Last Updated on
In the earlier posts, you’ve learned what is price action trading and some of the biggest trading lies that have fooled many traders.
If you’ve not read it, go check it out below…
You’ll discover some of the biggest mistakes traders make and how you can avoid it.
Plus, you’ll learn my MAE formula to help you identify high probability price action trading setups — consistently and profitably
So read on…
You’re a “one trick pony” Price Action Trader and you can’t adapt when the market changes
Here’s the thing:
Most Price Action traders are a “one trick pony”.
You have only one Price Action setup and it usually looks something like this…
- You wait for the price to come to an area of Support
- You wait for a Bullish Hammer to form
- You go long
Now, there’s nothing wrong with this Price Action setup.
But if this is your only “trick”, then you’ll find yourself waiting…
When the market is in a strong trend like this:
Clearly, in this market condition, the price hardly re-tests Support in a strong trending market.
And if you’re a “one trick pony”, you’ll miss big moves like this.
The bottom line?
Don’t be a “one trick pony”.
Learn how to adapt your trading strategy as the market condition changes.
Your stop loss is too tight and it gets “eaten” easily
One of the biggest mistakes you can make is to have a TIGHT stop loss.
You’re probably thinking…
“But a tight stop loss reduces my risk and improves my risk to reward.”
Because more often than not, you’ll get stopped first before the market can move in your favour.
This means your analysis might be correct but you still end up losing money because your stop loss is too TIGHT.
So, what’s the solution?
Increase the size of your stop loss so you can withstand the “noise” of the markets and watch the market move in your favour.
Your stop loss must be at a location where if reached, will invalidate your trading setup.
This means if you short the head & shoulders pattern, then your stop loss should be at a level where if the market hits it, the entire pattern is “destroyed”.
Or if you’re long Support, then your stop loss should be below Support such that if the market hits it, chances are, Support is broken.
Now, I don’t suggest placing your stops just below Support or Resistance because you’ll get stop hunted easily.
Instead, give it some “buffer” so your trade has more room to breathe.
If you want to decide how much “buffer” to give, you can use the Average True Range (ATR) indicator and set your stop loss 1ATR below Support.
Here’s what I mean:
You don’t know how to read Price Action analysis
Here’s the deal:
Many of you are entering your trades because you’re bored or because the market is moving “fast” — and you want to catch a piece of the move.
This leads you to enter your trades at the worst possible time, only to watch the market reverse against you.
That’s why it’s important you do a Price Action analysis before putting on any trades.
You’re probably wondering:
“What is Price Action analysis?”
Price Action analysis is about identifying the correct market structure so you can apply the correct trading strategy to it.
Range market structure
If the market is in a range, then you’d want to long Support.
So, an appropriate strategy you can use it to trade the False Break at Support.
Here’s what I mean…
Trending market structure
Alternatively, if the market is trending, then you’ll have a long bias.
So, a possible strategy is to go long on a pullback towards the Moving Average.
In short, Price Action analysis is knowing the current market structure and identifying an area of value to trade from.
(I’ll cover this in more details later.)
You trade Price Action patterns “blindly”
Let me ask you…
What do you think the market is saying when you see a chart like this?
Most of you would say it’s bearish because it’s a Bearish Engulfing pattern, right?
And some of you might even look to short the market.
But before you do so, look at the chart below (on the 4-hour timeframe)…
Now it doesn’t look quite as bearish, agree?
And if you went short, then chances are you’ll get stopped out.
So what went wrong?
The lesson is this…
The market is clearly in an uptrend. And it’s unlikely that a single reversal pattern can “erase” the entire move.
Sure, sometimes that can happen.
But more often than not, the trend continues higher.
The MAE Formula
Now, I agree Price Action Trading falls under discretionary trading.
But it doesn’t mean it’s a subjective trading method — far from it.
Because once you know what to look for, Price Action Trading can be straight forward and objective.
Introducing, The MAE Formula.
Here’s how it works…
- Market structure
- Area of value
- Entry trigger
#1: Market structure
Now, I know it can be daunting to be looking at a blank chart.
Because you don’t know what to do.
Should you buy, sell, or stay out?
That’s why the first thing to do is identify the market structure as it tells you what to do.
So ask yourself:
“Is the market in an uptrend, downtrend, or range?”
Once you know the market structure, then you’ll know what to do.
If the market is in an uptrend, you look to buy only.
If the market is in a downtrend, you look to sell only.
If the market is in a range, you can buy and sell.
#2: Area of value
Now, identifying the market structure alone isn’t enough.
Because you also need to know where to enter your trade.
Now you’re wondering:
“There are so many places to enter a trade. Which one should I choose?”
Well, you want to trade from an area of value so you can buy low and sell high.
- Support and Resistance
- Respected Moving Average
#3: Entry trigger
At this point:
You know what to do (identify market structure) and where to enter (area of value).
Now the final part of the equation is to know when to enter.
Personally, I like to enter when the market has shown signals of reversal — thus confirming my bias.
This can be in the form of reversal price patterns like:
- Hammer and Shooting Star
- Bullish and Bearish Engulfing patterns
- False Break
Here are a couple of examples:
GBP/USD Daily: Identify the market structure
GBP/USD Daily: Wait for the price to reach an area of value
GBP/USD Daily: Enter on a valid entry trigger
T-Bond 4-hour: Identify the market structure
T-Bond 4-hour: Wait for the price to approach an area of value
T-Bond 4-hour: Enter on a valid entry trigger
Now let me ask you…
Is Price Action Trading still subjective?
Not if you know what to do, where to enter, and when to enter.
At this point…
You’ve seen the power of price action trading and how it can transform your trading results.
Now, if you want to level-up your price action trading skillset, then keep a lookout for my next email for enrolment of The Ultimate Price Action Trader.
It’s my premium trading program that shows you how to read the price action of the markets without relying on fundamental news, trading indicators, or chart patterns.
But for now, here’s what I’d like to know…
What are the “AHA” moments you had over the last few days?
Leave a comment below and share your thoughts with me.