The Key Ingredients Required to Produce a Valid Price Action Setup.
What key ingredients do we need to differentiate between a good price action setup and a below par price action setup? There are a few important areas I will discuss in this article and try to explain why I feel they are very important and need to be taken into consideration.
Location location location.
First, we need to ask ourselves, where would be the best place to start hunting for price action setups? From any old level on the charts or from very important key levels that have produced strong reversals. Well, to me it makes sense to use the latter and trade from the important key levels.
Next, we must decide on what time frame to trade and for beginners I recommend the higher time frames, like the daily charts. The reasons why the daily charts are a better starting point is because they produce more accurate candles and the charts contain less noise to interfere with our analysis.
If however you are more experienced, then lower time frames maybe an alternative but be warned trading the lower time frames is not that simple.
Either way we must try to look for trades to form in areas that have shown themselves to be very important and strong levels that have resulted in turning the market aggressively. I find the best charts to use to find these important key levels is by using the daily charts. It will make you trade from the best areas and avoid trading from weak levels that I like to call “no man’s land” where price can go either way.
Trading from important key levels means we have a better chance that other traders will see the same thing and produce strong moves. It’s important to note that trading back into these key levels is very risky, indeed.
We always need to trade away from important key levels.
Remember, Forex traders can use many different strategies but for trades to move in the desired direction we need other traders to agree with us. Using important key levels to trade from increases the chances that other traders will agree with our analysis.
Below is a chart with the important key levels marked in red using a daily chart. These will be the good hunting areas to look for trades. The space in between the red levels is what I call “no man’s land”.
What triggers us to get into trades.
The first thing we have established is that we need to find the correct levels to trade from. Now we need a way to analyse if these important key levels are holding and are producing a rejection to turn price around. For this I use price action setups, the two main price action setups that I use are:
1) The Pin bar reversal
2) The Engulfing bar reversal
So if we see one of these price action setups forming at an important key level I have my second criteria fulfilled.
The structure of the price action setup must meet my own strict rules, the main criteria being that the size of the price action setup must be large in size and not small, large candles indicate strong momentum and power.
Which markets are active?
Forex trades can be executed pretty much 24/7 as it’s a global business, so we should consider which markets are open or closed when looking to trade a particular pair.
Say we were looking to trade a forex pair like the EUR/GBP on the 4hr as an example. Would it be wise to enter a trade going into the Asian markets when the markets that have the most influence, being the UK and European markets are closed?
No, not a good idea!
With no news releases for those currency pairs, the markets are more likely to just go sideways with little direction or momentum to move price.
Now I don’t what to discuss news related trading in depth as I don’t actively trade from the news. Yes, the news does of course effect the forex markets, but I prefer to use simple price action charts as I expect the news will get filtered into the charts, anyway. Removing the need to watch and study news releases etc….
Too much information can cloud our judgement and focusing on lots of different sources of information to analyse the markets rather than just using one technique is where traders can make it too complicated.
Using pure technical analysis and trading with price action charts, gives me all the information I need to analyse the markets in a very accurate manner.
The main thing I want to get you to understand and incorporate into your trading, is to try to increase your standards on what makes a valid trade setup. The location from where you trade from is so important.
Learning to hunt for trades from the best locations and using large price action setups as triggers to get you into trades does require patience. Remembering, the price action setups are used to get us into the trades but only if they form first at important key levels.
It’s not rocket science but it’s a very powerful technique and by using important key levels to go hunting for trades will increase the odds in our favour.
Improving our standards of where to trade from, improves the chances of trades moving in the desired direction.