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10 Price Action Trading Tips

1. Avoid trading when the market is far away from the moving average

When the market is trending, it tends to mean revert towards the moving average.
Depending on the type of trend you’re in:
  • In a strong trend, the market tends mean revert to the 20 MA.
  • In a normal trend, the market tends to mean revert to the 100 MA
  • In a weak trend, the market tends to mean revert to 200 MA
Thus, the last thing you want to do is enter a trade when the market is far away from it’s moving average.
Here’s what I mean:

Pro tip:
You need to identify the moving average that is currently being “respected” by the markets.
In a strong trending market, the moving average value is lower, and in weak trending markets, the moving average value is higher.

2. Support & resistance helps you identify areas of value to trade from

You want to buy low and sell high, right?
But the question is:
How do you define what’s low and what’s high?
Allow me to introduce to you…

Horizontal support & resistance

This is useful because it helps you identify areas of value on the chart.
Support – Area on the chart where you’re are looking to buy “low”
Resistance – Area on the chart where you’re looking to sell “high”
Here are a few examples:

Also, moving average helps you identify areas of value in the form of…

Dynamic support & resistance

These are Support & Resistance that moves along with the price.
Dynamic support occurs in an uptrend, and dynamic resistance in a downtrend.
They can be identified using moving averages. (I use 20 & 50 EMA).
This is what I mean…
Pro tip:
In a strong trending market, the price may not pullback towards horizontal support & resistance (which cause a lot of traders to miss the trend).
Instead, they tend to pullback towards dynamic support & resistance, which is an area of value you must pay attention to.

3. Trading at support & resistance gives you favorable risk to reward

Here’s the thing…
If you enter trades in the middle of a range, it never gives you a favorable risk to reward (at best 1 to 1).
An example:
If you enter trades at support & resistance, it would greatly improve your risk to reward.
Here’s what I mean:
Pro tip:
The risk to reward profile is only one side of the equation. The other thing you need to take into account is the probability of your trade working out.

4. The longer it ranges the harder it trends

If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion. – Paul Tudor Jones
If you notice the price has been ranging for a long time, you’re not alone.
Traders all around the world will be seeing the same charts as you.
Some will be queuing to short the resistance, and some will be trading the breakout.
If the price does trade above the resistance, shorts will get squeezed, and breakout traders will hop on the bandwagon.
That’s why price trend for a sustained period of time, due to the imbalance of buying/selling pressure.
Here are a few examples:
You’re probably wondering:
I don’t have the patience to wait this long. I want to capture big moves in the market, now.
And this is what I’ll cover next…

5. Narrow range candles usually lead to explosive moves

You’ve learnt that the longer price range, the harder it’ll trend. Now, you can take this concept further and apply it to the range of candles (instead of time).
The thing you’re looking out for is… narrow range candles.
Because you can expect an explosive move to occur soon.
Here are a few examples:
So, when you get series of narrow range candles, get ready for an explosive move.

6. Wide range candles serve as “hidden” support & resistance

A wide range candle is formed due to an imbalance of buying/selling pressure.
This represents “hidden” Support & Resistance in the markets (known as Supply & Demand by Sam Seiden)
Here’s what I mean:
There are traders who swear by Supply & Demand, and some who do just fine, with Support & Resistance.

7. False breakout provides one of the best entry to profit from “trapped” traders

First, let me explain what is a false breakout.
I define false breakout when price breaks support or resistance, only to close back into the range.
Here’s what I mean…
Why is this one of the best times to enter a trade?
Because you’re taking advantage of traders who are being “trapped”.
A trader, called Michael, went long on the break of resistance because he expects a rally.
After a few candles, price traded against him and closed under resistance.
At this point…
Michael is “trapped”. And chances are, there are many traders like Michael, who took the same breakout trade and are “trapped”.
Now, a proficient trader can take advantage of this.
By shorting the false breakout, with expectations that the “trapped” traders would cut their trade, and fuel further price decline.
And this my friend is the power of false breakout.

8. Trading with the trend gives you greater profit potential

A mistake made by many traders is that they become so involved in trying to catch the minor market swings that they miss the major price moves. – Jack Schwager
One of the best ways to improve your trading performance is, trading with the trend (and not against it).
This greatly increases the odds of your trade working out, and gives you a greater profit potential.
Here’s what I mean…

9. Continuation patterns work best in trending markets

You may wonder:
What are continuation patterns?
They’re chart patterns such as flags, pennants, triangles etc.
A big mistake traders make is, to trade these patterns in a range market.
An example:
So, when is the best time to trade continuation patterns?
You guessed it, in a trending market.
An example:

10. How to tell when a trend is ending

These are 3 things I’ll look out for:
  • A “respected” moving average is broken
  • Break of structure
  • Break of trendline
An example:
Let’s look it one by one…
  1. Price broke and closed below the 50 EMA, which was a dynamic support that has been “respected” by the  markets
  2. Price broke and close below the trendline
  3. A new structure low in the market is formed. Now you’ve got a lower high and lower low
When you’ve got all 3 factors lined up, it increases the odds that the trend is over.
Here’s another example: