Price Action by High Quality forex trading

Price Action trading system

price action trading

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

Time frame
D1 and H4 only. Also look at weekly for trend analysis. May look at H1 for candle patterns.

Logistics


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 method

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.

Position size

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.

Become consistently profitable in Simulator first

The power of simulated trading

trading simulator wordle

Get a year of trading experience in a few hours!

A very powerful tool available for us on a learning journey to become consistently profitable trades is a trading simulation software.

With a good trading simulator you can “trade” on historical charts. What is great about this is that, unlike in demo, you can fast forward the time 🙂  Of course, to get the value of learning, we should not “cheat”.

You can literally get a year of experience in a few hours. This is a fantastic way to learn and test your trading system, before you go live.

In my post on how to Qualify a trading setup, one of the steps is to backtest it. With a trading simulator this process can be much more effective.

How to use it? Very simply, choose a tool, and go ahead, treat this seriously, start trading your system, your trading setup, on historical charts. Of course you need to download high quality data.
Stating the obvious… if you are not profitable trading your setup on tester, you will not be profitable live. Unless by a short term coincidence, but not consistently.

To share my own experience, I am working to qualify and add to my arsenal a new system, called morning breakout. For a long position, it waits for a range to be formed during the Asian session, then it waits for the solid breakout around London open, then it waits for a correction, and places a buy stop above last high, stop loss around 20 pips, take profit at 1R, set & forget, 3 minutes to do it. And, I am intensively testing it on simulator!

OK, so what tool and where can I get it? There is a number of options, do a search for “trading simulator”.

The simplest and free is… no tool. Just open your trading platform, scroll back, and start scrolling it bar by bar. In MT4 use F12. In other platforms it may be right arrow. Place imaginary trades and stop losses and note the result.

If you search for “MT4 trading simulator”, you will get some free options available, some are free although not very user friendly. I used this one for a while.

I also know Ninja Trader tool has the capability.
There should also be an add in available for Amibroker for this.

Lastly, a very powerful tool is Forex tester 2. This one costs money. I am not affiliated with them in any way. This is not an affiliate link although they have an affiliate program. The demo version is great. It has a limit of max 1 month of history though. You can try to e-mail them and ask for a rebate coupon, I did.

Where to get the high quality forex data from? Ask your broker, some brokers offer a high quality data feed if you deposit certain amount of money. Also Dukascopy data feed is considered high quality by many people. There are also paid services as well, but I do not think you need them, unless you are testing very low timeframe and require volume data.

In short, I very much encourage you to become consistently profitable on simulator with any new setup you trade. Without risking any money, you can see if you are able to profitably trade a discretionary setup.

Note that Brett N. Steenbarger, author of a great book “Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology” recommends simulated trading, too, as a part of the learning plan. Also Mike Bellafiore uses simulators to train his traders, if you want a reason to believe.

What’s your experience with simulated trading?

Enjoy the process and keep learning

Enjoy the process and keep learning

Enjoy the process

enjoy the process of becoming a consistently profitable trader

Today I felt like sharing some of my recent insights on trading.
Here they are: enjoy the process, keep learning.

Let me elaborate a little bit. Becoming a consistently profitable trader is hard, few people are able to achieve this, it requires significant and consistent effort, and it takes time. Given this reality, it is much better, and you will be more effective, and certainly more likely to persist, if you enjoy the process. What to do to actually enjoy it?  Well, it is a matter of mindset and attitude isn’t it? Surely we should take out the monetary pressure away, while we learn. Trade small size, focus on high quality execution, not on making money.

The process learn trading I largely described here, in my post on how to Qualify a trading setup. It is a step-by-step action plan on how to take a trading setup and make it your own, and become consistently profitable trading it.  It does take time, so it is better to enjoy it.

The outcome may be that trading will become Effortless. But I think we never achieve a “final” state. Markets evolve, so should our approach, the setups we trade, maybe the markets and time frames that we trade, etc. Luckily the trading business offers endless opportunities if you think how many markets, time frames, and trading methods are available out there.  Key is to find the one that works for us.

And how to actually find the trading system that is right for us? While this is a topic for another post, and I wish I had a shortcut available, but what it seems to me that you need to search for it on your on, test and qualify different methods, and at some point you will find it. Actually, it is best to have a few trading systems / setups / method.

And in choosing the system that is right for us, we need to consider issues such as: how much time we have available for trading (scalping five minute charts is OK if you can dedicate a few hours of full attention to trading a day), what markets we understand and like, what approach feels logical and right for us so that we trust it (momentum trading, trend following, mean reversion, fundamental trading, etc.) and many others.  In terms of the sources: think books, forums, talk to traders for inspiration, or to get a fully documented “ready” system, but even in that case, always test it and make it your own.

Trading quotes

Trading quotes

Collection of my favorite trading quotes

trading quotes for high quality trading

This list is a continuous work in progress. I will be adding new trading quotes as I find them.

Persistence is instrumental to success. Most people faced with the early failures of some of the Market Wizards would have given up” – Jack Schwager

Market success is a matter of finding the methodology that is right for you, not finding the one true methodology” – Jack Schwager

Successful traders find a methodology that fits their personality” – Jack Schwager

So what exactly is your methodology? If you cannot answer that question, you are not ready to be risking money in the markets” – Jack Schwager

To make money you need to have an edge and employ good money management” – Jack Schwager

I always want to be better prepared than someone I am competing against. I prepare myself by doing my homework each night” – Jack Schwager

The hard work in trading comes in the preparation. The actual process of trading, however, should be effortless” – Jack Schwager

Trading is about skill development and discipline” – Mike Bellafiore

A man must believe in himself and his judgement if he expects to make a living of this game” – Jesse Livermore

The only time I really ever lost money was when I broke my own rules” – Jesse Livermore

Source of many of the quotes above is Jack Schwager on twitter and his book “Little Book of Market Wizards”.

Books added to top trading books list

I added two new books to my list of top trading books

“One Good Trade” and “The Playbook” by Mike Bellafiore.

See my recommendation added at the end of my post on top trading books.

Both books by the author are very good. While he talks about prop trading desk, trading U.S. stocks and ETFs on a 1 minute charts and “tape reading”, while I trade forex End-of-Day, so a very different approach, but everything about trading mindset, psychology, how to think, how to develop, how to learn – I am finding all of this very relevant and helpful for high quality end of day forex trading, which I do. 

You can also visit their blog.

Qualify a trading setup

How to qualify a trading setup?

qualify a trading setup

Here is what I recommend that you do if you are serious about trading a given setup: whether it is a pinbar, or a 1-2-3 pattern, or any other price action or other trade opening setup for that matter.

This is a critical step, a milestone, in the discovery process of your own trading system, a system that is right for you, that you will be able to trade effortlessly once you are ready. The setup is a key building block of the trading system.

It takes a lot of work, you may need to to practice like Patton’s soldiers, but here is a specific action plan I followed, and I will follow for new setups I am learning to trade:

Action plan to qualify and learn to trade a setup:

 

  1. Read a lot about this setup or patten. Search for it, on investopedia, on stockcharts, on forex factory and beyond. Read Joe Ross book law of the charts, it is free.
  2. Learn and understand this setup or pattern. What does it mean? What is happening in the market when it is being printed. Why it is supposed to work? Who feels fear and who feels greed? Where the unfilled orders are if this pattern is printed on the chart? Where the stop losses are? Read dr Alex Elder book “Trading for a living” to understand the trading psychology behind technical analysis patterns.
  3. Learn and decide how you would trade it. Where would you place a stop loss? Where is the entry order? Is this a limit, stop or market order? (entry method)
  4. Find it on historical charts. Find 20+ occurrences of this pattern on historical charts. Note down what happened next. How it would be good to trade it. Find occurrences that paid and ones that did not pay (would end up in a loss). Take screenshots, copy them and review.
  5. Backtest it. scroll back without looking and go bar-by-bar (F12 in MT4) and look for the pattern. Imagine you are trading this. Note the result. Do at least 20 trades. Are you profitable? If not, repeat and learn, possibly adjust the approach. Yes, it is a lot of hard work. It is more like weeks vs. hours. Use a trading simulator.
  6. Forward test it. Once you are profitable trading this pattern bar-by-bar on historical charts with no cheating, move to demo. Trade it on demo for at least 20 trades, but I’d recommend 40-100. Use equal dollar risk per trade position sizing so that results are not randomly impacted by a trade size.
  7. Checkpoint. Are you consistently profitable on demo? Do you trust in your ability to trade this pattern? If you said yes to all of the above
  8. Start trading it live on a micro account. Set a position size to lose a small equal amount per trade. Trade it for 3 months or 40 trades at least, whichever comes last. Analyze your performance on myfxbook. You can start a journal on forex factory to stay motivated and get inputs from others. Important note: to start trading you need to qualify the complete trading system, not just the opening setup. See other building blocks.
  9. Gradually increase your position size. If you are profitable on micro, slowly increase your trade sizes and keep trading and learning. Over time, if you are successful, add new systems and test them the same way, withdraw some profits, diversify your savings.

Is this all?  No. I covered the trade opening setup qualification here. You need to follow a similar path to learn how to close the trade effectively, how to use confluences and filters and how to apply the right position size, i.e. other building blocks of the trading system.

As a result, you will be trading with high quality, and you will be consistently profitable if you have a profitable trading system and trade it with quality. And this is what we are after!

One last point, if you think now: “OK, I can do this, but what setup should I learn to trade?” or “just give me a profitable system and I will do it“, my answer is:  you can try my SDH1 EOD system that I trade, however I do not know if it is the system right for you. You can also read trading books or Forex Factory trading systems forum. Unfortunately no one can do this work for you. Everyone needs to discover their own trading system or method.

Trade opening filters

Trade opening filters

trade opening filter

To have a complete trading system you need trade open criteria, entry method, initial stop loss placement, trade management plan, positing sizing method. For a complete trading plan, you need to add list of markets, broker, computer, trading hours, mental preparation, emergency plan, etc.

This article talks about one component of the trading system, i.e. filters you can use to decide if to open a trade.

Filters

Filters are criteria that needs to be met for you to open a trade. This is a list of things that, if not met, you do not open a trade. A good filter will eliminate losing trades. It will also occasionally eliminate a wining trade; that’s trading.

Possible filters to use

  • trend, i.e. simply the trend on the timeframe you trade. If there is a clear uptrend, you take long setups only. Or maybe you trade the system only if there is a clear trend.
  • higher timeframe trend, e.g. if your primary trading timeframe is H1 (i.e. primary TF where you look for setups and you look at the chart every hour), then likely your higher level TF will be daily D1 or H4. So, a trend on your higher level TF can be a filter, i.e. if the trend is UP, you take long trades only. If the higher TF trend is DOWN, you take short trades only on your primary TF. This is what dr Alex Elder says in his books.
  • how to define a trend – here is a number of ways:
    • judgemental, i.e. you look at the chart to tell if it is going up, or down, or unclear (if unclear you do not trade it OR use a trading system designed for range trading)
    • using the indicators, e.g. if EMA 13 is above EMA 26 (or any other combination such as 9,21 or 100, 150, or 150, 365, all depending on your TF), OR MACD histogram OR combination, e.g. if both EMA 13 above EMA 26 AND MACD histogram up, then define it an uptrend)
    • using high and lows, i.e. define the uptrend by higher highs and higher lows and downtrend by lower highs and lower lows. Define a “high” or “low” (or call it swing high or low) by a bar pattern. “High” is where two bars before and two bars after the bar are lower, also known as fractal. “low” is where two bars before and two bars after the “low” are higher, i.e. fractal.
    • using a trendline, i.e. draw a trendline, for uptrend using at least last two swing lows, for downtrend using last two swing highs. This is judgemental.
    • using a supply & demand analysis, i.e. if previous demand levels are being taken out, then we are in a downtrend. If previous supply levels are being taken out, we are in an uptrend
    • any other way that makes sense to you.
  • market type. What market are we in? Is this a good market for this trading system? Van Tharp in his books and newsletters says there are 6 market types. bullish / bearish / neutral and normal / volatile (6 combinations). You may identify more or less types. Also different pairs look differently. Have a look at the chart and assess if this market is “friendly” for a given method. e.g. if you see a ranging chart, then it is likely not good for trend following, but may be a good market for some range trading systems. If you see a very clear trend, look for a system that will look for value zone locations to safely join the trend at a correction end.
  • the market, i.e. simply which currency pair or index or commodity or interest rate or stock or whatever tradeable market this is. Simply some systems are better for some markets than others.
  • time of the day, in case you have backtested a specific day trading system, you may have noticed it works well in certain time of the day when there is volatility, or it may exploit a certain time-based characteristic of the Asian session, or a London close. If your system is time-sensitive, then obviously a time of the day becomes a filter. If you have the system to follow the morning breakout of the London session, do not trade it in the evening, and so on. The same idea may apply to days of the week, e.g. do not trade on Mondays, etc.
  • news – or better a lack of big planned news releases, many day traders avoid trading if there is an upcoming big news event. “big” often defined as red item in the forex factory calendar. So a lack of news becoms a filter. Also, right before, during and after the news release, the spreads are often higher, which is a bad thing.
  • sentiment – bullish or bearish
    • broker’s sentiment index
    • info from the analyst you trust or your broker
    • Commitment of traders data on myfxbook
    • your own assessment of the sentiment based on how the market reacts to news:
      • e.g. if the market ignores the bad news and goes up on good news, then you may say there is a bullish sentiment. Reverse for bearish
  • R ratio TP level “available” before key S/R. For example, you want to go long, your logical place for initial stop is 20 pips below the market, so if you want to get at least 2R TP, you need to aim for 40 pips. But what if there is a major resistance 35 pips above, before your TP level? This may be a reason to pass on this trade, because the market is likely to reverse just before your TP.
  • behavior of some other market. I explored this a bit in my post about trade opening, but it also can act as a filter, e.g. you go long an individual stock only if the stock index is in an uptrend. Or look at the U.S. dollar index before trading any USD-based pair.
  • your mental state – are you relaxed, focused, good and positive? or distracted, stressed, feel like need a revenge on the market, feel like ego is at stake and need to make money fast? Yes, the former is the good mindset and a mental state to trade. The latter is a big NO GO to putting money on the line.
  • almost any other criteria – same as ones you use for trade opening setup
  • anything else that works for you – and what works we need to learn by backtesting, forward testing and live trading experiences…
  • and last but definitely not least – the fundamentals, i.e. your macro view on the economy, your or the analyst you trust. Application of fundamental analysis is a big topic in itself, and while not necessary for everyone, it may be a great filter for pro trades for higher timeframes.
  • and one more related to fundamental analysis: the interest rates differential and its impact on swap points (roll-over rate), important if you intend to keep the position long term, rollover rate will impact your trade result positively if you go long the pair with a higher interest rate and short the pair with the low interest rate (a famous carry trade).  This may be a filter, too.

Note that you can decide to use zero, one or more filters. Backtesting is the way to tell if a given filter is a good thing. The more filters you add the less trades you will take. Question is, and you need to answer while backtesting, how it impacts the overall profitability.

See my other articles with a trading system label to learn about other building blocks of the complete trading system.

Confluence factors for trade opening

Confluence factors for trade opening

confluence wordle

A complete trading system building blocks include open criteria, entry method, stop loss, closing method, position size algo, etc. But there is more.

This article talks about one more component of the trading system, i.e. confluence.


Confluence are additional criteria that, if met, are additional reasons for you to open the trade.  They increase the chances of a given trade to be profitable.  In other words, confluence if making a trade a higher quality one!

This is a list of confluence factors that you may want to look at:
  • fibo retracement level
  • key support & resistance level
  • key supply & demand level
  • higher level timeframe trend (up, down, sideways)
  • any criteria for trade opening can be a confluence in a different trading system
  • anything else that you choose to look at

Here is how it works: let’s say you trade pinbars. A pinbar is your setup and a trade opening criteria. You see a pinbar on the chart. And before you open a trade, look at confluence factors above to decide if you want to trade this pinbar or not. Is it on a key level? In line with the trend? etc.

In other words, confluence factors are odds enhancers, as Sam Seiden calls it in his videos.

See my other articles with a trading system label to learn about other building blocks of the complete trading system. 

Trade opening setups

Trade opening setups

trade open setups wordle

Trade opening setups

To have a complete trading system you need trade open criteria, entry method, initial stop loss placement, trade management plan, positing sizing method. For a complete trading plan, you need to add list of markets, broker, computer, trading hours, mental preparation, emergency plan, etc.

This article talks about one component of the trading system, i.e. possible setups you can use as a trigger to open a trade and place your entry order (order type will depend on entry method).

Setups you can use to OPEN the trade

  • Price Action setup, or a candle pattern, e.g. pinbar, outside bar, engulfing, etc. Search for “price action” and “candle patterns” to read more. Here is a good list of candlesticks patterns or this classic book. For price action, here is a good primer. Price action trading includes trend analysis and bars patterns such as pinbar, inside bar, bullish outside bar, etc. There is no need for me to repeat a good existing material incl. baby pips school. Fractal is also a candle pattern, a 4 or 5 bars pattern that happens at each swing high or low.
  • Indicators behavior, e.g. RSI below 30 and turned up, or CCI above 240, etc, i.e. any setup driven by indicators. It can be based on indicator value, e.g. above 70, or indicator behavior, e.g. turned up, diverge from price, indicator trend line break, etc. See Dr Alex Elder book or ask google for indicators description. If you choose to use indicators as your opening setup, make sure you really understand how they are calculated (what in fact they show). Note that indicators do not have a predictive power. They merely show if the price went up or down, or the speed of move has increased or decreased. Or, like ADX, they show a trend strength, regardless of direction. Or, like ATR, they show volatility. They can be very useful, but please understand they are merely a different way to present the price action. Another important concept related to indicators is divergences. You can read on them and learn to identify them on charts. Many key reversals are accompanied by a divergence. Unfortunately not all divergences produce a reversal.
  • Chart Patterns, e.g. head & shoulders, flag, triangle, trendlines, 1-2-3 pattern, etc. Technical analysis classic. Read about them, as anything you may want to use, please backtest it: see tens if not hundreds of occurrences of your setup on chart, train yourself to spot them, see if you think you can be profitable trading the pattern. Entry is usually on the break of the pattern (with the stop as an order type and “on the break” as en entry method).
  • News event, such as central bank rate change, payrolls data, inflation data, or even a political event. Great source for news events is forex factory calendar. News websites such as Reuters, bloomberg, marketwatch or others can be a source, too. Brokers often offer access to Reuters newsfeed. Remember though, that, as a retail trader you have no edge on news timely access. In my opinion it is very difficult to become profitable trading news. I certainly am unable to do so. Most people I talked with advise against trading the news. Daytrading during news release means higher spreads, higher volatility. A seemingly effective strategy of trading a breakout with stop orders, will often fail as the markets go up and down before it “decides” where to do.  However, I see two interesting ways of using the news.  First, is to see how the market reacted to news to gauge a sentiment. If it is not going down in spite of bad news, it may indicate it “wants” to go up.  Secondly, you can combine fundamental and technical analysis and use news events to consider longer term setups, e.g. a trade that will last a few days or even weeks, based on a central bank (e.g. go long the currency that hikes the interest rate). This can be more effective if combined with a technical analysis based entry method, e.g. use some candle pattern to time the entry and place the stop, based on a formation.
  • Support and Resistance, i.e. technical analysis classic, can also be used as an open criteria, or a filter, too. For example, short at a resistance, buy at a support. Could be “blindly” with limit orders, or waiting for a reaction at a level, e.g. if the price approaches resistance and shows a bearish candle, then go short. Otherwise, do nothing.  Or, want for a level to be broken, and enter in this direction. Or trade false breaks of the key level, i.e. see a price break the key resistance (triggering lots of buy stop orders for traders who are short and are closing their trades and traders who are entering on the break) and reverse. Join the down move. This idea is often referred to as “false break trading” or “fade the breakout” or “turtle soup system”. Search for this and feel tree to test this idea (as anything else before you trade it live).
  • Supply and demand, i.e. trading the supply and demand levels as described in my system post: these are places where there was a supply vs. demand imbalance, which we see on chart by the price moving away fast and far from the level, after a brief consolidation. This is what I use for my trading, as I found it work for me, after trying many other things.
  • Elliott Wave and harmonic patterns, geometry. One of the schools of technical analysis is waves analysis, wave 1,2,3,5 in the trend and A,B,C in correction, with waves 1,3,5, being impulse and 2 and 4 correction waves. Many people claim to be profitable trading this. Among many sources I found on this concept, the book by Robert Miner “Dynamic Trading”  was very good and explained it clearly, offering a complete trading method (vs. just a way to count waves). Geometry is an idea to look for relationships between corrections or trend lengths in time and price, often using fibo numbers. Very often they strikingly accurately work as a price turning points. However, you never know which level will work. There are ways, in these concepts to predict this by looking for areas where number of retracements or expansions are aligned, e.g. fibo retracement of the recent trend at 68% and fibo expansion of AB wave length from a potential B point is 100%. Or, more simply, 100% of the recent correction length. Combine it with a key S/R level and trend direction and it may be a good method.
  • Volume. Volume itself, you can use in many, many ways. There are also indicators based on volume such as OBV and others. There is a school of analysis called “Volume Spread analysis”, if you google on it, that claims to really reveal how the markets work, accumulation and distribution phases, how the smart money makes money by manipulating the market, price and news. Very interesting and might be the idea for you.  As I repeatedly say, everyone needs to find theirs. The method right for them, which you learn from Market Wizards books.  Another point on volume in forex… we do not know the real volume. We use tick volume as an approximation. To what extent it works is debatable.
  • Other markets. Your setup to trade may be driven or triggered by a price action on a different market. For example go long S&P if VIX (CBOE volatility index) is above 20 and turned down on daily timeframe) as this may indicate a correction end. Close a long S&P position if VIX reading is very low, e.g. 12. Another idea: use fundamental or technical analysis or USD index, to find the strongest and weakest currency pair and match them to choose which market to trade and trigger a trade, e.g. if you believe EUR is strong and JPY weak you can trade long EURJPY (which is essentially a long EUR short JPY trade). Another idea is pairs trading: look for usually correlated pairs and if their charts diverge go long the one that is “too low” and short the one that is “too high”, in a prediction that the charts will soon converge, while a directional move is neutral to you. This is a more advanced strategy and makes it more difficult to manage the risk (requires a mental stop). Carry trade is a concept you may read on. In short, go long the pair with high interest rate, short the one with low rate (texbook example is long AUDJPY) and make money (swap points, rollover) for keeping the trade. It is not a holy grail because you can loose money as a result of the price move.
  • Intuition. Read the “Trading from Your Gut” by Curtis Faith to learn about whole-brain trading (not just left brain which uses reasoning). The book is a must read for everyone, trading based on your gut feel is for more advanced trades who, thanks to hundreds of hours screentime have trained their intuitive brain to see patterns subconsciously, after they have seen thousands of times a pattern did or did not work. But again, in my opinion, before we very deeply learn a trading system, we should not trade purely beased on gut feel. But do train the intuition and listen to it over time.
  • Always in the market. Here I refer to trading systems which are always in the market, either long or short. They may or may not also have a opening (or rather position reversal) setup. For example a trading system based on moving averages (e.g. long on cross above EMA 50, short on cross below) [unfortunately it seems, based on my testing, mechanical systems like this are not consistently profitable, they are sometimes profitable: in trending markets]. Also a “buy-and-hold” which is a “system” people use for stocks in system that is “always in the market”
  • Random. Yes, however ridiculous it sounds, there can be systems with a random entry trigger and direction. Theoretically, if a trading closing method and position sizing method gives a good enough edge, then a system with a random entry could make money. Tharp says in his book that he backtested random entry system with good exits and it produced profits. I tried in Amibroker, tested hundreds of iterations of random entry systems and some of them were indeed profitable, but only if I eliminated transaction costs 😉  But it is not impossible that a system that does not has an entry edge, can be overall profitable. Just like systems based on concepts like astrology and things like this.
  • Anything else. This list is not complete. It is to list ides, while there can be many more reasons to open a trade. Again, everyone needs to find what works for them.
  • Any combination of the above. To increase number of possibilities even further, any combination of the above may also work, incl. adding some conditions as filters and/or looking at same/other conditions also at a higher timeframe! Combinations are powerful. If you have a higher timeframe trend and a key level and a price action all aligned, this is likely a high quality trade.
  • Lastly, I’d like to mention a few things that are NOT  good reasons to open a trade. Do not open a trade for the following reasons: a revenge trade, i.e. “I have just lost, so now I must open a trade to make it back, and maybe even double up”. Do not reverse just because you were stopped out. It may be OK if this is a codified and previously tested part of the trading system, but reversing a position just because the stop was hit is usually a bad thing. Do not trade because you really wanted to end this day/week/month in profit. This leads to over trading. Do not trade if your setup is not on the chart. Do not trade based on  ideas from other people. Do not trade if a minimal lot size and stop distance make the potential loss too high for you. Do not trade if you feel bad, physically or mentally, e.g. if you are stressed or distracted, as this deceases our brain’s effectiveness.

The above are setups, or triggers, or, in other words, a thing you need to see on the chart before you open a trade. And, if you follow your system, you trade only if the opening criteria are met. If there is no trade setup on the chart, you do not trade. This is often the hardest part 😉

See my other articles with a trading system label to learn about other building blocks of the complete trading system.

high quality trade open setups wordle