How to trade with price action (kickstarter) galen woods

How to Trade with Price Action (Kickstarter) Trading Definitions, Concepts & Price Patterns Galen Woods ©2014 Galen Woods Contents Notices & Disclaimers i Introduction iv Price Action Trading Primer 1.1 Definition of Price Action Trading 1.2 Origin Of Price Action Trading 1.3 Markets For Price Action Trading 1.4 Essential Price Action Trading Concepts 1.5 Price Action Trading Methods 1.6 Beyond The Primer 1 11 Beginner’s Guide To Reading Price Action 2.1 One Price Bar 2.2 Three Price Bars 2.3 Reading Price Action 2.4 A Rose By Any Other Name Would Smell As Sweet 12 12 19 20 22 A Beginner’s Guide to Day Trading Futures Using Price Action 3.1 Choose The Futures Contract You Want to Day Trade 3.2 Get Your Trading Platform and Data Feed 3.3 Learn How to Trade with Price Action 3.4 Trade in Simulation 3.5 Start Day Trading Futures Using Price Action For Real 24 24 25 26 27 27 CONTENTS 10 Price Action Bar Patterns You Must Know 4.1 Reversal Bar Pattern 4.2 Key Reversal Bar 4.3 Exhaustion Bar 4.4 Pinocchio Bar (Pin Bar) 4.5 Two-Bar Reversal 4.6 Three-Bar Reversal 4.7 Three-Bar Pullback 4.8 Inside Bar 4.9 Outside Bar 4.10 NR7 4.11 What’s Next? 29 30 31 33 35 37 39 41 43 45 47 49 10 Price Action Candlestick Patterns You Must Know 5.1 Doji 5.2 Marubozu 5.3 Harami Candlestick 5.4 Engulfing Candlestick 5.5 Piercing Line / Dark Cloud Cover 5.6 Hammer / Hanging Man Candlesticks 5.7 Inverted Hammer / Shooting Star Candlesticks 5.8 Morning Star / Evening Star 5.9 Three White Soldiers / Three Black Crows 5.10 Hikkake 5.11 What’s Next? 51 52 53 55 57 59 62 64 65 68 69 71 10 Chart Patterns For Price Action Trading 6.1 Head & Shoulders 6.2 Double Top / Double Bottom 6.3 Triple Top / Triple Bottom 6.4 Rounding Top / Rounding Bottom 6.5 Island Reversal 6.6 Rectangle 6.7 Wedge 6.8 Triangle 74 75 78 81 84 87 90 93 95 CONTENTS 6.9 Flag 98 6.10 Cup & Handle 100 6.11 What Next? 102 Price Action Trading Strategies (Beyond Price Patterns) 104 7.1 Market Bias - Price Action Context 105 7.2 Price Action Trading Setup 109 7.3 Trade Exit Plan 110 7.4 Creating Your Own Price Action Trading Strategies 112 Instantly Improve Your Trading Strategy with Support and Resistance 8.1 What are Support and Resistance levels? 8.2 How to find support and resistance levels? 8.3 How to use support and resistance levels in your trading strategy? 8.4 Support & Resistance - Essential & Effective Ways to Trade a Channel 9.1 Trading Trends with Channels 9.2 Trading Reversals with Channels 9.3 Trading Ranges with Channels 9.4 Trading Break-outs with Channels 9.5 Make the Most out of Trading Channels 10 How to Keep Trading Records as a Discretionary Price Action Trader 10.1 Recording Price Action 10.2 Recording Discretion in Trading 10.3 The Critical Difference: Ex-Ante versus Ex-Post Trading Records 11 What’s Next? 11.1 How to Trade with Price Action (eBooks) 11.2 How to Trade with Price Action (Online) 11.3 Day Trading with Price Action Self-Study Course 114 114 115 120 122 123 123 124 125 126 127 128 129 130 131 133 133 133 134 Notices & Disclaimers Copyright © 2014 by Galen Woods (Singapore Business Registration No 53269377M) All rights reserved First Edition, October 2014 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 Contact Information Galen Woods can be reached at: • Website: http://www.tradingsetupsreview.com • Email: galenwoods@tradingsetupsreview.com Financial Disclaimer Trading is risky Please consult with your financial adviser before making any trading or investment decision The information contained within this book including e-mail transmissions, faxes, recorded voice messages, and any other associated content (hereinafter collectively referred to as “Information”) is Notices & Disclaimers ii provided for informational and educational purposes only The Information should not be construed as investment/trading advice and is not meant to be a solicitation or recommendation to buy, sell, or hold any securities mentioned Neither Trading Setups Review nor Galen Woods (including all content contributors) is licensed by or registered with any regulating body that allows us to give financial and investment advice Trading Setups Review and Galen Woods makes no claim regarding past or future performance While there is always a risk a loss when considering potential for profits Losses connected with trading futures contracts or other leveraged instruments can be significant Hence, you should consider if such trading is suitable for you in light of you financial circumstances bearing in mind that all speculative trading is risky and you should only speculate if you have sufficient risk capital Trading Setups Review and Galen Woods does not manage client assets in any way Trading Setups Review is an educational service, not an advisory or stock recommendation service All examples are provided for educational purposes You agree that Trading Setups Review, its parent company, subsidiaries, affiliates, officers and employees, shall not be liable for any direct, indirect, incidental, special or consequential damages All trades and investment decisions in your account are at your own risk There is no guaranteed trading performance Members and readers agree to indemnify and hold Trading Setups Review, subsidiaries, affiliates, officers and employees harmless from any claim or demand, including reasonable attorneys’ fees, made by the member or any third party due to or arising out of a member’s use of the service Company names, products, services and branding cited maybe trademarks or registered trademarks of their respective owners and the owners retain all legal rights The use of trademarks or service Notices & Disclaimers iii marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Trading Setups Review Trading is risky Please consult with your financial adviser before making any trading or investment decision Affiliate Disclaimer Trading Setups Review seeks to provide you with the best trading resources As a result, we always include useful links in our articles Some of these links are affiliate links It means that we might receive a commission from your purchases made through those links But you not pay more For transparency, we are disclosing our list of affiliates below: • • • • • • • • Amazon MarketInOut TheStreet.com Bookdepository.com Firstrade Optionshouse ADVFN Forex Smart Tools You should assume that any links to the companies listed above are affiliate links However, we include links (affiliate or otherwise) in our articles only if we feel that they provide value to you Please don’t hesitate to contact us if you need any clarification Introduction This eBook contains a selection of articles I have written on Trading Setups Review You can find out more about me by clicking here (All articles in this eBook are available for viewing online at http://www.tradingsetupsreview.com for free.) In this Kickstarter Edition, I have carefully picked 10 articles and guides that are especially useful for traders new to price action trading It covers an introduction to price action, common price patterns, and basic trading tools I hope you find this eBook a friendly companion for your offline learning, and I wish you all the best in your trading career Price Action Trading Primer 1.1 Definition of Price Action Trading Price action trading is the process of observing market price movement to anticipate future price movement The purpose is to transact in the market to make a profit As it uses past and current price action to predict market movement, it is a branch of technical analysis Traditional technical analysis focuses on chart patterns like double top/bottom, head and shoulders, and flags However, price action trading is increasingly used as an umbrella term that includes analyzing chart patterns, bar patterns, and candlestick patterns Look at how search volume in price action trading has increased steadily while searches of chart patterns has fallen Price Action versus Chart Patterns in Google Trends Instantly Improve Your Trading Strategy with Support and Resistance 120 This method keeps you focused on important support and resistance levels instead of flooding your chart with dozens of potential support and resistance levels 8.3 How to use support and resistance levels in your trading strategy? Trading Direction In up trends, support levels are likely to hold In down trends, resistance levels tend to hold Hence, if you see that support levels are holding up, you might consider taking only long trades The reverse is true if you see resistance levels holding up Paying attention to price levels is a simple way to find a clear market bias MSFT Weekly - Big Picture Analysis This example is from our weekly chart analysis It shows major swing lows that are holding up as support, which is a sign of a bullish market Instantly Improve Your Trading Strategy with Support and Resistance 121 Filter Bad Trades Your trading strategy might have its own way of determining market bias In that case, not confuse your analysis with support and resistance Rely on your trading strategy for a primary bias However, you can use support and resistance analysis to augment your trading strategy For instance, if your trading strategy dictates a buy, but price is right below a major resistance level, you might want to wait for a clear break-out of the resistance before entering on pullbacks By waiting for more price action to unfold near support and resistance levels, you can avoid low-quality trades Trade Entries Look for bullish signals at support levels and bearish signals at resistance levels This is the key to finding the best trades in any trading strategy MACD with Inside Bar Winning Trade This chart shows a trade from the MACD with inside bar trading strategy The bullish inside bar was a result of support at an area of earlier price congestion It had the makings of a high-quality trade Instantly Improve Your Trading Strategy with Support and Resistance 122 Trade Exits Support and resistance, even the minor ones, are effective as price targets and stops Retrace Day Trading Setup Winning Trade For day traders, the high and low of the previous trading session are important support and resistance levels This example (retrace day trading setup) shows that the low of the previous session was the perfect price target for this trade 8.4 Support & Resistance - Essential & Effective Support and resistance are essential features of the price landscape Do not navigate prices without them Before considering any trade, mark out the support and resistance levels These potential zones of demand and supply will help you understand the market Use this understanding in your trading strategy to your instant advantage Ways to Trade a Channel Do you trade with a channel? There are dozens of channel for trading including linear regression channel, moving average channel, and trend line channel Regardless of your favorite channel tool, there are ways to trade them Let’s learn about them to make the most out of your trading channel 9.1 Trading Trends with Channels This is a trend trading strategy To use this trading method, you must have a channel that is sloping at a healthy angle to confirm that the market is trending A trend line channel is the perfect tool for this trading method Draw trend line channels to find retracements in trends Channel also provide good target objective Ways to Trade a Channel 124 Let’s go through this channel trading example We drew a trend line with two swing highs The trend line was sloping downwards Then, we drew a parallel line starting with the swing low to complete the channel Prices went up to test the trend line, which is also at the level of a previous congestion area Hence, the context was excellent for a bear trade, so we went short with the bearish inside bar The channel trend line provided the perfect price target for this trend trade We could have taken the short trade using only the trend line However, having the channel gave us a clear exit point for this trade To learn more about trading trends with trend line channels, read Channel Surfing: Riding the Waves of Channels to Profitable Trading 9.2 Trading Reversals with Channels When price exceeds the channel trend line, it could be a climatic move, implying that the trend has exhausted itself We can then look out for reversal trades like the one below Ways to Trade a Channel 125 The break-out of the channel trend line got rejected by a bullish outside bar, setting up a bullish reversal trade Reversal trades are usually low probability trades so we must select only the best trades Follow these rules to find the best reversal trades • Ensure that the channel is going against the trend of the higher time-frame Effectively, you are looking for a retracement of a larger, more powerful trend • Trade reversals with steep channels Steep channels are unsustainable • Strong rejection of break-out of channel trend line (like the outside bar in the example above) 9.3 Trading Ranges with Channels Channels are not just for trending markets They are also useful in highlighting range-bound trades In horizontal channels, we can trade without directional bias We can sell short at the top of the channel and buy at the bottom The Gimmee bar trading setup is an example of trading ranges with channels However, in the Gimmee bar strategy, the Bollinger Bands acted as the channel Ways to Trade a Channel 126 Trading sideways market using Bollinger Bands as a trading channel Read our review of the Gimmee bar trading setup to learn more 9.4 Trading Break-outs with Channels The earlier strategies assume that the channel will contain price action and seek to buy low, sell high What if this assumption fail? Then, we might have a break-out trading setup that often offers quick profits However, judging which break-outs are valid is an art that is hard to master • Pay attention to volume Valid breakouts are strong with increased volume • Look out for break-out bars with above average bar range (Read Yum-Yum continuation pattern.) For trading strategies that finds break-outs with channels, take a look at: • Quick Trade using Linear Regression Channel - A classic example of a break-out trade • A Simple Day Trading Strategy - It uses MACD to confirm the breakout of Bollinger Bands Ways to Trade a Channel 127 9.5 Make the Most out of Trading Channels Channels are powerful trading tools that highlight trading opportunities for all types of basic trade setups However, for some traders, having too much trading options is a drawback They look for trading setups everywhere They take a retracement trade, and then a reversal trade, and then think that a break-out is impending All these within a few minutes They are overtrading A solution is to draw a larger channel to analyze the larger price context and only take trades in its direction For indicator-type channels, you can increase both the look-back period setting and the deviation setting to create a larger channel to contain long-term price action Let’s go channel surfing 10 How to Keep Trading Records as a Discretionary Price Action Trader Most traders agree that trading records are essential to improving your trading performance But when it comes to the specific pieces of trading information to record and how to it, things get fuzzy Some traders think that the trading records from their brokers are enough Others might record their reasons for taking each trade Some might have a trading emotions journal Some traders even track their physiological responses, like their heart rate and body temperature To get the right answer, we must look at the goal of keeping trading records Our aim is to improve our trading results And we can this by refining the source of our trading edge which is determined by our trading style Here, I will focus on what a discretionary price action trader should record and the right way to so Most price action traders trade with discretion This is also how I trade This trading style has two main components: price action and discretion How to Keep Trading Records as a Discretionary Price Action Trader 129 Trading Records for Discretionary Traders 10.1 Recording Price Action As price action traders, we find our trading edge from price movement Thus, to improve our trading performance, we must make price action a cornerstone in our trading records Move beyond recording basic trade information like the profit/loss and time of entry/exit Start recording your price action analysis I am not referring to the price action reasons behind each trade (For instance, I took this trade because of a Pin Bar.) I am referring to a constant analysis of the market’s price action, regardless of whether you are considering a trade It is almost like a market commentary to yourself A simple example goes like this The day opens with a gap down It is trying to make a bullish push but is rejected by the low of the last session A bearish Pin Bar forms, but the top shadow is quite short I expect the market to fall The market is falling now It makes a new low A reaction should be coming soon How to Keep Trading Records as a Discretionary Price Action Trader 130 It is an ongoing analysis that encompasses price structure, patterns, and speed It includes your description of price action as well as your expectations of it There are two main benefits to recording your analysis of the market in real-time Over time, these trading records will be the basis of your trading rules For instance, your records show that after several Dojilike bars, it is better to abstain from trading This is a valuable conclusion you can use to improve your trading rules Also, recording your analysis in real-time will help you avoid hindsight bias This common bias causes traders to over-estimate their trading skills With real-time recording, you will come to terms with your ability to read price action in real-time You will not fall into the trap of looking at historical charts and thinking that you know how to find the perfect trade each time (Anyone can this.) If you have truly mastered the skill of analysing price action, these real-time analysis records will be the proof With them, you will gain the confidence to trade in real-time 10.2 Recording Discretion in Trading What does being a discretionary trader mean? It means that you not trade with fully automated trading systems It also means that your trading rules are not rigid You bend your rules according to the intuition that you have developed (or are trying to develop) The basic conviction is that in your brain, there is something valuable you cannot quantify or reduce to rigid rules This something is often called the trader’s intuition/gut This fuzzy idea of discretionary trading has an obvious problem How to Keep Trading Records as a Discretionary Price Action Trader 131 When you “exercise your discretion” in trading, are you relying on solid intuition? Or are you just using discretion as an excuse for your lack of discipline? Adding a simple step to your record keeping process will answer this question For each trade, record if that trade is one that conforms to your trading rules completely, or one that requires you to bend them The former is a mechanical trade, and the latter is a discretionary trade Label each trade as mechanical or discretionary before the end of the trade, before you know if the trade is a winner or loser After collecting a decent sample of trades (labelled as mechanical or discretionary) in your trading records, review their performance Is your discretion adding value to the rigid rules? Do the discretionary trades better than the set of mechanical trades? If they are adding to your trading edge, you have well-honed trading skills If not, you should probably stick to your rules and start working on your trading discipline 10.3 The Critical Difference: Ex-Ante versus Ex-Post Trading Records When keeping trading records, distinguish between ex-ante and ex-post records In our discussion above, we have emphasised this principle As humans, we are extremely susceptible to hindsight bias There is almost no chance of avoiding it when we look at historical charts Learn technical analysis for one day and you can pick the best trading setup of the decade from a historical chart It seems so easy Adhering to this simple principle will keep your trading records accurate, consistent, and useful How to Keep Trading Records as a Discretionary Price Action Trader 132 Let’s see why • Ex-ante record: The market will rise after this bullish reversal pattern • Ex-post record: The market did not rise This is undeniable proof that our expectation was wrong Recording everything ex-post will give rise to hindsight bias • If the market did not rise, we would conveniently forget the fact that we expected it to rise • If the market rose, we would congratulate ourselves for being such a good price action trader It is human nature to want to feel good and forget bad experiences Our minds distort the truth easily Unless we record it before our minds get the incentive to so This is why discretionary traders experience difficulties when they trade in real-time They are either overconfident of their ability or they are unable to trust their own read of the market In both cases, they are doomed For such traders, keeping good trading records of their price action analysis in real-time is the best solution (Mechanical traders can back-test their trading systems Also, realtime decisions not play a role for their style of trading.) If you are a discretionary price action trader and you have not been keeping solid trading records, it’s time to start (Image credit: “Fondos archivo” by Archivo-FSP - Own work Licensed under CC BY-SA 3.0 via Wikimedia Commons.) 11 What’s Next? Congratulations for mastering the basics of reading price action Ready to move to the next level? Here are some recommended options 11.1 How to Trade with Price Action (eBooks) You have just completed the Kickstarter Edition of this series The Strategies Edition contains an explanation of 10 price action trading strategies It includes a variety of price patterns and minimal indicators The Master Edition explains the more advanced concepts in price action trading with a focus on intraday trading Click here to download the 3-book “How to Trade with Price Action” series for free (or pay what you want) 11.2 How to Trade with Price Action (Online) The “How to Trade with Price Action” eBooks are compilations of selected articles on Trading Setups Review and are updated periodically For our latest articles on price action trading, visit our website now What’s Next? 134 11.3 Day Trading with Price Action Self-Study Course Interested to learn the complete price action trading framework I use to trade? Take a look at my self-study course Click here to learn more ... Next? 11.1 How to Trade with Price Action (eBooks) 11.2 How to Trade with Price Action (Online) 11.3 Day Trading with Price Action Self-Study Course 114 114... work with NinjaTrader here You can also read this article and use these indicators 3.3 Learn How to Trade with Price Action Day trading futures using price action is the simplest way to trade, .. .How to Trade with Price Action (Kickstarter) Trading Definitions, Concepts & Price Patterns Galen Woods ©2014 Galen Woods Contents Notices & Disclaimers