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.
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