Price action is among the most popular trading concepts. A trader who knows how to use price action the right way can often improve his performance and his way of looking at charts significantly. However, there are still a lot of misunderstandings and half-truths circulating that confuse traders and set them up for failure. In this article, we explore the 8 most important price action secrets and share the best price action tips.
#1 Support and resistance zones are better than levels
Support and resistance is probably the most popular price action concept, but only very few traders can actually make money with it. The reason is often very simple, although it’s not as obvious at first glance.
Most traders just use single, horizontal levels when it comes to trading support and resistance which look great in hindsight but fail during live trading. The reason is that singles lines are no effective way of looking at price movements. Creating support and resistance zones is much more effective when it comes to understanding price.
The screenshot below shows that the trader who just uses a single line either misses trading opportunities when the price does not reach his lines. Or he gets thrown out during volatility spikes; the trader who uses zones instead can filter out the noise that exists in the zones.
I hope that this concept doesn’t have to stay one of the price action secrets much longer and more traders will start using this technique.
#2 Highs and lows – one of my favorite price action secrets
This point describes a very basic concept, but it’s SO important to understand and not used widely enough. I strongly believe that once a trader knows how to analyze highs and lows correctly, he has a much better chance of trading profitably.
The analysis of highs and lows offers so much information about trend strength, trend direction and can even foreshadow the end of trends and trade price reversals in advance.
Here are a few things that will help you understand highs and lows beyond the general trading knowledge:
- Do you see long trend waves with small pullbacks only? (this signals a strong trend)
- Is price barely making higher highs/lower lows? (this could indicate fading momentum)
- Do you see increasing volatility – larger candle wicks – while price makes new highs/lows? (you’ve probably heard the quote that volatility is greatest at turning points)
- An uptrend where price fails to make a higher high should get your attention
I challenge you: take a look at any “textbook” chart pattern out there and you’ll see that the only thing that really matters is how highs and lows form within that pattern. For example, the powerful Head and Shoulders is defined by a sequence of highs and lows.
#3 Location – improve your trading instantly
Even if you see the best price action signal, you can still greatly increase your odds by only taking trades at important and meaningful price levels. Most amateur traders make the mistake of taking price action signals regardless of where they occur and then wonder why their winrate is so low.
In my own trading, I pay a lot of attention to the location. A good signal at a very important support/resistance or supply/demand area can often foreshadow a great trade.
On the other hand, even a great price action signal at a bad location is nothing that I would trade.
#4 Stop looking for textbook patterns
One big problem I often see is that traders keep looking for textbook patterns and they then apply their textbook knowledge to the charts.
Just ask yourself: why do so many traders lose money? Does it maybe have to do with the fact that they all read the same books, trade the same patterns in the same way and look at charts identically? I think so! As a trader, you need to think differently.
Trading doesn’t work this way and the price is a very dynamic concept. Price and patterns change all the time and if everyone is trying to trade the same way on the same patterns, the big players will use that to their advantage.
This is maybe one of the most misunderstood price action secrets. Stop looking for shortcuts and do not wait for textbook patterns – learn to think and trade like a pro.
#5 The 4 clues of candlesticks and price action
This further highlights the importance of putting together the pieces when you trade price action and avoid blueprint-thinking. The 4 following points will help you avoid many of the common trading mistakes people make who just look for blueprint patterns.
The 4 following points will help you avoid many of the common trading mistakes people make who just look for blueprint patterns.
2) Bullish vs. bearish wicks
Do you see more/longer wicks to the upside or to the downside? Wicks that stick out to the downside typically signal rejection and failed bearish attempts.
3) Position of the body
Is the body of a candle positioned closer to the top or the bottom of the candle? Bodies that close near the top often signal bullish pressure.
4) The body
Candles with a large body and small wicks usually indicate a lot of strength whereas candles with a small body and large wicks signal indecision.
Read more: How to read candlesticks like a professional
#6 Broker time doesn’t matter
We get the question how broker time and candle closing time influence price action a lot. It does not make any difference to your overall trading although time frames such as the 4H or daily will look different on different brokers.
The graphic below illustrates what we mean. The charts show the same market and the same period and both are 4H time frames. They used different closing times for their candles and, thus, the charts look slightly different. Some of the important clues that the left market shows are not visible on the right chart and vice versa.
So there is no broker time that is “better” than the other – just the signals you get slightly vary. The most important point is that you make consistent decisions and don’t confuse yourself by changing between different broker feeds.
Don’t stress out about your broker time; over the long-term, everything averages out as long as you stay consistent.
#7 The amateur squeeze and stop hunting
Conventional price action patterns are very obvious and many traders believe that their broker hunts their stops because they always seem to get stopped out – even though the setup was so clear.
It is very easy for the professional trader to estimate where the amateur traders enter trades and place stops when a price action pattern forms. The “stop hunting” you’ll see is not done by your broker, but by profitable traders who simply squeeze amateurs to generate more liquidity.
This is one of those price action secrets that can make a huge difference and we have seen that many of our students have turned their trading completely around with it. Below you see an equity graph from one of our premium students. The transformation after taking our trading course surprised us all.
#8 Correct market selection
Building a watchlist prior to your trading is important and market selection is a very misunderstood concept in trading. Let me give you an example from my trading: every Sunday I sit down and go through all of the 30+ forex pairs that I consider trading.
However, usually, only 6-8 make it on my actual trading watchlist for the week ahead. And the main reason why the others get cut is that of low probability price action which usually means tight congestions, squeeze consolidations and narrow ranges with a lot of volatility.
An effective market selection is important and you should only look for markets that offer clear price action and stay away from markets that are too erratic and noisy. Don’t make this mistake of being too fixated on the pairs you trade – rotate them and only focus on markets with good price action.
Most of those tips are probably not considered price action secrets by advanced traders, but amateurs can usually improve the quality of their trading and how they view the markets by just picking a few of them. If you have any other tips or know about some mistakes traders do in price action trading, leave a comment below.
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