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Price Action Trading Strategy

Technical Analysis
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Technical analysis is the act of using a chart with trendlines, moving averages and
candlestick formations to make buying and selling decisions.

Technical analysis is a very broad topic, and this section will teach you the most
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important aspects you need to know for the Price Action Trading Strategy.


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Chart Types & Trading Session
 Drawing Tools
 Support and resistance
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 Moving averages
 Swing highs and Swing lows

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Trendlines and Trend-Channels
 Trading ranges
 Measured moves
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 Entry counts
 Traps
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 Spike & Channel

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Chart Types & Trading Sessions:
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We chose to use ‘volume charts’ for the Price Action Trading Strategy because it
provides us with the most accurate view of the market.

A ‘volume’ candlestick develops as more trading volume enters the market, and
therefor provides us with a better ‘feel’ for the price-action as the day unfolds.
 Furthermore, we prefer to use ‘electronic trading hours (ETH)’ on the volume
charts.

For example, when trading Crude Oil Futures we will use a 1000-volume chart
with the electronic trading session being from 6:00pm to 5:15pm EST Sunday
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through Friday.

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Drawing Tools:

One of the most important skills to learn for Price Action Trading is how to draw
trendlines and channels on the chart to find trading opportunities.
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The most important drawing tools will be the following:


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Ruler
 Line(s)
 Arrow
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 Trendline
 Trend-Channel

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Rectangles
 Chart-markers

It is very important for new traders to learn the ‘shortcut keys’ on their keyboards
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so they can use these drawing tools quickly and correctly as the market moves.
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Support & Resistance:

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The term support and resistance is very important to understand, and it can be
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applied to a variety of price levels on a chart for many different reasons.

The most important thing to remember is the following:

 Support is a price level below the current price, and is where we

anticipate buyers to react.
  Resistance is a price level above the current price, and is where we
anticipate sellers to react.

It is important to understand that support and resistance are nothing more than
areas where we will anticipate the buyers or sellers to react. Wise traders will
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always look for a confirmation of this ‘reaction’ before using the support and
resistance level to enter into a new trade, or stay in a current trade.

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Moving averages:

Moving averages are likely the most commonly-known form of support and
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resistance on a chart, and they are used by traders around the world in many
different ways. Furthermore, there are literally millions of different types of
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moving averages and ways to calculate them.

The most important thing you need to know about a moving average is that it is
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the average price over a specific period of time.

We prefer to use the 21 EMA (Exponential Moving Average) which is the

average price over the last 21 candlesticks on the chart.
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Moving averages benefit from the ‘self-fulfilling prophesy’ that says they are only
important because other traders consider them as support and resistance levels,
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and therefore we see price react to these moving averages very consistently.
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Swing high & Swing low:

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A swing high is formed when a high is made that is
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higher than other highs that came before it.

A swing high is considered to be a significant

resistance level on the chart when it is above the
current price, and a previous swing high is
considered support when it is below the current
 price.

A swing low is formed when a low is made that is

lower than other lows that came before it.
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A swing low is considered to be a significant
support level on the chart when it is below the
current price, and a previous swing low is
considered resistance when it is above the current
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price.
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Price action swing highs and lows are slightly different as they are from candle to
candle instead. It follows the same guidelines but is more of a micro view. The
primary difference is that a single candle that makes a high or low above others is
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considered a swing level.
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Trendlines:
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Trendlines are drawn using swing highs and swing
lows to provide a visual interpretation of the
direction of price.
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Trendlines are considered support when they are
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below and resistance when they are above the
current price.
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The most important thing to remember about
trendlines is that they must fit prices neatly. This
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means price wicks, opens, and closes must fit well
inside of the trendlines.

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 Trend-Channels: Bullish and Bearish

A trend-channel is defined by two (2) parallel trendlines

that are either moving higher (bullish) or lower (bearish)
on a chart.
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The trendlines that make-up the trend-channel is
considered an important level of support and resistance.
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The most important thing you need to know about a trend-channel is how to
draw them correctly and to make sure they fit neatly.

The proper location to look for a trend-channel is

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at a MAJOR swing high or Swing low in the market,
which means it should begin where a major price-
reversal has occurred on the chart.
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Furthermore, a bullish trend-channel is ‘best’
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drawn using the support trendline first, and adding
the resistance trendline to the highs. A bearish
trend-channel is ‘best’ drawn using the resistance
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trendline first, and adding the support trendline to
the lows.
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Drawing trend-channels correctly is an art form that must be learned and
mastered over time.
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Some trend-channels look perfect, while others do not fit exactly correct but are
still valid. For this reason, we call this the ‘art of drawing trend-channels’ because
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there will never be only one single way to do it correctly.
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Spike & Channel:

The term ‘Spike & Channel’ refers to a scenario where there

is a significant ‘spike’ in the price higher or lower on the
 chart, which is then immediately followed by a trend-channel moving in the same
direction as the ‘spike’.

In the case of a ‘Spike and Channel’ the ‘spike’ is often quite violent and happens
quickly, whereas the trend-channel usually moves quite slowly and methodically.
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The most important thing to know about a ‘Spike and Channel’ is that the spike
is not required to begin from a major swing on the chart, and the trend-channel
will be treated like any other trend-channel even though it too does not begin at
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a major swing on the chart.

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Trading Ranges:

A trading range is simply the range of price

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from high to low over a certain period of time
on the chart.
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A trading range is defined with horizontal
trendlines at the highs and lows of the range.
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The low of a trading range is considered
support, and the high of a trading range is considered resistance.
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Trading ranges are often referred to as ‘sideways trend-channels’ because they
act the same way and can be used in the same way.
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The two (2) most important things to know about trading ranges are:

 The best trading ranges are defined by trendlines that have the most
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number of ‘tests’ on each side of the range.
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 The first time price tries to breakout of a trading range is usually a failure.

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 Traps:
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The term ‘trap’ in Price Action is used to describe a
failed breakout of a trading range on a chart.

If the breakout occurs at the highs it is called a ‘bull

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trap’ and if the breakout occurs at the lows it is called a
‘bear trap’.
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There are three (3) steps to finding a ‘trap’ on the chart:
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 First, you must find a trading range on the chart
 Second, you must wait for the first attempt to break out of the trading
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range
 Third, when that breakout fails it is considered a ‘trap’.

The most important things to know about a ‘trap’ are:

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 The first attempt to break out of a trading
range is almost always a failure, which is why
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‘traps’ can be good trading opportunities.
 The best ‘traps’ to use for trading
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opportunities are the ones that attempt to
break out of the trading range against the
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current trend.
 ‘Traps’ don’t have to be only by 1 tick, it can be several but the only thing
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that matters is there is a break of the high or low of the trading-range and
prices come back showing failure.

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 Measured moves: (AB=CD)

The term ‘measured move’ describes

the way price-action usually will move
in two (2) equal legs up or down on a
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chart.

Measured moves are often referred to

as the ‘AB=CD pattern’ on a chart,
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which means the first leg (A to B) is
equal to the second leg (B to C) on the chart.

The most important thing to know about a measured move is that a bullish
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measured move creates resistance and a bearish measured move creates
support.
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Entry Count:

The term ‘entry count’ is specific to

Price Action Trading in the way that it
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describes the process of ‘counting’ the
number of times price makes a new
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high as it pulls-back lower after a swing
high (or) the number of times it makes
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a new low as it retraces higher after a
swing low.
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The ‘entry count’ begins for the buyers
after a new swing high is made on the
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chart, and the count ‘resets’ when
there is a new swing high made on the
chart.

The ‘entry count’ begins for the sellers after a new swing low is made on the
chart, and the count ‘resets’ when there is a new swing low made on the chart.
 The two (2) most important things to know about the ‘entry count’ are:

 When the entry count ‘resets’ and starts over-again

 When you see a ‘2nd-entry count’ on the chart
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The ‘entry count’ resets when you see a new
swing high or swing low on the chart, depending
on which direction the price is moving.
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The ‘2nd-entry’ is the most important for price-
action traders because it is the best time to enter
a new trade.
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