In today’s episode, you’ll discover the top 6 practices for newbie price action traders.
So tune in right now…
Hey, hey, what’s up my friend? In this episode, I want to share with you the 6 best practices for beginner price action traders.
1. Know the current market structure
You must find out what’s the current market condition, is it in an uptrend, a range or a downtrend:
- If the market is in an uptrend, look for buying opportunities
- If the market is in a downtrend, look for selling opportunities
- If the market is in a range, look to buy near the lows of the range at support or sell near the highs at resistance
Things become clearer once you can define the current market structure.
2. Identify the area of value
Here’s the thing, just because the market is in an uptrend doesn’t mean you want to blindly hit the buy button. It doesn’t work that way because the uptrend could be overbought and about to make a big pullback or reversal.
What you have to do instead is do identify the areas of value on your chart. If the market is in an uptrend, an area of value could be:
- An area of support
- A swing low
- A respected moving average like the 50-period moving average
- A respected trendline which the market has bounced off a few times
These are areas of value that you want to identify on your chart.
3. Know your trading setup ahead of time
For example, if the market is in an uptrend, there are numerous ways to trade that trend. You could look to trade the breakout of the swing high or even trade the retest of the resistance turned support of the breakout.
You can see that there are numerous ways or setups to go about trading an uptrend. You want to know ahead of time which trading setup to use for the particular market conditions or market structures.
4. Avoid trading in no man’s land
Imagine that the market is in a range, contained between the highs and lows of the range but the price now is now in the middle of the range. If you were to trade in the middle of the range, your risk-reward on the trade is usually unfavourable.
Because if you want to set a proper stop loss, it has to go below the low of the range. As for the profit target, you’re not going to target like 10,000 or even 1,000 pips above the highs of the range, because the market could retest the highs of resistance and get rejected to head down the lows of the range.
For most swing traders, they would set their targets just below the highs of the range, which is right before resistance. This means that if you’re buying near the middle of the range, your stop loss is below the low of the range while your target is before resistance.
From a risk-reward standpoint, it’s usually less than 1-to-1. You’re probably risking $1 to make like $0.60, or worse. Avoid trading in no man’s land when the price is in the middle of nowhere. Avoid trading when the price is far away from an area of value.
5. Know the behaviour of the markets that you’re trading
Different markets have different behaviour. For example, the stock market is statistically proven according to academic research and my own backtest to be in a long-term uptrend.
Yes, there are pullbacks along the way, but more often than not, it will not become a bear market or a recession. That pullback will usually end and then the uptrend will continue itself.
If you’re a stock trader trading stocks in an uptrend, whenever there’s a pullback or a correction, those are trading opportunities for you to buy because there’s a more than 50% chance that the trend will resume itself.
If you understand this behaviour of stocks or even other markets, you can use this to your advantage even as a price action trader. Another example is in the FX market GBP/JPY and GBP/USD.
These are trending forex pairs and they usually have momentum behind them. Whenever these currency pairs break above the previous day high, they’ll tend to continue higher. Whenever it breaks below the previous day low, it tends to follow through towards the downside as well.
These pairs are quite good to trade breakouts or trade trend continuation. And finally, the last tip that I have for you as a beginner price action trader is…
6. If you’re in doubt, stay out
Price action trading involves discretion and subjectivity. Sometimes the market structure might not be something that you’re familiar with. Well, if you’re not sure, then stay out. No one’s pointing a gun at your head and telling you to put on a trade. No, just stay out.
Look at other markets that have trading opportunities or trading setups that you’re more familiar with. Don’t force trades. Don’t take trades that you’re not comfortable with and don’t take trades that you’re uncertain of.
Let’s do a quick recap…
- Identify the current market structure
- Identify areas of value
- Know your trading setup
- Avoid trading in no man’s land
- Know the behaviour of the markets that you’re trading
- If you’re in doubt, stay out