Price Action Trading (P.A.T.) is the discipline of making all of your trading decisions from a stripped down or “naked” price chart.
This means no lagging indicators outside of maybe a couple moving averages to help identify dynamic support and resistance areas and trend.
All financial markets generate data about the movement of the price of a market over varying periods of time; this data is displayed on price charts.
Price charts reflect the beliefs and actions of all participants (human or computer) trading a market during a specified period of time and these beliefs are portrayed on a market’s price chart in the form of “price action” (P.A.).
Whilst economic data and other global news events are the catalysts for price movement in a market, we don’t need to analyze them to trade the market successfully.
The reason is pretty simple; all economic data and world news that causes price movement within a market is ultimately reflected via P.A. on a market’s price chart.
Since a market’s P.A. reflects all variables affecting that market for any given period of time, using lagging price indictors like stochastics, MACD, RSI, and others is just a flat waste of time.
Price movement provides all the signals you will ever need to develop a profitable and high-probability trading system.
These signals collectively are called price action trading strategies and they provide a way to make sense of a market’s price movement and help predict its future movement with a high enough degree of accuracy to give you a high-probability trading strategy.
‘The Holy Grail Of Futures Trading Strategies’ – Daily Chart Time frames
Let’s face it, 95% of you reading this are probably not consistently successful traders, in fact, you’ve probably blown out a trading account or three by now.
You probably enter a trade and then sit at your computer watching the market tick away or reading economic news for the next two hours, unable to think about anything but what “could” happen to your trade.
Maybe you can’t even sleep at night because you are so addicted to the 5 minute chart and to watching every pip of price movement that all you can think about is the market.
If any of this sounds all too familiar to you, it’s obviously time for a change; it’s time to start concentrating your trading efforts on the daily chart time frame.
You know how that old cliché goes about ‘getting what you’ve always gotten from doing what you’ve always done‘…
Well now is the time to make the change…the one lesson that I learned early on in my trading career that helped me the most, was that the noise and false-signals of a 5 or 15 minute chart (lower time frames) were simply not worth spending my time on or risking my money on.
I believe that daily chart trading can be your “Holy Grail” in the markets, here’s why…
Trading the 5 minute chart (and other lower time frames) decreases your chances of success and is widely considered gambling:
I am going to tell you guys something right now that you may not have thought about before…
you only need 1 big winning trade a month to be a successful futures trader.
Yup, that’s correct, 1 big winning trade a month.
How is that possible you might ask?
Well, I’ll bet if you go look at your trading account history right now you might just find the answer yourself.
You see, most of you are losing money because you are trading too often, and you are trading too often because you are fixated on over-analyzing the market, futures news variables, and lower time frame charts (I consider any chart under the 1 hour to be “lower time frame”).
Some of you probably even know that this over-involvement with the market is why you are losing money regularly or struggling to keep your head above water.
Yet, even though you know it’s keeping you from achieving success in the markets, you cannot break your addiction to trading lower time frame charts and over-analyzing the markets.
But, the cold hard truth of the matter is that you will likely never be a successful trader until you first break this addiction…
Now, here is why I firmly believe that trading lower time frame charts is a waste of time and money.
Trading a 5 minute chart stimulates the reward centers of your brain…it gives you instant gratification.
Having patience and discipline to focus ONLY on the daily charts takes more effort from your more highly-evolved brain areas.
So, what it really comes down to is that traders who are addicted to the lower time frames cannot break free from the instant stimulation they get when they enter a trade…even if it usually results in them losing money, because each time they enter the market, their brains are flooded with endorphins from the “thrill” of potentially making a lot of money really fast.
So, the point here is that traders who are addicted to trading a 15 minute chart are actually addicted to the feeling they get from entering the market, and this means they are unable to use their more advanced planning and long-term brain areas effectively.
It does not mean they are incapable of using them, it just means that they either don’t know they are addicted to trading lower time frames, or they don’t know how to stop it.
I have personally only met a few day-traders who make money consistently, and they almost all seem really frazzled and strung-out, like a junky who cannot stop thinking or talking about their drugs (the market).
Sure, it’s possible to make money from sitting in front of your computer 8 hours a day staring at each tick, but why in the world would you want to?
Let’s face it, watching the market tick away is not really that fun, NOR is it productive…at all.
Now, let’s get back to my main point that trading lower time frames is decreasing your chances of winning and destroying your trading account.
To focus on daily chart trading you need patience and mental fortitude, this takes intelligence and forward-thinking, it takes checking your ego at the door, and it takes a realistic attitude.
Anyone can go to a casino and get lucky a few times at the poker table, but why do you think it’s possible for some people to win at poker again and again and again, to the point where they make a living from it?
It’s because they have taken a longer-term view and they realize that their success is not defined by any one hand of cards, just like your trading success is not defined by any one trade.
So, if you want to turn your trading around, it’s time to swallow your need to “control” the market and for instant gratification, and begin taking a longer-term view of the markets by focusing on the daily chart time frame.
I don’t have enough money to trade the daily charts…
I get this email almost every day: “How can I trade the daily charts when I need to have wider stop losses and I don’t have a lot of money in my account, I can only afford to trade the 15 minute chart for now, then when I build up my account I will trade longer time frames”…
Many traders think this way, and it’s usually just because they don’t know enough about futures trading position sizing or because they think by trading bigger position sizes on the lower time frame charts they are going to somehow make money faster.
So let me set this straight for you guys right now:
Through position sizing, you can trade the daily charts just fine on a small trading account…you just have to trade a smaller position size.
But, let’s face it, if you have a small trading account you should not be trading large position sizes anyways!
You need to get rid of this attitude of “getting rich quick” and thinking that trading a 15 minute chart is somehow going to provide you with more opportunities to profit.
Here’s the deal…
Yes, there are MORE trades on a 15 minute chart, however, there are also more false-signals and there is more random market noise, so you are just going to end up taking more losing trades and stressing yourself out more.
This all contributes to a poor trading mindset and ultimately to you losing more and more money.
Look at this chart below of the daily market.
There was an obvious pin bar strategy from February 16th.
This trade setup was clearly with the existing up trend, it was well defined, and formed near two areas of support….a ‘no-brainer’ for savvy price action traders.
The point is this…if you wait patiently and hit one big winner like this a month, you are doing very very well.
My main trading philosophy is to trade futures like a sniper, and this is a prime example of how that’s done:
Why you need to make the daily time frame your primary chart starting today…
• Daily charts provide more clarity
As I stated before, lower time frames are full of random market “noise” and false-signals, you will eliminate most of this noise by simply focusing on the daily charts.
Focusing on the daily charts will also give you a clearer view of the overall market picture and will naturally improve your ability to read the market’s direction both near and long term.
• Daily charts help you develop a more effective and accurate market bias
Understanding the overall daily time frame bias of the market is very important for trading the daily charts and the 4hr or 1hr charts too.
I do teach 4hr and 1hr time frame trading, but it’s crucial to master daily chart trading first so that you get a feeling of the underlying market sentiment.
This goes along with developing your discretionary price action trading skill; you have to learn to “read” the market and get in touch with its ebbs and flows…
It sounds a little cheesy maybe, but the market talks via price action, and if you “listen” closely enough to what it is saying you can understand where it is most likely to go next.
• Higher risk : reward
While the amount of money you risk per trade is a highly personal decision that depends on your individual financial situation, trading the daily charts can allow you to risk a bit more per trade than trading the lower time frames.
Take note:
I am NOT saying you should risk more per trade, I am saying that when you only TRADE 3 TIMES A MONTH (or thereabouts), you clearly can risk more money on one trade than if you are trading 30 times a month.
So, this is an answer to the question “I can’t make as much money trading the daily charts as I can on the lower time frames”…
Yes you can because when you trade like a Sniper you inherently enter far fewer trades each month than if you trade like a Machine Gunner, so this allows you to trade more lots per trade.
However, keep in mind, this obviously only works if you can remain disciplined enough to not jump back into the market on revenge after you have a losing trade.
• Daily charts reduce the frequency with which you trade – slow and steady wins the race
One thing I firmly believe in is that futures trading success is largely a result of the quality of the trades you take…
Not the quantity of trades you take.
By simply reducing the frequency with which you trade, you will simultaneously improve your odds of succeeding over the long-term.
You need to understand and accept the fact that 2 or 3 quality trades a month is going to put you much further ahead than 20 or 30 emotion-fueled impulse trades a month…
No matter how good it makes you feel to take them.
Remember, the tortoise won the fabled race because he was slow and consistent, instead of fast and full of emotion like the hare…
Shift your thinking (Take this stuff seriously)
Trading success is a direct result of the way you think about the markets.
So, if you view the markets as a game of chance that you just like to “play around with” and you think you will make money by getting lucky every now and then…your trading account will quickly shrink in size.
Professional traders view the market as an arena to spot high-probability setups, setups that virtually “jump” off the chart at them; they then trade these setups and risk only an amount of money that they are 100% comfortable with losing.
They also view the markets as a reflection of their own ability to control their emotions and actions in an arena of constant temptation…
Most people cannot do this consistently, and that’s why many people are bad at trading.
It takes consistent control of your emotions and actions in the market to produce consistent trading results.
To shift the way you think about trading, you need to start getting excited about patience and about NOT trading…
Understand that the way you are thinking now is the way most traders think about the market…and most traders lose money…
So if you can learn to do what most traders don’t do and think opposite from them…
It goes to reason that you will greatly improve your chances of making money…
Making the transition into ‘daily chart’ price action trading
Now that you understand why trading a 5 minute or other lower time frame chart is counter-productive to achieving long-term success in the markets, it’s time to make the transition to daily time frame trading.
There is no sure-fire way to eliminate the temptation of the lower time frame charts, but if you re-read this article, you will reinforce the reasons why taking a slower and longer-term view on the market is the quickest way to making money as a trader.
The daily chart time frame is at the heart of how I trade and how I teach; my price action trading strategies and my overall trading philosophy revolve around taking a calm and stress-free approach to the markets.
I know what I am looking for on the charts, if it shows up, I enter the trade, if not, I walk away from my computer.
The underlying point that you should take away from today’s lesson is that the more you push and “try” to make money in the markets by burning your eyeballs out staring at lower time frame charts, the more the money you so badly desire will elude you.
Trading is an art, and like any art, it takes practice to become good at, but trading is a different beast because to excel at trading you need to take a largely “hands-off” approach, meaning you have to look at and study the markets a lot while actually “doing” relatively little (meaning not trading).
Indeed, trading is the ultimate test of self-discipline and will power, and the more you develop these abilities, the more you will find that the profits you seek from the markets are not so elusive after all.
If I had to boil down my futures trading strategy into to one simple phrase, it would be this; trading simple price action signals from confluent levels in the market.
In this trading training lesson, I am going to explain how to find higher-probability trade entries by looking for price action trading signals from confluent levels or areas in the market.
So, let’s begin by defining the two trading tools we will be discussing today:
Price action:
Price action is the movement of the price of a market over a specific period of time.
By learning to read the price action of a market, we can determine a market’s directional bias as well as trade from reoccurring price patterns or price action setups that reflect changes or continuations in market sentiment.
Confluence:
A point in the market where two or more levels intersect each other, thus forming a ‘hot point’ or confluent point in the market.
In the dictionary, confluence means ‘a coming together of people or things; concourse’.
So, basically, when we look for confluent areas in the market we are looking for areas where two or more levels or analysis tools are intersecting.
Determine a market’s trend using price action
One of the most important aspects of learning to trade with P.A. is to first learn how to identify a trending market versus a consolidating market.
Trading with the trend is highest-probability way to trade and it’s something you HAVE TO learn how to do if you want to stand a chance at making serious money as a trader.
The charts below shows how to use price dynamics to determine a markets trend.
We consider a market to be in an uptrend if it is making Higher Highs and Higher Lows (HH, HL) and a downtrend is Lower Highs and Lower Lows (LH, LL).
In the image example below, we can see how higher highs and higher lows signal an up-trend in a market:
In the image example below, we can see how lower highs and lower lows signal a down-trend in a market:
Determine Trending VS. Consolidating markets using price action
As we discussed earlier, P.A. or “Price Action Trading Analysis” is the analysis of the price movement of a market over time.
From our analysis of price movement we can determine a market’s underlying directional bias or “trend”, or if the market has no trend it is said to be “consolidating”…
we can easily determine whether a market is trending or consolidating from simply analyzing its P.A..
We saw how to determine a market’s trend above, to determine if a market is consolidating we just look for an absence of the HH, HL or LH, LL patterns.
In the chart below note how the “consolidating price action” is bouncing between a horizontal support and resistance level and is not making HH, HL or LH, LL but is instead going sideways…
The image example below shows a market moving from a consolidation phase to a trending phase:
The next major step in trading P.A. is to draw in the key chart levels and look for confluent levels to trade from.
Some of the factors of confluence I look for on a chart:
• An uptrend or a down trend; essentially a “trend” is one factor of confluence in and of itself.
• Exponential moving averages; I use the 8 and 21 day EMAs on the daily charts to help with trend identification and dynamic support and resistance identification.
Both the 8 and 21 EMAs are factors or levels that can add confluence to a price action setup.
• Static (horizontal) support and resistance levels. These are the “classic” horizontal support and resistance levels that typically connect highs to highs or lows to lows.
• Event areas. Event areas are levels in the market where a significant price action event occurred.
This can be a strong directional movement after a price action signal forms, or it can simply be a rejection of a level followed by a strong directional movement…
Some significant “event” needs to have occurred at a certain point in the market, we can then consider this an event area or level.
• 50% retrace levels.
I personally watch the 50% to 61.8% retrace levels for another factor of confluence.
I don’t get into all the other Fibonacci extension levels as I think they are too discretionary and haphazard to be of any use.
It’s common knowledge that most major moves in the markets tend to retrace approximately 50% at some point after they form.
But all the other Fibonacci levels are simply a case of “if you put enough levels on your charts some of them are bound to get hit…”, in other words they are more messy and confusing than relevant or practical.
The 5 factors of confluence above are just some of the levels that can intersect to form a confluent area in the market, there are also intra-day levels and other factors of confluence that we can watch for.
Combining levels of confluence with price action signals
When I am analyzing the markets, I am primarily looking for an obvious price action pattern that has formed at a confluent point in the market.
Of course, learning what constitutes on “obvious” or high-probability price action setup and a confluent point in the market is the result off education and screen time, but they really do not take long to learn.
Once you spot a high-probability price action signal you can then begin to do some analysis of the market structure and the context that the signal has formed within.
Check for the factors of confluence listed above and see if two or more of them line up with the price action signal, if so, you just might have a trade worth risking your money on.
Here’s an example of an obvious pin bar setup on the daily chart that had 4 factors of confluence supporting it:
1. This pin bar had confluence with the dominant downtrend, as it formed telling you to sell the market with the trend.
2. The pin bar showed clear and forceful rejection of the daily 8 / 21 EMA dynamic resistance layer.
3. The pin bar was also rejecting a horizontal level of resistance.
4. The pin bar showed clear and forceful rejection of the 50% retrace of the last down move.
In the next example, we can see a pin bar setup on the daily chart that had 4 of the factors of confluence mentioned above:
1. This pin bar had confluence with the recently formed uptrend, as it formed telling you to buy the market with the trend.
2. The pin bar showed clear and forceful rejection of the daily 8 / 21 EMA dynamic support layer.
3. The pin bar was also rejecting a horizontal level of support.
4. The pin bar showed clear and forceful rejection of the 50% retrace of the last up move.
In the next example, we can see an inside bar pattern on the daily chart that had 3 of the factors of confluence mentioned above:
1. This inside bar had confluence with the strong downtrend that was in place.
Having the ‘weight’ and momentum of a trend behind the signal you are considering is a big piece of supporting evidence for a trade.
2. The inside bar formed after a small retrace up to the daily 8 / 21 EMA dynamic resistance layer.
3. The inside bar formed at a horizontal level of support.
When we get multiple factors of confluence coming together like this for a particular trade setup, it’s a very good sign and gives us a type of ‘confirmation’ that the trade is worth taking…
In the next example, we can see an fakey pin bar combo pattern on the 4 hour chart that had 3 of the factors of confluence mentioned above:
1. This fakey pattern had confluence with the strong downtrend that was in place.
Having the ‘weight’ and momentum of a trend behind the signal you are considering is a big piece of supporting evidence for a trade.
Also, the market was falling on the daily chart at the time this 4 hour signal formed, so that adds more weight or confluence to our setup.
2. The fakey formed at a horizontal level of support.
When we get multiple factors of confluence coming together like this for a particular trade setup, it’s a very good sign and gives us a type of ‘confirmation’ that the trade is worth taking…
In the chart below we can see that a very obvious and confluent pin bar setup formed that kicked off a huge uptrend higher.
Note that the pin bar trade setup showed rejection of a key horizontal support level as well as the 50% retrace of the last major move, thus the pin bar had “confluence” with the surrounding market structure…
In the image example below, we can see a pin bar setup that formed at a confluent point in the market:
From the examples above, you should have gained a basic knowledge of what trading price action from confluent levels in the market is all about.
This lesson has given you a little glimpse into my core trading philosophy; looking for confluent levels in the market to trade obvious price action signals from.
You should trade clean and effective price action strategies from confluent levels in the market.
In this lesson I am going to share with you three of my favorite price action signals; pin bars, inside bars and fakeys.
These price action signals are simple yet very powerful, and if you learn to trade them with discipline and patience you will have a very potent commodities trading edge.
Note that I’ve included a “failed” trade setup because not every trade will be a winner; we aren’t here to show you “perfect” past trading results…
We are here to teach you in an honest and realistic manner.
Whilst these three price action setups are my ‘core’ setups, there are many other versions and variations of them that we focus on in our advanced price action trading course.
However, you can learn some good basics in this article to lay the foundation for future learning.
So, without further delay, let’s get this party started…
How to Trade with Price Action Trading Strategies
So how exactly do we trade with price action?
It really boils down to learning to trade P.A. setups or patterns from confluent levels in the market.
Now, if that sounds new or confusing to you right now, sit tight and I will clarify it soon.
First we need to cover a couple more things:
Due to the repetitive nature of market participants and the way they react to global economic variables, the P.A. of a market tends to repeat itself in various patterns.
These patterns are also called price action trading strategies, and there are many different price action strategies traded many different ways.
These reoccurring price patterns or price action setups reflect changes or continuation in market sentiment.
In layman’s terms, that just means by learning to spot price action patterns you can get “clues” as to where the price of a market will go next.
The first thing you should to begin P.A. trading is to take off all the “crap” on your charts.
Get rid of the indicators, expert advisors; take off EVERYTHING but the raw price bars of the chart.
I prefer to use candlestick charts because I feel they convey the price data of the market more dynamically and “forcefully”.
I like simple black and white charts the best, as you can see below.
After you’ve removed all the indicators and other unnecessary variables from your charts, you can begin drawing in the key chart levels and looking for price action setups to trade from.
The image example below shows examples of some of the trading strategies.
Note the key support / resistance levels have been drawn in:
Pin Bar Setup:
The pin bar is a staple of the way I trade the market.
It has a very high accuracy rate in trending markets and especially when occurring at a confluent level.
Pin bars occurring at important support and resistance levels are generally very accurate setups.
Pin bars can be taken counter trend as well, as long as they are very well defined and protrude significantly from the surrounding price bars, indicating a strong rejection has occurred, and preferably only on the daily chart time frame.
In the following chart example we will take a look at pin bars occurring within the context of a trending market; my favorite way to trade them.
Also, note that this uptrend began on the back of two bullish pin bars that brought an end to the existing downtrend.
Fakey Setup:
The fakey trading strategy is another bread and butter price action setup.
It indicates rejection of an important level within the market.
Often times the market will appear to be headed one direction and then reverse, sucking all the amateurs in as the professionals push price back in the opposite direction.
The fakey setup can set off some pretty big moves in the market.
As we can see in the illustration above, the fakey pattern essentially consists of an inside bar setup followed by a false break of that inside bar and then a close back within its range.
The fakey entry is triggered as price moves back up past the high of the inside bar (or the low in the case of a bearish fakey).
In the chart below we can see the market was recently moving higher before the fakey formed.
Note the fakey was formed on the false-break of an inside bar setup that occurred as all the amateurs tried to pick the market top, the pros then stepped in and flushed out all the amateurs in a flurry of buying…
Inside Bar Setup:
The inside bar is a great trend continuation signal, but it can also be used as a turning point signal.
However, the first way to learn how to trade the inside bar strategy is as a continuation signal, so that is what we will focus on here.
As we can see in the illustration above, an inside bar is completely contained within the range of the previous bar.
It shows a brief consolidation and then a break out in the dominant trend direction.
Inside bars are best played on daily and weekly charts.
They allow for very small risks and yet very large rewards.
The inside bar strategy combined with a very strongly trending market is one of my favorite price action setups.
In the example below, we are looking at a current (as of this writing) inside bar trade setup that has come off to the downside with the existing bearish market momentum.
We can see a nice inside bar setup formed just after the market broke down below a key support level, the setup has since come off significantly lower and is still falling towards the next support at 1.2625, as of this writing.
Many of our members are in on this trade as we’ve discussed it extensively.
commodities trading does not have to be complicated or involve plastering messy and confusing indicators all over your charts.
Once you master a few solid price action setups like the ones above, you will be well on your way to becoming a more confident and profitable commodities trader.
Just remember, mastering these setups will require patience, dedication and discipline.
I hope today’s introduction to Price Action Trading has been a helpful and enlightening lesson for you.
All economic variables create price movement which can be easily seen on a market’s price chart.
Whether an economic variable is filtered down through a human trader or a computer trader, the movement that it creates in the market will be easily visible on a price chart.
Therefore, instead of trying to analyze a million economic variables each day (this is impossible obviously, although many traders try), you can simply learn to trade price action, because this style of trading allows you to easily analyze and make use of all market variables by simply reading and trading from the P.A. trail they leave behind in a market.
No matter what strategy or system you end up trading with, having a solid understanding of P.A. will only make you a better trader.
If you’re like me, and you love simplicity and minimalism, you’ll want to become a “pure” P.A trader and remove all unnecessary variables from your charts.
Trading 50% Retracements with Price Action Confirmation
This is one of the most powerful price action trading strategies you will ever learn, it’s one of my favorite patterns.
You need to learn this, and apply it.
In this price action trading lesson, I am going to explain how to use the 50% Fibonacci retrace in conjunction with a price action reversal ‘confirmation’ signal, ideally a pin bar setup or fakey bar reversal setup.
It is a widely accepted fact among chart technicians that most major moves, and many minor ones, will eventually retrace to around the 50% level of the move.
There are many reasons why these 50% retracements are so prevalent in the market, but we aren’t going to speculate on those today, because in the end it doesn’t really matter, what matters is that the 50% retrace is a very real and very useful event to be aware in the market.
I am only a fan of trading the 50% retrace off a swing low or high as long as there is a price action signal to confirm its validity; I don’t “blindly” enter only because the market has retraced to a 50% level.
My trading is all about confluence and finding evidence to support the price signals on the charts.
How to find the 50% level of a move
Before we talk about trading price action signals from 50% retrace levels, we need to be clear on how exactly to draw in the 50% levels because some traders don’t really understand how to properly draw use the Fibonacci drawing tool on their trading platform.
Quick note:
I don’t use all the other Fibonacci extension levels because there are just too many of them and I don’t see the point of having so many different levels all over your charts.
The 50% phenomenon has been proven across hundreds of years of technical analysis whilst the other Fib levels are much more haphazard and self-fulfilling in the sense that if you put enough lines all over your charts, some of them are going to get hit regardless of whether or not there is any significance behind them or not.
I primarily only use the 50% level, but for me it is an ‘approximate’ 50% retrace and that means if a valid signal forms near the 50% level, say anywhere from a 45% retrace to a 60% retrace, I will also count that as a valid retrace and treat it the same I would as a signal exactly at the 50% level.
It really is quite simple to draw in the 50% levels, but it’s important that you understand where a move begins and where it ends, because I know some traders get confused about that.
Where the move started should be an exact high or low of the move, or very close to it, this is where you first place the Fib tool, then you click and drag the other end of the Fib tool to the other end of the move; where the move terminated.
Where the move started you should see the “100.0” in the top right of the Fib tool and you should see the “0.0” in the bottom right of the Fib tool.
This might seem confusing at first to have the 100 % level at the start of the move, but it makes perfect sense if you think about it like this:
You are looking for a retracement of a move, so by the time the move is finished and the market starts retracing, it is moving back toward the origin of the move and if it were to retrace back up or down on the whole move, it would then have retraced 100% of the move.
In the example below, we are looking how to properly apply the Fibonacci tool to find the 50% retrace level of a major down move:
How to trade price action signals from 50% retrace levels?
When you have a price action signal present on the daily chart, you then match up the fib 50% retracement level if there is one present, if the price action candlestick signal matches up with the 50% swing retracement level then you’re good to go and potentially have a valid trade.
If you can also find a relevant horizontal level to match up here, its a ‘double whammy’ of confluence (a reason to get excited).
The process of trading the 50% retrace is simple, below is one example of a recent trade:
After finding the potential trade signal, decide to enter at market prices, or wait for a pull back to get your stop loss tighter to reduce overall risk.
In the chart example above, given the ‘perfection’ of the setup, as prices started to move up in the correct direction, a long entry could have been taken, momentum in the correct direction is always a good sign.
These obvious and ‘perfect’ price action setups at a 50% retrace level can lead to huge moves on daily chart time frames and learning how to identify and trade them can give you a very potent trading tool for your price action trading toolbox.
I personally feel that when a trader looks for the price action signal first, then matches up the supporting factors (confluence) they tend to make better trades.
What I am saying here is this…
If you see a giant signal on the daily chart, find out what other factors are backing it up and showing supportive evidence; we won’t always be able to trade a signal, mainly because we prefer not to fight the natural trend of the market, and many times we see signals forming against the trend.
In the next chart example below, the 50% swing retrace line and price action signal both came together at one common point and showed us a nice setup here, but what you should really take away from this example is that it was in line with the general thrust of the market, notice that prior to the pull back, we saw a nice rally up, and the pull back did not exceed the 50% area, rather it rejected it strongly and has now bounced aggressively higher to the new recent highs.
In this example we can see a 50% retrace and a price action buy signal that formed showing rejection of it:
Personally, I only get a handful of these setups every month on the daily charts, but when you see these swing retracements inside a general trend movement, its wise to mark them on your charts and then look for a price action confirmation entry signal.
These setups typically lead to some very significant, and potentially very profitable moves.
