Price Action trading system
This is my take on “price action” trading. There are many places with similar approach described, and I make no attempt to be innovative here. This is what works for me, and I learned it from many sources, other traders and mentors.
This is what I call Price Action at its core, in a nutshell, simplest, best to make trading Effortless. Now, am I consistently profitable trading this method? I wish I could say yes, let me say , in all honesty, that I believe I am on track. Read on to see a complete approach defined here, incl. how to get organized.
Trading systems rules
D1 and H4 only. Also look at weekly for trend analysis. May look at H1 for candle patterns.
Weekly review of all markets (~20 forex pairs), update key levels on weekly and daily, analyze the trend and write a text label on chart with W1 trend, D1 trend (up, down, or range). On weekend. Decide if I am going to trade this pair this week, only if the market looks “clear” and I “understand” it. Write down a plan, such as “trade long, if the market retraces to this level and shows a reversal candle pattern there”. Mark this level with a rectangle on chart. This takes 3-4 hours.
Daily end-of-day review of all markets and open positions. Adjust levels if needed, in case there was a big reversal this week. Update the trading journal. Trail the stop on open trades. Enter new trades on D1 if setups are in place. This takes 15-30 minutes.
Every H4 during the day, in my case 7.00, 11.00 and 15.00 CET. Optional, only if time allows, take 5 minutes to go through the markets (10 seconds per chart) and see if there is any price action signal at the area defined during the weekly review. Trade ONLY IF there is a price action signal there, on a rectangle placed on a chart during a weekly review. This is the trading plan to execute. Nothing else. This takes 2-5 minutes.
Opening a trade
1. trade only if there is a candle pattern (price action setup: pinbar or engulfing or outside bar)
2. at a key level (support of resistance, identified during a weekly review)
3. in line with the trend (defined as higher highs and higher lows or LHs, LLs on daily chart)
4. ideally if there is also some confluence (e.g. level is also a Fibo retracement, or there is a chart pattern such as triangle or head & shoulders, or “big round number” such as 1.3000, or fundamental outlook such as interest rate decision).
Entry at market on close of the D1 or H4 candle.
Alternatively can use limit entry on a roughly 50% retracement of the bar of the candle pattern traded (e.g. 50% of the pinbar). This gives much better R ratio, but is a lower probability trade (if the trade goes against us, we will get a fill, if goes directly where we want, we will not get on board).
Alternatively can use a stop entry, which is a higher probability setup (we are on only if the price goes in our direction, but offers a lower R ratio as the entry price is not favorable, and anyway offers no guarantee of course).
Trade management method
Stop loss at a high / low of the candle patten (pinbar, engulfing or outside bar high / low) plus 1 pips, plus spread (in case of going short, because trade will be closed at Ask price while the chart typically shows a Bid price).
Take profit for half of the position around 1R. This is to eliminate risk from the trade as soon as possible. You can use a limit TP order at a broker for half the position (technically it requires using two order for entry, two different positions technically), or do this manually once the price is around 1R, i.e. the profit roughly same as a stop loss distance.
Move the stop loss to break even, at the time of closing half of the trade at 1R.
Then, the other half of the position, if holds and is not taken out by a stop loss, trail the stop loss manually, behind each next support or resistance level. Do this “slowly”, it is OK to give back some profits, also because this is only a half of the position and the trade is already a winner. But of course, do not give back too much, for example when the profit is 2R, the stop loss should be at around 1R, so that , in the worst case, we give back 1R of profit.
Alternatively you can choose not to scale out and close half of the position at 1R. Many people say, and even prove mathematically, that if you have an opening edge, it is better to have a 2 or more R profit on a full position. While I do not argue with the arithmetic, I do believe that for psychological reasons, to enable us to consistently trade a system with quality, it is better to take the 1R profit and eliminate the risk of a loss.
Adjust such that if the stop loss is taken, the loss is totally acceptable to you. It can be 1% of your account, or less, or slightly more, it can be higher % of the account if your trading capital is somewhere else, but key is that each loss, in monetary terms, to be OK.
That’s is… above is a complete trading approach definition.
Now we “just” need to learn how to trade it with high quality and effortlessly.
My recommended drill is this… write your trading plan (as above), find 40-100 historical examples on charts and take screenshots and review, do this on simulator, then on demo, then live using microlots, then gradually increase the size.
Key thing is always to trade best setups only. This method should offer roughly 1 to 5 trades per week. No more. I count my trades and if I take more than 5-7, it likely means I over-trade.
I hope this is helpful for those who find this post. It is a price action trading in a nutshell, simple yet complete, and I believe this is a good starting point, while surely there is a lot of work needed to turn this one-page post into a capability to become consistently profitable trader. Good luck.