In today’s episode, you’ll discover 6 price action questions to ask yourself before you place your trade.
So listen to it in now…
Hey, hey, what’s up my friend? In today’s episode, I want to share with you 6 things to look for before you place a trade, or 6 questions I ask myself before I place a trade (from a price action trading context).
If you’re a discretionary trader or a price action trader then this episode will be really useful for you.
Question #1: What’s the current market structure
Is the market in an uptrend, a downtrend, or is it in a range? Because if the market is in an uptrend, then I want to look for buying opportunities. If the market is in a downtrend, then I want to look for selling opportunities.
And if the market is in a range, then I know that I can be both a buyer and a seller. I’ll buy support, sell resistance, buy low, sell high. So this is the first question, what’s the current market structure.
Question #2: What’s the higher timeframe trend
This is important because let’s say on the 4-hour timeframe the market might be in a downtrend or appears to be in a downtrend. But on the daily timeframe, it’s in an uptrend.
This means that on the 4-hour timeframe, chances are, it’s just a pullback against the daily timeframe. This is important because the daily timeframe will give you a clue to whether the trend that you’re looking at on the entry timeframe is likely to continue or reverse.
I asked myself what the trend on the higher timeframe is as much as possible, as I want to be trading in the direction of the higher timeframe trend.
Let’s say the 4-hour timeframe is in a range, and you might want to buy at support and sell at resistance. But let’s say that on the higher timeframe, the daily timeframe, is in an uptrend.
Then as much as possible, you want to be buying near the lows of the range, at support, because if the daily uptrend continues, chances are, the price will breakout of resistance and resume the uptrend.
This is the power of understanding where you are in the big picture, what’s the higher timeframe trend.
Question #3: Where are the areas of value on the chart
Here’s the thing, just because the market is in an uptrend, doesn’t mean you want to buy immediately. Because you want to know where the areas of value on the chart are.
It could be at support, the 50-day moving average where the market has retested three times, or it could be at the upward trendline. There are multiple areas of value that you can define depending on the market condition.
And this is the third thing I ask myself – where are the areas of value on the chart.
Question #4: Am I trading near an area of value
So once you have identified support, you want to ask yourself, are you trading near support or are you trading far away from it?
This matters because if you’re trading far away from an area of value, your stop loss will be wide assuming that you’ve set a logical stop loss. If you set it below support but you’re trading far from an area of value, then that stop loss is going to be wide.
And when you have a wide stop loss, it results in a poorer risk-to-reward on your trade. It’s simple. If you have 500 pips stop loss, you need the market to move 500 pips in your favour for you to earn a 1:1 risk-reward ratio.
If you have 50 pips stop loss, all you need is for the market to move 50 pips in your favour for you to earn a 1:1 risk-reward ratio. Make sense?
All else equals as much as possible, you want to have a tighter stop loss because it offers a more favourable risk-reward on your trade. And to get a tighter stop loss, you want to be trading near an area of value not far away from it.
So the fourth question I ask myself is, am I trading near an area of value or far away from it.
Question #5: Where will the opposing pressure come in
If you buy at support, then at some point in time, sellers are going to come in to short the market because perhaps the price is too high at that point. So you want to yourself where might opposing pressure come in.
Again, let’s take it the other way around. Let’s say the market is in a downtrend, you sell at resistance, then where might buyers come in? Where might opposing pressure come in?
Because once you can “anticipate” where opposing pressure might come in, it’ll help you set a better take profit level.
Let’s say you’re a swing trader, you short at the resistance. Now, if 300 pips away is a swing low, then that’s where buying pressure could come in, so you want to possibly take profit at maybe 250 pips or 280 pips away from your entry price just before the swing low.
Once you can, identify where might opposing pressure potentially step in, this helps you to determine ahead of time where’s a good place to take profits.
Question #6: What is the volatility of the market
Is the volatility of the market increasing or decreasing? Because here’s the thing, volatility in the market is always changing. It moves from a period of high volatility to low volatility and vice versa.
If you see the markets, let’s say on a daily timeframe, the candles’ range is very small and the market seems to be going nowhere, then that’s a sign that the market is about to make a move. Whether it’s up or down, I have no idea, and nobody knows.
But you know it’s about to make a move. And this is important because if that the market is about to make a move, then what you can do is go down to a lower timeframe, let’s say the 4-hour timeframe to get a good entry point to enter the trade. Then you can hold for as long as possible and see whether the market does breakout in your favour.
What I do is that if I notice that on the daily timeframe, the market is in a low volatility environment, I like to go down to the 4-hour timeframe and look for potential trading setups, maybe to buy the lows of support or sell the highs of resistance.
Because I know the market has a good chance of breaking out of the range and the volatility could expand in my favour, which offers favourable risk-reward on the trade.
So pay attention to volatility expansion and contraction. Low volatility market environment is where favourable trading opportunities are because your stop loss can be nice and tight.
Whereas markets that are in a high volatility and crazy environment, are those that are not as favourable. Because at that point, the market is swinging wildly up and down, your stop loss needs to be very wide to accommodate those wild swings.
And when your stop loss is wide, it reduces the risk-to-reward on the trade and it’s not a favourable trade to take on.
Here’s a quick recap…
- What’s the current market structure – uptrend, downtrend or range
- What’s the higher timeframe trend
- Where are the areas of value
- Am I trading near the area of value – I want to be trading near the area of value not far away from it
- Where might opposing pressure come in
- What is the volatility of the market – is it contracting or expanding
With that said, I have come to the end of this episode and I’ll see you in the next.