What types of trades can we use?

There are three different types of trades we can take:

  1.     Swing trades
  2.     Breakout trades
  3.     Range trades

1)Swing trades

A swing trade describes a trade where we look to get into a trade from a swing point. They are the best and most reliable way to trade and very simple to find. These setups make up 95% of all my trades.

First, we need to find a trend, so say we see a pair is making higher highs and higher lows, we label this as an uptrend.

To jump onto an uptrend we want to see a new high form then price to pullback to a key level, maybe to the previous swing high and then look for a bullish price action reversal setup, like the pin bar or a bullish engulfing bar. So we are taking a bullish price action signal at swing low and at a key level.

Uptrend example

The reverse would happen in a downtrend, so the pair would be making lower highs and lower lows, if price makes a new lower low, we wait for price to pull back up to a key resistance level and then look for a pin bar or bearish engulfing bar. So we are looking to take a bearish price action signal at a swing high and a key level.

The diagram below shows a simplified downtrend structure and where we want to hunt for price action setups.

Here's a simple swing trade setup.Trading with price action, Forex, Learn how to trade the forex, Price action setups, Price action

Here’s what an actual setup looks like:

2013-11-05_1352trend_trade

It’s that simple, the reason they are really solid setups is because we are trading with the current momentum and because we are trading from a pull back at a swing point, so there is space for the trade to move back into.

Now we can also take swing trades against the momentum, these are called counter trend trades.

So this time, we are not trading a pull back but rather looking for a key level to reverse price and trade price down with the pull back. They’re naturally more risky as we are going against the current momentum but this is why the price action setup has to be from a key level and the setup must be clean, large and really stick out with the space for the trade to move into.

Here is an example of a counter trend swing trade.

Counter trend trade

2) Breakout trades

Breakout trades are when price breaks through a key level and closes beyond that level. It’s usually a fairly large candle that breaks out due to the build-up of orders which get filled. These can be useful when price breaks out of a range bound market.

breakout example

So, whenever price manages to break out of a key level, I want to see price pull back and retest the recently broken level and confirm its holding and rejecting price.

I only have one technique to deal with breakouts and this involves the use of the inside bar.

If an inside bar forms and especially if the inside bar shows rejection of the key level just broken, do I consider it to be a valid breakout.

Remember, breakout trades have the ability to trap inexperienced traders because they can swiftly turn into false breakouts.

A False breakout is where price breaks out of a key level and so looks like it wants to continue one way but instead quickly reverses back. This stops out all of the traders who believed price would continue. For this reason I always wait for price to close beyond the key level and then an inside bar to form. Trading just the break out candle without knowing the key level will hold, is too risky for me.

See below an example of a false breakout.

false breakout

 

This is the reason I wait for the broken level to be retested, is to see if the broken key level is now holding.

2013-11-08_1940breakout_trade

 

3) Range trades

Range bound markets are when you see price moving sideways, so price is not able to make any new highs or new lows and is basically stuck in a price range – zig-zagging horizontally.

Range markets are very common in the Forex markets but they can be tricky to trade. So, we have to be careful, what I mean by this is we must only trade from the extreme highs and lows of the range.

You’ll tend to find the middle ground of a range market to be very messy, as the market has no real direction to follow and so price whipsaws about.

There are a few things I do recommend you consider before entering a range trade. First, always consider what the trend was before the range formed. It’s much safer to look for range trades that are in-line with the original trend.

Why? Well the markets have a tendency to move in one direction strongly and then takes a breather ( market ranges) and then continues on in the same direction.

So if the trend was up before the market became range bound we’d prefer to look for long setups at the low of the range. This is reversed if the trend was down before the range formed.

Here’s a simplified image of a range trade:

2013-11-09_2304range_pic

Here’s an example of an actual range trade setup:

 

2013-11-08_1927_range_setup

Module 1: The Basics

Module 2: Market Analysis

Module 3: Price Action Setups

Module 4: Chart Setup

Module 5: Trade Management

Module 6:  Trade Psychology

Module 7: Continue your learning