You’re a price action trader.
You trade Pinbar and Engulfing patterns at a key support resistance area.
But I think you’ll agree with me when I say:
Sometimes you’re waiting for a pullback that doesn’t come, and price trades higher without you.
The low number of trading setups you get makes you wonder whether you’re even trading at all.
Don’t worry, you’re not alone.
In this post, I’ll share with you the 4 biggest problems with price action trading, and how you can fix them immediately.
1) Low number of trades
Price action trading requires patience. This is because it requires the trader to wait for confirmation at support & resistance.
But by waiting for confirmation, traders tend to miss trading opportunities when price simply ‘touch and go’.
It is heart-wrenching to watch price bounce off your levels, without being in the trade.
So what can you do?
One way to overcome this problem is to not wait for confirmation. That’s right, don’t wait for confirmation.
What you can do is identify your levels as per normal, and trade without price confirming at your levels.
Try this on demo, then compare it with your own actual trading. See if there’s any difference in your frequency of trades and profitability. You may be surprised at the results.
Alternatively, you can look to trade more markets like exotic currency pairs, equities, and futures.
Now the next problem…
2) Waiting for your levels
Price action traders would always wait for the price to come to their levels.
Some of these levels could be support & resistance, or previous resistance turned support etc.
But in a trending market, often price does not come back to retest these levels due to the strong underlying momentum.
This cause price action traders to be on the sideline while the market is making a directional move. How can you fix this?
Here’s an example:
What you can do is to go down into the lower time frame and look for your trading setups.
If price is making a parabolic move the daily timeframe, drill down to the 1-hour timeframe to find trading opportunities.
On the lower time frame, you will notice that it has its own set of support & resistance. You can then look to trade these levels with the bias from the higher time frame.
Below you can see 3 possible trading opportunities that are not apparent on the daily timeframe:
3) Poor placement of stops
If you read most trading books or attend trading courses, you will be taught to place your stops just beyond the highs/lows of the candle.
Thus it is no surprise that traders tend to place their stops at obvious levels. E.g. a few pips beyond the wicks of the candle, just above resistance, just below support or at round numbers.
However, dealers are not stupid and have an educated guess where your stops are, without looking at the order book. Yes, those juicy support & resistance levels.
Because of this, you find yourself being stopped out of your trades unnecessarily, only to watch the price go back in your favor. Sounds familiar?
An example below:
A solution to this problem would be to place your stop loss away from support & resistance.
An approach you can consider is to use the ATR indicator to gauge how far away your stop loss should be.
This way if you do get stopped out, it’s a good indication the support & resistance has failed to hold up.
Now here comes the best part, quantifying high probability patterns…
4) Size of reversal candlestick
Candlestick reversal patterns serve as confirmation of whether a level is holding up.
Candlesticks like the Pinbar and Engulfing pattern comes in all shape and sizes. But are they created equal?
Not necessarily. The larger the Pinbar or Engulfing pattern, the stronger the price rejection.
What if you get a small looking Pinbar that lacks conviction, would you still trade it?
How do you quantify the size of the Pinbar to trade?
One way to overcome this issue is to use the ATR indicator to gauge the volatility of the market and compare it with the range of the Pinbar.
You can look for the Pinbar to have a range of at least 2 times the ATR.
The larger the range compared to the ATR, the more conviction of the underlying move.
Looking at the chart below, the given ATR for that period is 45 pips.
Notice the range of Pinbar 1 is 45 pips, I would skip this Pinbar as it is not 2 times the ATR.
Next, Pinbar 2 has a range of 95 pips. It is more than 2 times the ATR and tells me that there is conviction behind the move. I would choose this Pinbar to trade instead.
This method would allow you to identify Pinbar or Engulfing patterns that have a higher probability of working out.
Frequently asked questions
#1: If you went short at resistance without confirmation, do you close that position early if the candle closes above resistance but have yet to hit your stop loss?
One thing to point out is that I don’t sell blindly at resistance. I’ll usually wait for a price action pattern like a shooting star or an engulfing pattern to decide if I want to enter a trade.
If you were to trade without confirmation, the key question to ask is this, is your resistance area invalidated?
The candle might close above resistance, but it doesn’t mean that the area of resistance has been invalidated. Because resistance is an area on your chart, not a line. So if that area is still intact, then you shouldn’t close your trade.
But if the candle breaks and closes above your area of resistance, and it invalidates that area, then yes, you should exit the trade.
#2: Do you use a stop loss order or do you keep “mental” stop loss orders? I think if I had used “mental” stop loss orders, a lot of the previous losses might have been avoided as the market eventually goes up higher as per my initial intention.
I use stop loss orders, I don’t use mental stop loss orders.
If you use mental stop loss orders, and you find that your results improve, then feel free to experiment with it.
But the downside about mental stop loss order is that often traders don’t have the mental capacity to exit the trade when it’s time for them to exit the trade. Instead, they hold onto it longer and their losses end up being bigger than intended.
If you have the discipline to execute your mental stop loss order, then give it a go and see if it helps with your trading results.
You’ve just seen how to overcome the 4 biggest problems with price action trading.
I hope this helps!