#9: Price Action Trading Hacks
Here’s the thing…
Whenever you hear someone talk about price action trading, you know it's always just scratching the surface level.
You know, just the basic amateur surface level stuff.
But as you dive deeper into price action trading…
You realize that there's a whole world – a whole new aspect to it.
How do you tell whether the support level will break or not?
How do you identify low-risk high-reward trading setups?
How do you know where other traders put their stop loss so you don't put them at the same place and not get stopped out together?
That’s why price action trading is more than just support and resistance and some basic candlestick patterns.
And I want to share more with you right now.
Let's get started…
Price Action Trading tip #1: Don't Put Your Stop loss Where Everyone Else is Putting Theirs
The first price action trading hack is you don't want to put your stop loss at a level where everyone else is putting theirs.
Where is everyone else putting their stop loss?
If you've studied textbooks and courses…
They tell you to put your stop loss just above resistance that looks something like this…
Because that's what the textbook says!
Then, what happens?
You can see the market retraces slightly lower and hit those cluster of stops above and then continue lower.
Here’s what I mean…
Price comes into an area of support and traders see a bullish engulfing pattern here…
You may be thinking, “the market is going higher, time to buy! buy! buy!”
Since traders have the fear of missing a move…
They don't want to wait, they buy first.
Where do they put their stop loss?
“Hey, I think the textbook says put below support!”
What happens next?
The market swings down lower…
Hits your stop loss…
Then rallies up higher…
Can you see the point I'm trying to bring?
Whenever you put your stop loss…
The golden rule is:
- You want to set your stop loss at a level where if the price reaches it, will invalidate your trading idea
- Your stop loss has to be a distance away from market structure This is the first price action trading hack that I have for you.
Price Action Trading tip #2: Trade Breakouts with Buildup
Whenever you trade breakouts, you want to trade it with a buildup.
Let me share with you how not to trade breakouts first.
How not to trade breakouts
Let's say the market is in a range like this and breaks above resistance:
You don't want to be buying the breakout at this point in time.
A couple of reasons:
1. The market has moved quite a distance within a short period of time
The market needs to breathe.
The market could possibly pull back or even retrace all together.
If you don't believe me…
Go to the track right now and sprint 100-meter.
Tell me, on the 100-meter mark...
Do you still feel like you can sprint another 100 meters or take a breather?
So, it's the same in trading.
When the market moves too fast or too soon, it needs to take a breather as well.
2. Buying breakouts with buildup give you a better risk-to-reward
If you were to buy on this break out, then where is the logical place to put your stop loss?
Maybe somewhere here?
From a risk-to-reward standpoint, your stop loss is this wide.
This means the market has to move a lot just for you to breakeven.
Now if you recall…
Whenever you trade breakouts you want to trade it with a buildup.
So what is a buildup?
What is a buildup
A buildup is when the market makes a very tight consolidation like this…
Can you see the difference?
With a buildup, you can actually reference its low to set your stop loss (and no longer have to reference the original area of support)…
From a risk-to-reward standpoint, your stop loss is now tighter.
So the market doesn't have to move too much in your favor for you to breakeven.
Also, a buildup is a sign of strength.
Whenever you see the market come into a key level of resistance and hovers around it…
There are buyers willing to buy at higher prices!
One example is Bitcoin:
If you’ve read the price action, the clues are already there.
There is no guarantee, but you can see there is an area of support at 6,000…
A pretty nice descending triangle, and if you think about it…
This is the buildup I mentioned earlier…
A nice tight buildup consolidation.
Because if the price were to break down, where do you set your stop loss?
You don't have to set it at the very highs anymore since you can just reference from this
swing high over here…
You don't want to be shorting at this point over here…
Because the market has moved too fast.
You have no logical place to put your stop loss.
Again, if you use the original level as your stop loss, the nearest one would be at this swing high…
Which is very far away, and from a risk-to-reward standpoint, it's not very attractive.
Price Action Trading tip #3: How to Trade Reversals
If you want to trade reversals…
You want to see the “too fast, too soon” move to occur.
Because if the market moves too fast, there's a good chance the market could reverse.
Let me illustrate…
You want to see a strong power move coming to a level.
This is where the body of the candles are large and strong.
You don’t want to see a buildup if you are trading reversals, because you're not trading the breakout.
There are no guarantees, it’s all about probabilities.
But these are the stuff that has worked for me.
In this example…
here is a pretty strong power move into a market structure at the area of resistance.
Notice the boldness of the candle.
There is no build-up over here, it's just a strong power move.
So, whenever you get such moves…
All that's left to do is to wait for a price rejection, a reversal candlestick pattern to take the trade towards the opposite direction.
In this example, you can see a strong power move towards support and made a bullish engulfing pattern…
The market did rally, breaking to the upside.
This is what I mean by a clean move into the market structure.
Price Action Trading tip #4: Trade at The Area of Value
The next price action trading tip I have for you is that whenever you look at a chart…
You want to ask yourself where is the area of value.
What do I mean by area of value?
Whenever you go to the supermarket, you buy apples when it's $3 or $2.
You don't buy apples when it's $10.
No, you're going to buy value and is the same for trading, you want to trade from an area of value.
So, how do you define value?
Identifying an Area of Value
There are numerous ways you can define value:
- Support and Resistance
- Trendline Channel
- Moving Average
Basically, areas on your chart where the market mean reverts to.
For simplicity sake, here’s a 50-period Moving Average on palladium…
Notice that this market tends to mean revert towards the 50 MA…
From a price action trading perspective, you don't want to be buying when the market is at the highs.
Here’s what I mean…
Recall, on a risk-to-reward standpoint, your logical stop loss has to go way below the Moving Average.
So, I prefer for the price to go to an area of value towards the Moving Average.
This means that I could have a tight stop loss.
Another example is USD/JPY:
As I've said, the Moving Average is just one way to define the area of value.
When the trade is choppy, a Moving Average won't really cut it, so this is where the trendline
might help as shown in the example.
In this case, we have an upward trend line that has been tested 4 times, which also serves as an area of value…
If you were to go long, your stop loss could be somewhere here…
Again, from a risk-to-reward standpoint, buying close to the area of value is usually one of
the better ways to be entering your trade.
Another price action trading hack than I want to share with you is a term I call the first pullback.
Price Action Trading Tip #5: First Pullback
Recall, you don’t want to be buying breakouts without a buildup.
But then some of you might be thinking…
“But Rayner! I don't want to miss the move, how can I do it?”
“What if the market doesn't retrace back towards the area of support?”
“What if the market doesn't retrace back to previous resistance and turn into support?”
“Am I going to miss the move?”
Well not quite…
Because this is where you can look for the first pullback.
The first pullback
The first pullback is literally the first pullback out of the range:
In this case, it looks something like a bull flag pattern and you can look to get long if it breaks the highs.
The beauty of this is that when you wait for the first pullback…
You can reference this swing low as your stop loss…
Again, can you see that the concepts are basically building one concept on top of another?
Now, if you did not wait for a pullback, there is no logical place to put your stop loss.
Also, there are other traders who missed the breakout move as well, so buyers are piled up together and push the next wave further.
So, when the market breaks out and makes the first pullback, to me, that is usually the best time to be entering a trade.
Obviously, these are all cherry-picked charts to illustrate my point.
Only an idiot teacher will pick a chart that goes against their point.
Again, what I am going to look for is a long-term range.
You can see the price is in an area of Support…
Then, the market broke down and made the first pullback…
This is a sign that there could still be a strong move down lower or another leg of the move, in case you missed the breakout.
The entry is not really important but the concept of the first pullback is what really matters.
Another example is the USD/INR which is largely in a range and shows a breakout with a buildup…
If you didn't trade the breakout with a buildup, don't worry.
What you don’t want to be doing is buying at the highs over here…
Because the price is now so far away from the market structure and the stop loss would be wide.
Also, when the price advances too fast and too soon, chances are the market tends to reverse.
So, wait for the first pullback which occurred over here…
We've covered a lot today so let's do a quick summary…
Here’s what you’ve learned:
- Set your stops away from Market Structure
- Trade breakouts with a buildup
- If you want to trade reversals, look for a “clean” move into a level
- Identify your area of value
- The first pullback is the best pullback