Day Trading With Price Action Volume 2 - Galen Woods

2 ND EDITION Day Trading with Price Action Volume II: Market Bias Galen Woods Trading Setups Review Copyright © 2014-2016 Galen Woods PDF eBook Edition Cover Design by Beverley S www.tradingsetupsreview.com i Copyright © 2014-2016 by Galen Woods (Singapore Business Registration No 53269377M) All rights reserved First Edition, September 2014 Second Edition, April 2016 Published by Galen Woods (Singapore Business Registration No 53269377M) All charts were created with NinjaTrader™ NinjaTrader™ is a Registered Trademark of NinjaTrader™, LLC All rights reserved No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, without written permission from the publisher, except as permitted by Singapore Copyright Laws Affiliate Program If you find this course to be valuable and wish to offer it for sale to your own customers or readers, please contact Galen Woods to be an affiliate and get a percentage of each sales as commission Contact Information Galen Woods can be reached at:   Website: http://www.tradingsetupsreview.com Email: galenwoods@tradingsetupsreview.com www.tradingsetupsreview.com ii Disclaimer The information provided within the Day Trading with Price Action Course and any supporting documents, software, websites, and emails is only for the purposes of information and education We don't know you so any information we provide does not take into account your individual circumstances, and should NOT be considered advice Before investing or trading on the basis of this material, both the author and publisher encourage you to first seek professional advice with regard to whether or not it is appropriate to your own particular financial circumstances, needs and objectives The author and publisher believe the information provided is correct However we are not liable for any loss, claims, or damage incurred by any person, due to any errors or omissions, or as a consequence of the use or reliance on any information contained within the Day Trading with Price Action Course and any supporting documents, software, websites, and emails Reference to any market, trading time frame, analysis style or trading technique is for the purpose of information and education only They are not to be considered a recommendation as being appropriate to your circumstances or needs All charting platforms and chart layouts (including time frames, indicators and parameters) used within this course are being used to demonstrate and explain a trading concept, for the purposes of information and education only These charting platforms and chart layouts are in no way recommended as being suitable for your trading purposes Charts, setups and trade examples shown throughout this product have been chosen in order to provide the best possible www.tradingsetupsreview.com iii demonstration of concept, for information and education purposes They were not necessarily traded live by the author U.S Government Required Disclaimer: Commodity Futures Trading and Options trading has large potential rewards, but also large potential risk You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets Don't trade with money you can't afford to lose This is neither a solicitation nor an offer to Buy/Sell futures or options No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site The past performance of any trading system or methodology is not necessarily indicative of future results CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDEROR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN www.tradingsetupsreview.com iv Contents Chapter - Introduction Chapter – Finding a Tradable Time Frame 2.1 - Price Action Time Frame Index (PATI) 2.2 - Finding Tradable Time Frames with PATI 2.3 - Minimum Tradable Time Frame (MTTF) 12 2.4 - Useful Notes for Finding the Optimal Trading Time Frame and Market 14 2.4.1 - Optimal Trading Environment (OTE) Index 14 2.4.2 - Insufficient Trading Opportunities 16 2.5 - Alternative Chart Types 18 2.6 - Conclusion 21 Chapter – Swings 23 3.1 - Defining Swings 24 3.1.1 - Exercises: Price Swings 34 3.1.2 - Solutions: Price Swings 37 3.2 - Swing Pivots 39 3.3 - Pivot Types 43 3.3.1 - Basic Pivot 45 3.3.2 - Tested Pivot 46 3.3.3 - Valid Pivot 56 3.3.4 - Exercises: Pivot Types 75 3.3.5 - Solutions: Pivot Types 78 3.4 - Swinging It: Putting Them Together 80 3.5 - Conclusion 86 Chapter – Trend Lines 88 www.tradingsetupsreview.com v 4.1 - Drawing Trend Lines 90 4.1.1 - New Trend Lines 90 4.1.2 - New Valid Pivots 93 4.1.3 - Contains All Price Action Before The Trend Extreme 95 4.1.4 - When to Stop Adjusting a Trend Line 98 4.1.5 - Not Too Many Trend Lines 101 4.2 - Interpreting Trend Lines 102 4.2.1 - 6E 60-Minute 103 4.2.2 - ES 5-Minute 107 4.2.3 - 6J 30-Minute 112 4.3 - Conclusion 115 Chapter – Evaluating Market Bias 117 5.1 - Our Thought Process 118 5.2 - Step-by-Step Guide 122 5.2.1 - Trend Line Break 124 5.2.2 - Multiple Trend Lines 132 5.2.3 - Large Gap Between Price And Trend Line 141 5.2.4 - Almost Flat Trend Lines 146 5.2.5 - Short-Lived Trend Lines 148 5.2.6 - A Struggling Trend 151 5.3 - Conclusion 154 www.tradingsetupsreview.com vi Chapter - Introduction In trading, the market bias is king The market bias is simply the tendency of a market to move in a certain direction Is the market more likely to move up or move down? Answering this question is the cornerstone of successful trading After you master the art of interpreting the price action context and deciphering the market bias, you have a thousand and one ways to trade profitably However, there is no easy answer to that question This is because the market is lying constantly Don’t blame it You are part of it Not to mention that the market has to lie It has no choice It has to deceive traders into thinking that it is moving down, in order to move up It has to convince traders that it is rising up, in order to fall further The logic is simple Price rises until there is no one interested to buy at a higher price Then, it falls Price falls until nobody wants to sell at a lower price Then, it rises This story repeats and gives birth to the market swings we see on all trading time frames It follows that for the market to trend either up or down, it must so through a series of rising and falling In bull trends, the total magnitude of the rising swings is larger than that of the falling swings The opposite is true for bear trends – the total magnitude of downswings is larger than that of upswings www.tradingsetupsreview.com Chapter - Introduction In a bull trend, each time it falls, it is tricking some poor bearish traders into the market, before rising up again In a bear trend, each pullback upwards represents the same trickery in reverse Facing such a deceptive market, how we determine its bias? The key is to focus and stay relevant This is also where the difference between “market bias” and “trend” matters In this series, I will use these two terms interchangeably But, there is a subtle difference between them Trend exists on many levels Major trend, intermediate trend, minor trend, monthly trend, daily trend, hourly trend, and the list goes on Trying to figure out the trend of all degrees is not only impossible, but impractical for trading The secular trend lasting several years is not relevant for the day trader Similarly, the 5-second trend is worthless to the pension fund investing with a long-term horizon Think of market bias as the relevant trend We need to figure out the degree of trend that is useful for our trading time frame We must constantly try to interpret the trend that actually gives us an edge in our trading The trend in the appropriate trading time frame dictates our market bias Our job is to find the relevant trend (i.e the market bias), and focus on it In this volume, you will learn the essential tools for determining the market bias Our approach uses pure price action that involves observing market swings and drawing trend lines You will learn how to implement these basic concepts to the market objectively Towards the end of this volume, you will integrate them to form your assessment of the market bias (For clarification, the charts in this series are in the GMT +8 time zone.) www.tradingsetupsreview.com Chapter – Finding a Tradable Time Frame Our main analysis tool is the price chart It is a visual depiction of market prices over time Our choice of trading time frame affects how many bars we have in our charts and how the bars look Hence, the trading time frame has an important influence over our analysis context Thus, deciding our trading time frame is Step Zero An oft-repeated claim of price action traders is that price action works in all time frames This claim is largely true However, some trading time frames are not amenable to price action analysis Price action involves pattern recognition By claiming that price action works in all time frames, we are assuming that charts of all time frames are visually similar Compare Figure 2-1 to Figure 2-2 Both charts show 6A futures One chart shows 30-minute bars while the other shows 30second bars Do they look the same? If not, how are they different? www.tradingsetupsreview.com Chapter – Evaluating Market Bias This bearish reversal bar offered a shorting opportunity In fact, it was a Trend Bar Failure setup which is a simple price action pattern you will learn in the next volume Overall, this is a classic example of a deep bull pullback within a larger bear trend 5.2.3 - Large Gap Between Price And Trend Line When price is playing with the trend line, we know that we should look closer at the market to see if a reversal is looming on the horizon The scenario at the other end of the spectrum also warrants a closer look That is when price is too far away from the trend line The problem with price that is too far removed from the trend line is that the market bias can change without a trend line break Hence, when the price is too far away from the trend line, we must keep our eyes open and look out for signs of changes in the market bias In some cases, a trend line would form in the opposing direction to confirm a change in market bias, like the dual trend lines examples we went through in the last section However, in other instances, the market might reverse its bias without forming a new trend line Price usually gets too far away from the trend line when a strong trend develops, or when a trading session opens with a significant gap If a trend forms valid pivots along the way, we would have adjusted our trend line to catch up with the market movement However, a strong trend might move quickly without forming any valid pivots When that happens, we are unable to draw or adjust trend lines Hence, it is possible for a strongly trending market to move far away from the most recent trend line www.tradingsetupsreview.com 141 Chapter – Evaluating Market Bias An example is shown in Figure 5-13 First strong downthrust Tested highs showed strong bullish momentum No new valid lows; no adjustment of trend line Figure 5-13 A rising market without valid lows As the market rose without deep pullbacks, there were no new valid pivot lows Hence, we did not adjust the trend line, and the gap between price and the trend line widened An analysis of the tested pivots showed that price had been pushing higher with solid momentum There was no reason to consider a bearish outlook This held true until the first strong downthrust set off by the bearish outside bar at the top of the chart This downswing cleared the last swing low Moreover, the market’s effort to rise again was minimal, as shown by the three small bullish bars following the downswing This downthrust made us doubt our bullish bias Hence, we stepped aside and held back our trading activities www.tradingsetupsreview.com 142 Chapter – Evaluating Market Bias The above example in Figure 5-13 shows the 6A futures in 24hour trading Hence, there were no obvious gaps in the chart However, if you are not trading 24-hour charts, you will encounter gaps between trading sessions that will also cause price to move far away from the trend line Figure 5-14 shows a CL 4-minute chart with a gap between its regular trading sessions This example shows how price momentum can help us confirm the market bias in times of uncertainty Bullish momentum fading Large down gap that caused price to move away from the trend line First tested high had strong bullish momentum Bearish momentum returning Figure 5-14 Using momentum as a compass The large gap down from the previous session was an extreme exhibit of bearish prowess It also pushed the market a great distance away from the bear trend line The greater the distance between the market and the trend line, the more sensitive we need to be to signs of market reversal The first tested high of the session showed strong momentum, clearing above the preceding swing high It was a www.tradingsetupsreview.com 143 Chapter – Evaluating Market Bias bullish sign Hence, despite the bear trend line and our technical bearish outlook, it was unwise to take any bearish setups However, the next tested high showed that the bullish momentum was faltering Instead of clearing above the preceding swing high, the market merely closed above it for one bar before being rejected down That was the first hint that the bears might have returned The rejection from the session’s high pushed right below the preceding swing low, clearing it and closing below it for four bars It was a clear sign of bearish momentum Coupled with the earlier fading bullish momentum, we could confirm that the market bias was still bearish It was then time to look for short setups Figure 5-15 shows another example of the market moving far below the bear trend line Resistance from the bear trend line Both bullish thrusts showed good momentum Limited upside due to the bear trend line Figure 5-15 Going up against a bear trend line www.tradingsetupsreview.com 144 Chapter – Evaluating Market Bias After plummeting far below the bear trend line, the marketed rebounded sharply The bullish momentum was undeniable As the market was far below the bear trend line, we were more sensitive to bullish signs Hence, it was acceptable to turn our bias bullish at that point As price tested the bear trend line, the long top tail showed clear resistance While this pullback down offered an opportunity to go long, we must bear in mind that our profit potential was limited We could target the bear trend line, or the last swing high If we were able to find a trading setup with small risk, we might be able to take it However, more conservative traders would have skipped this opportunity You can compare Figure 5-12 in the last section with Figure 5-15 here They are similar in terms of our market bias assessment Technically, we were in bullish mode for both despite the overhanging bear trend line However, we were more likely to consider a trade in Figure 5-15 This is not because we knew that the market in Figure 5-15 was going to break-out and continue rising It is because of rewardto-risk considerations There were two clear resistance areas in each case They were the last pivot high and the bear trend line In Figure 5-12, the first pullback after we formed our bullish bias was shallow Hence, there was not enough room for profit even if the market rose back to test the last pivot high On the other hand, in Figure 5-15, the pullback down went deeper and hence the profit potential was higher www.tradingsetupsreview.com 145 Chapter – Evaluating Market Bias The point is that our assessment of the market bias guides us to focus on setups in the right direction Then, our knowledge of pivots and trend lines acting as support or resistance helps us to evaluate if the setups are worth taking, given their potential reward and risk We will focus more on the latter aspect in the final volume where we consider the concept of positive trade expectancy 5.2.4 - Almost Flat Trend Lines Technically, it is possible to encounter very shallow trend lines These almost flat trend lines occur when the two points of the trend line are found within a tight price range For instance, if the start point of a bull trend and the first valid low formed are near to each other in price terms, the resulting bull trend line will be relatively flat The closer in price and further in time the two pivots of the trend line are, the shallower the resulting trend line is You would wonder if such lines still deserve the word “trend” in their description Flat trend lines might indicate a lack of trend However, the more common scenario is that it indicates a trend that has yet to pick up momentum This is because by requiring a valid pivot before drawing a trend line, we are looking for a high threshold to confirm our market bias Valid pivots seldom form unless the market has a certain degree of trend conviction Often, price moves quickly away from a flat trend line to present situations we went through in the last section (Chapter 5.2.3 Large Gap Between Price And Trend Line) www.tradingsetupsreview.com 146 Chapter – Evaluating Market Bias Otherwise, the flat trend line quickly evolves into a steeper trend line with the formation of new valid pivots Figure 5-16 below shows such an example in the 6A (AUD/USD) futures market A B Shallow trend line drawn Price broke below and confirmed the valid high Figure 5-16 A flat trend line – cause for concern? This market was initially in a bullish bias In fact, you could see the current bull trend line at the bottom right hand corner of Figure 5-16 This price bar pushed to a new low and confirmed pivot B as a valid high Hence, we drew a bear trend line by connecting the start of this possible new bear trend A with the valid high B This bear trend line was hardly assuring It was so flat that it did not look like it was highlighting a bear trend www.tradingsetupsreview.com 147 Chapter – Evaluating Market Bias Since we could not be sure of the bearish bias, it was wise to wait and see The market gave us an answer pretty soon after, as you can see in Figure 5-17 below A B C Trend line grew steeper with a new valid high Together with this clear and strong break of the bull trend line, the bearish bias was clear Figure 5-17 Bear trend line grew steeper and more convincing A steeper bear trend line was possible with the new valid high C Together with the decisive break of the bull trend line, the bearish bias was clear The lesson here is not to fear flat trend lines or over-analyse them Just be patient with them Eventually, they will show you the market bias 5.2.5 - Short-Lived Trend Lines As you keep up with your trend line practice on actual markets, you will come across trend lines that fail almost right after you draw them www.tradingsetupsreview.com 148 Chapter – Evaluating Market Bias These short-lived trend lines often point to a market bias in the opposite direction A short-lived bull trend line hints at a bearish market; a short-lived bear trend line hints at a bullish bias Figure 5-18 below shows a bull trend line that failed quickly in the FDAX futures market The market broke this bear trend line with solid bullishness This bar confirmed a valid low for the new bull trend line The bull trend line failed right after it was drawn Especially when the market failed to clear above this resistance Be careful of the bullish bias this bull trend line implied Figure 5-18 Immediate failure of a new trend line is ominous The market was in a bearish bias before it broke the effective bear trend line decisively However, the strong upthrust was followed by an equally strong downthrust (Look at the threebar and six-bar consecutive bearish bars that followed.) Given such conflicting price action, we were hoping for some clarification This bar confirmed a new valid low for us to add the first bull trend line to the chart It offered fresh bullish hope However, this new bull trend line failed as quickly as it formed This immediate failure of a bull trend line had bearish www.tradingsetupsreview.com 149 Chapter – Evaluating Market Bias implications It made us more wary of subsequent bullish attempts This was why we were more sceptical when we got this second bull trend line When price struggled to push beyond the high of the last bullish drift, it confirmed that the bulls were not ready to turn the market tide Indeed, this bull trend line failed again, without offering the falling market much support Figure 5-19 below shows another example of a quick failure of a trend line, this time from the 6A currency futures market Due to the scale of the chart, the valid lows might not be apparent Hence, I’ve highlighted the swings that formed the valid lows Broke above the extreme high by just one tick to confirm the valid low The market was rejected down right after confirming the valid low Trend line drawn with this valid low Trend line drawn with this valid low Figure 5-19 Quick failure of bull trend lines in a bearish market www.tradingsetupsreview.com 150 Chapter – Evaluating Market Bias This price bar broke above the resistance by just one tick to confirm the valid low With the valid low, we drew a bull trend line However, right after the trend line was added to the chart, the market started falling and swiftly broke below the trend line Despite an impressive five-bar bullish thrust, the rise above the resistance was rejected quickly This instance was similar to the first bull trend line Just after we drew the bull trend line, the market fell and broke the trend line In this case, the failed bull trend lines not only confirmed the bearish bias, they were also potential trend line break setups Go back and look at the examples again You will notice that trend lines that fail quickly usually represent a pullback on a higher time frame This is why there’s no need to complicate our analysis with a higher time frame If you learn how to interpret what you see on your active time frame well enough, you are not missing out anything critical 5.2.6 - A Struggling Trend Trends pause and look like they are going to reverse They keep doing that But usually, they resume after a few tries A bull trend resumes by making a new trend high A bear trend resumes by pushing to a new trend low When a trend does not resume after a few tries, it is a struggling trend Struggling trends are usually a prelude to a www.tradingsetupsreview.com 151 Chapter – Evaluating Market Bias prolonged sideways market or even a reversal It pays to trade carefully when you observe a struggling trend Use four attempts as a rule of thumb If a market tries to resume the existing trend for four swings and fails, it is struggling Figure 5-20 below shows an example It shows the later part of a session in the CL futures market Existing bearish bias The blue lines mark out eight swings, of which four swings tried to resume the trend, but failed Push to new low rejected (early warning) Figure 5-20 A struggling bear trend ended with an upwards drift The market bias was bearish as shown by this bear trend line This push to a new trend low was rejected clearly by the market It was an early warning that this downwards trend might be over However, it was in no way conclusive of a bullish takeover Compare this price action (blue lines) to the earlier pullbacks in this downwards trend The earlier pullbacks resumed the www.tradingsetupsreview.com 152 Chapter – Evaluating Market Bias trend with two downswings At this point, the bear trend failed to resume even after four downswings It was struggling Combined with the bullish rejection mentioned in point 2, it was reasonable to hold back our search for bearish setups If you were short, it’s a good time to cover your position However, it was premature to adopt a bullish bias with confidence The market drifted upwards until the end of the session Of course, not all struggling trends reverse nicely like Figure 5-20 Let’s take a look at another example of a struggling trend in Figure 5-21 The market was bearish Bull trend line that failed fast; bearish The bearish trend resumed only with the fifth downswing Figure 5-21 Struggling, or not? The market was in a bearish trend This pullback took four downswings to resume the bearish trend The pullback upwards was strong enough to form a bull trend line But it was a bull trend line that failed almost www.tradingsetupsreview.com 153 Chapter – Evaluating Market Bias immediately after forming Recall from the last section that this was a bearish sign Soon after resuming the bearish trend, the market lapsed into another multi-swing pullback The fourth downswing in the pullback could not resume the trend Technically, according to the rule of thumb I mentioned, it was a struggling trend But trading is not about rules of thumb It is about what is really happening in the market There were good reasons to downplay this supposed struggle of the bear trend First, remember that we just saw a short-lived bull trend line It pushed our market bias towards the bearish side, and made us more sceptical of the bullish price action that followed Second, the broken bull trend line has clearly flipped into a resistance Look at how price bounced off the bull trend line Given such a bearish context, the inability to resume the trend by the fourth downswing was not a deal-breaker for traders who were looking to short 5.3 - Conclusion This is a tough chapter to digest But this is the closest you get to assessing the market bias in real trading, without actually trading Getting the market bias right is the key to our trading edge As you will see, price patterns only help to limit our risk Our trading edge comes chiefly from getting the market bias right If you get the market bias right, you can pretty much enter along with the bias with any setup www.tradingsetupsreview.com 154 Chapter – Evaluating Market Bias A few useful tips for deciphering the market bias: Do not be too quick to decide that the market bias has changed When you cannot decide if the market bias has changed, it is always safer to assume that it has not and that the current bias is still intact Of course, nothing is safer than just stepping aside and waiting for more price action to unfold Regardless of the market bias, not trade against the most recent strong momentum By strong momentum, I am referring to tested pivots that manage to clear their preceding swing pivot If the most recent tested high showed strong bullish momentum, not take any short trades until there are signs of bullish momentum fading or bearish momentum returning (Like the example in Figure 5-14.) Watch out for the first tested pivot of each session This is especially applicable for sessions that open with a gap away from the previous session Wait for the first tested pivot of the session and see what it shows you about the momentum of the session If the first tested pivot of the session shows strong bullish momentum, you should consider that in your market bias assessment MARKET BIAS  Always have a directional bias in the market but be prepared to change it  Trend lines are our best tool for mapping the market structure  Don’t be afraid to step aside when the market bias is unclear www.tradingsetupsreview.com 155 .. .Day Trading with Price Action Volume II: Market Bias Galen Woods Trading Setups Review Copyright © 20 14 -20 16 Galen Woods PDF eBook Edition Cover Design by Beverley S www.tradingsetupsreview.com... Process 118 5 .2 - Step-by-Step Guide 122 5 .2. 1 - Trend Line Break 124 5 .2. 2 - Multiple Trend Lines 1 32 5 .2. 3 - Large Gap Between Price And Trend Line 141 5 .2. 4 - Almost Flat... 2. 1 - Price Action Time Frame Index (PATI) 2. 2 - Finding Tradable Time Frames with PATI 2. 3 - Minimum Tradable Time Frame (MTTF) 12 2.4 - Useful Notes for Finding the Optimal Trading