The Hunt Begins!
When you turn on your charts, do you instantly know where to look for high probability trades to form, do you know how to use the different time frames to increase the odds of finding those high probability trades?
If the answer is “No”, then I recommend you begin by reading an article I wrote recently, entitled – The art of marking support and resistance levels. This explains how to find the key daily levels in the Forex markets and where the best places are for you to go hunting for price action signals.
Before I can explain how you can use the lower time frames to find trades, I need to go through which factors I use to determine if a possible price action signal is valid.
I believe there are three key factors to consider before entering any price action signal on any time frame, and these are as follows:
- Whether the price action signal forms and rejects a key daily level
- Whether the price action signal is large and powerful in size
- Whether the trade has space to move back into
Let’s discuss the first and most important factor – where price action signals form.
Trade from the right areas
Where you take trades from is a vitally important factor and the first step in finding solid trade signals. One of the biggest mistakes lots of traders make is to focus primarily on looking for the price action signals and then once the signals are found to try to find levels to back them up. Traders who trade like this clearly don’t consider where they trade from as the most important aspect regarding finding trades.
So how should you go about finding the correct locations for trades to form? Well, what you need to do is first look for the areas in the market where price has reacted and reversed strongly from in the past (key levels) and this is always carried out from the daily charts.
By having the correct key levels marked up on your charts, you can begin to start hunting for trades in the proper areas. Looking for trades to form at predetermined important key levels and waiting for price to come to you, is the way it should be done.
By making the decision to wait and let price come to you is very powerful because it means you lie in wait ready for price action setups to form and so are able to take trades from areas where you want to trade from and not rush into trades from any old location.
The markets have a habit of repeating themselves over and over and this fact is no secret with lots of other traders recognising and exploiting this. Therefore, finding these important key areas and watching these areas for trade signals to form, makes perfect sense.
The simple fact is that we need other traders in the markets to make the price move, period. If more traders agree with our analysis, price will be more inclined to move in the fashion we want it to and help our trades move in the desired way.
If you decide to trade from weaker/minor levels the chances that price will move and react strongly, are much lower. Due to the fact that less traders will be watching and looking to place trades from these minor levels.
Therefore, where you trade from is such a big deal it cannot be overlooked and should be your primary focus when looking for trades. The next important factor to consider is the size of the price action signal.
The size of the price action signal matters!
Once you have determined the locations where you want trades to form you need a trigger to get you entered into a trade. For me the price action signal acts as this trigger and provides you with an entry point into the market. However, not all price action signals are equal and being able to differentiate between what is a valid signal and what is not, requires you to consider the actual size of the price action signal itself.
The actual size or range of the price action signal can provide telling facts about how powerful the signal is. The larger the signal the more powerful it is and in turn a better indicator of what price could do in the future. Taking price action signals which stand out compared to the surrounding candles and which are impossible to miss on the charts are what I want you to look for.
The best way to consider whether the price action signal is large enough is to compare the candles around it and within that swing. If the price action signal is larger in size than the candles formed in the current swing, the signal is valid.
By picking the larger price action signals and ignoring the smaller, weaker signals, you will increase your selectiveness and set in place solid criteria for each trade to meet.
I believe that the size of the price action signal is something traders tend to forget and ignore because they are too focused on taking trades rather than picking only the best trade signals with the correct criteria.
A price action signal also needs space to move into to deem it valid and worth trading. What I mean by this, is that price is always going to reach a level in the market which could have the potential to cause the trade to reverse. These are called first trouble areas (FTA’s) and they form an important part in capital preservation.
If you consider that the markets in the simplest form are simply moving from one level to the next, you can begin to realise and recognise which trades have space and which do not.
Please note, the levels I am talking about are not key levels but more minor levels, as we never want to be trading back into key levels.
The previous data printed on the charts in the form of candlesticks shows us how price has reacted and how it has travelled through certain areas on the charts. This allows us to establish if price has moved easily or not so easily and this data allows us to make assumptions that price has a high chance of reacting and moving in a similar fashion in the future.
If for example a price action signal forms and you can see in the past the area you will be trading through has caused price to stutter and move indecisively it would indicate that the trade could experience the same fate and so not a good place to enter a trade. If, however the chart shows price in the past has moved swiftly through the area you are trading through, then it presents a much better picture and one which I would feel more confident in taking.
Learning how to spot FTA’s is a similar process to marking your key levels but instead we are looking for the first minor level that could cause price to turn on us. Every trade will at some point need to take a breather and pullback and by using this knowledge regarding FTA’s you can protect yourself from price reversals, which is something that is very high on my trading agenda.
The good and the bad
So there you have the three most important factors to differentiate between the good trade signals and the bad. By sourcing trade signals with all three factors present you will begin to become much more selective about which trades to take.
It’s important to note that if you ever find you are not 100% sure about any particular price action signal, and it looks to be missing one of the three criteria, always step aside and let the trade go by. If you enter trades which you are not 100% sure about it means you still have issues with and need to work on your discipline. Never feel pressured into entering any trades, only enter trades when you are sure the trade meets the correct criteria.
Now let’s look at the different time frames which are available to us to go hunting for price action signals.
Daily time frames
The daily time frame is where all your trading should stem from and using the key support and resistance levels marked from the daily charts, provides us with a solid base to work from. Before jumping into the lower time frames though, it is important to start off trading from the daily charts and learning which types of trades to look out for and how to manage trades.
It can be frustrating having to wait for a whole daily candle to form but it is a great way to introduce patience into your trading. Plus, if you are still in fulltime employment the daily charts require far less of your time to trade, reducing the impact and stress into your current lifestyle.
Taking trades only from the daily charts will mean you will inevitably miss some intra-day trades but you need to learn to walk before you can run.
Once you are comfortable with trading daily charts the next step is to add lower time frames to your repertoire, the key point to note here is that you still use the same key daily levels you marked off the daily charts but widen your hunting area by adding the lower time frames.
Learning how to use the different time frames correctly is a great advantage, as it increases the chances of finding good solid trades.
The lower time frames I use are 1hr, 2hr, 3hr, 4hr, 6hr, 8hr, and 12hr
Using lower time frames
So I hope I have established the importance of the daily time frame and how you should always start off analysing any Forex pair on the daily time frame. It is by far the most valuable time frame but the lower time frames can also prove to be very useful as well.
By utilising the lower time frames it is possible to find more swing trades with the desired space that would otherwise be invisible on the daily charts and this is how we use the lower time frames. They act to enable us to zoom in on a specific key level and increase our search for valid price action signals at those key levels.
By adding more and more time frames can cause issues though, as the amount of information available to analyse increases dramatically, with each additional time frame exposing more and more levels to consider. This is where you need to stay focused and remember to keep your trading consistent you need to trade from only the best key daily levels and for this reason you need to keep looking for trades on the lower time frames using only the key daily levels.
To give you an example, if you look at the daily chart below you can see the highlighted key level and how price has broken above it and then retraced back down to retest it. The daily candles do not give us a visible price action signal to trade this pair long but by keeping this same level on the charts and scanning all of the lower time frames (1hr, 2hr, 3hr, 4hr, 6hr, 8hr, and 12hr) the chances of finding a valid price action signal increases. As you can see the 2hr chart below the daily chart does give us a bullish and valid pin bar price action signal to go long and gives us a great entry into the market with the daily momentum.
Therefore, before entering any price action signals you need to check the signal possesses and exhibits the three important factors discussed previously, these being:
1) To form and reject a key daily level
2) To be large in size and really stand out from the rest of the price action
3) To have space to move back into
By asking all price action signals to meet these set criteria, you will set the required standards for all your price action signals to be very high. Once you know the properties required to make a price action signal valid you will be much more confident and clear on which signals to take and which to ignore.
Having the confidence in knowing what trade signals to look for allows for the addition of lower time frames to your repertoire. Theses additional time frames are designed to merely increase the potential of find more trades at those key daily levels but not to increase the number of levels at which you can look for trades. Sticking to trading from the daily key levels is paramount and means you are always taking trades from strong areas, helping to increase the odds of trades moving strongly in the desired direction.
My goal regarding this article was to show you how the lower time frames have a purpose and if used properly can increase the chances of finding high probability signals but also to give you some guidance on certain criteria you can use to validate price action signals.
If you have any questions, please submit below and if the article has helped you please give it a like. I appreciate all feedback.
If you are looking for more guidance on all things price action, the advanced membership is only one click away.