below the box, I could look for a signal for the continuation of the trend in favor of the break with the price that pulls back right on the previous support / resistance level.

To mark the two key areas of the box, we generally have to think more about the price closings than the highs or lows, paying particular attention to the round numbers (figures 00 or 0.50) near these levels.