Price Action Trading

Stage 1: Bars
The first stage in mastering price action is to know what any kind of bar is. This just not just mean differentiating between a reversal bar and an inside bar but also what the bar means in a given context. For example, you should master various aspects that strengthen and weaken a setup such as:

  • an up/down trend bar pair is a reversal signal only if its not in mid-range. 
  • A doji before a reversal bar greatly weakens the signal.
  • An inside bar needs to have a strong close to be a reversal signal, but a tail may be acceptable if its a failed breakout of a Trading Range.
  • doji signal bars often work for with-trend trades but fail for counter-trend trades.
  • huge bars are trading ranges

Stage 2: Bar Sequences
Master bar sequences. Most setups are bar sequences so you should be able to recognize them. For example:
  • 2 legged pullbacks 
  • three pushes with TCL OS
  • trend channel overshoots of MTL

In addition, you should be able to expect common bar patterns based on current bar. For example:
  • large bar could become possible Spike and Channel
  • large bar could be a failed breakout
  • a pullback bar followed by doji could become barb wire. 
  • bars suddenly turn tiny and doji-like in a strong trend could be TTR 

Stage 3: Market Structure
Market structure takes a bit more experience, but this is the most important. You should be able to keep track of whether the market is trending, is about to break out into a trend from a trading range, etc. You should also be able to determine the kind of move and the type of trading thats successful in this market. Is it a soft trend where you should buy every fL2? Is it a hard trend and you should short every L1? Is the range very tight and every trade is a scalp since every stop will be taken out? Is it a strongly trending market that is likely to run for a long time? Is it a wild and crazy market that's stopping everyone in all directions? The quicker you can recognize these, the faster you can act.

Market structure is your filter and overall guide ensuring you dont take trades in the wrong direction. If you like to swing for multiple points, you want to trade with-trend in a strongly trending market. If the market is weak or tight, you can trade both with and counter-trend (with some experience). 

Market structure mastery also allows you to sit though pullbacks and exit at the right time, maximizing your gains. Until you have mastered this, you will feel helpless in anything but the normal average trends and trading ranges. You will sit helplessly in a hard trend and short your way to the top in a soft trend.

However, even with market structure mastery, you wont be able to enter a setup correctly without mastering Stages 1 and 2. If your entries are stopped out and the market then moves in the direction of your original entry, you have a poor mastery of stage 2.

Stage 1 is so fundamental that you need to be a really poor trader to not master this. If you are buying above bear bars and selling below bull bars and many of your entries turn into 1tf and 5tfs you probably need to work on mastering your bars properly.

During trading hours, mark the chart with your read of the Stages above and compare your performance at the end of the day. This will help identify areas that need work and you should pick one or two specific deficiencies and correct them one after another. Most people are unable to fix all problems at once, so don't bother trying it.

Using the 10 week rule, if you have correctly identified items you seek to correct on the chart, you can move on to the next one.

See Also:

Price Action Basics I - Bar Selection
Price Action Basics II - Reversals and pullbacks in trends
Price Action Basics III - 1st Reversal or Opening Reversal
Price Action Basics IV - Trading ranges, Trends, fBOs and BPs
Price Action Basics V - The Open Gaps
Price Action Basics VI - The first bar
Price Action Basics VII - The initial trend, 1Rev and 1PB
Price Action Basics VIII - The Opening range and its measured move
Price Action Basics IX - Scalp and swing entries
Price Action Basics X - More than bars

Four trades off nine transitions
Rule of ten
Two Strikes Risk management policy

Trading plan: Trading Range day
Trading plan: Trend days
Trading plan: Hard Trends
Trading plan: Soft Trends
Trading plan: Spike and Channel days

Trading Psychology

15 comments:

  1. "A doji before a reversal bar greatly weakens the signal."
    Hi Cad, does a doji has to close near the middle of the range to be a doji, that weakens a RVB?

    ReplyDelete
  2. Does a doji 2 bars before a RVB weaken it too?

    ReplyDelete
  3. TD, any doji right before a reversal weakens it and it weakens any reversal signal, including 2 bar reversals. However, if the doji breakout traps both bulls and bears, its usually good for the next signal.

    ReplyDelete
    Replies
    1. Dear Cadaver :
      I was just introduced to your site from a fellow trader .
      I was wondering if you would be interested in doing a Skype session with our Meetup.com group on your style and experience .
      Please contact me and perhaps we could have a quick phone conversation to see if it would work out .
      Thank you .
      Duncan Adams
      duncan11a@gmail.com

      http://www.meetup.com/Indianapolis-Metro-Area-Traders-and-Investors/

      Delete
  4. great article cadaver. wonder where should I start on the readings on bars and bar sequences. the glossary would be more helpful with example charts. (:

    ReplyDelete
  5. Hi cadaver, what should we be watching for when we see these bar sequences?

    - three pushes with TCL OS = watch for possible trend reversal, W1P?
    - trend channel overshoots of MTL = ?

    ReplyDelete
  6. econbizer,

    - yes
    - MTL OS will cause at least a pullback so its often a good place to take profits.

    ReplyDelete
  7. just amazing explanation of price action.

    ReplyDelete
  8. Hi Cadaver

    Is MTL a micro trend channel, I don`t see it in the glossary.

    Kind Regards
    Gary

    ReplyDelete
  9. Soft Trend buy fl2, you mean buy a failed 2 legged PB short entry ?

    ReplyDelete
  10. Replies
    1. Hi, I dont put the email here to avoid spam, but if you donate even a tiny amount, you will see my email

      Delete