Have you been looking for a strong, simple, and useful price action trading strategy lately? This price action strategy will teach you how to spot dead zones, red zones, and end zones. Be ready to hear some Football terminology! This sounds a bit complex. But trust me, you are going to want to pay special attention to this trading strategy. It might be all you need to become a full-time trader.
Price Action Trading is very straightforward. Instead of relying on fundamental indicators (qualitative stories in the news) or indicators that are typically lagging, price action traders focus on the actual price movements.
The relationship between ongoing price movements and current price levels is strong. Price action trading strategies are ideal for day traders, due to the fact they use information that is accumulating in real-time. Here at Trading Strategy Guides, we will help you discover how to make quick trading decisions and how to become an effective price action trader.
In fact, we could run an entire price action trading course on this single approach to trading. We think we have uncovered the best price action trading strategy. Make sure you read, study, and take notes on this approach to trading. Also, please leave a comment below to give us some feedback. We will do our best to answer your questions.
This is a stock price action strategy, a forex price action strategy, and an options trading strategy. The pure price action trading system needs no price action indicator to help you trade. Also, read about Scaling in and Scaling out in Forex.
Price action is simply how the price will react at certain levels of resistance or support. It is the action of the price of a currency pair (or other instruments). This technical analysis approach will help you learn things from price history. You'll learn how to identify the swing high/swing low, trend lines, and past support or resistance areas.
Now, this could be the price of testing a support or resistance level. It could even be when the price movement creates a swing high or swing low.
Price action requires no lagging indicators or moving averages to distract you from the price. The chart will have a clean look to it. It’s refreshing sometimes to see a clean chart with no indicators. In fact, some traders make a living without ever looking at an indicator.
Price action is displayed in the form of the candles on a chart and the interaction of those candles with each other. People who are strictly “Price Action” traders have also been humorously called “Naked Traders”. They trade with charts that are naked of any other indicators other than the price candles. Price Action (or PA) traders use only historical price levels and candle patterns to determine trade entry and exit levels. Some more progressive PA traders may also use trend lines and Fibonacci measurements, but these are still based upon the price action.
Price action trading also involves taking trades when the price shows reactions at critical price levels.
Start by looking left on your chart for significant levels (usually “violent” price rejection in the form of “pin bars”) where you can expect the price to react.
The higher the time frame you find these levels, the more significant they will be. You are likely to get bigger reactions from higher time frame price levels.
I don’t plan on showing you each and every price action pattern, just the ones that are my personal favorites. Simple descriptions of price action patterns can be found in any number of places on the Internet. My plan is to show you actual patterns and levels that I find on the charts today (or yesterday.) They’re not pretty or perfect, but they demonstrate the concepts of Price Action Trading.
You can apply moving averages, MACD, stochastic, RSI, Fibonacci retracement, Bollinger bands, and more to your charts. Keep in mind, when you are searching for the red zones based on this strategy, these indicators could distract you and cause you to make bad trading decisions. So with that being said, we don't recommend using a specific indicator for this strategy.
If you do decide to use them, some common technical indicators used by today’s traders include:
- Moving Average Indicators allow you to easily identify the “average” price of an asset over a specific period of time. Simple moving averages focus solely on the mean price within a time period. Exponential and weighted moving averages adjust for the fact that recent information is more relevant.
- Moving Average Convergence Divergence (MACD) is a momentum indicator that compares moving averages to an easy to read “buy line.” Once the moving average has moved above this line, you may want to consider opening a new position.
- Stochastic Oscillator is another momentum indicator that enables you to see if current price trends deviate from the expected norm. It was developed by George Lane in the 1950s and is characterized by it's clear buy and sell signaling.
- Relative Strength Index (RSI) is an index that takes measures whether an asset is overbought or oversold, using a scale ranging from 1 to 100. As the RSI approaches the more extreme ends of the scale, the risk of trading decreases.
- Fibonacci Retracement is another method for gauging support and resistance. Using time-tested Fibonacci patterns, traders can get a more nuanced view of the market.
- Bollinger Bands are bands that make it easier to identify the price channel an asset typically trades within. When prices move towards the edges of this channel, they will either breakout (requiring further analysis) or return to the expected norm.
While these indicators can be very useful in certain circumstances, you should also be cautious when using them as a price action trader. Our price action trading strategies will be much more focused on finding “red zones”, rather than focusing on the raw application of technical indicators.
The main risk of using indicators (explained below) is that they tend to “lag” behind—each of these indicators is derived using historical data. This is something that can be distracting to you as a price action trader. Be careful of trading solely off of these signals. Use your indicators as a second data point, in tandem with the price action strategy for best results.
Leading & Lagging Indicators
You’ve probably heard about leading and lagging indicators. Calling something a “leading” indicator seems to say that the indicator “leads” the market and market direction can easily be predicted by a “leading” indicator.
A “lagging” indicator suggests that the indicator doesn’t really indicate anything current, but shows only historical direction.
I believe both of these terms are bogus and misleading.
I suggest that all technical indicators are lagging. They express what has happened in the past. For a forex technical indicator to be leading, it would have to use either crystal ball or time travel technology. It could be argued that some fundamental indicators can be considered leading, in that traders take trades in a certain direction based upon those “fundies." Even still, fundamental indicators (news, data releases, etc) still represent historical information.
Now that I’ve said all that, all we have to use to predict future market movement is historical market movement. And what’s the best way to summarize historical market movement? Indicators. Lagging indicators.
So don’t be fooled by rhetoric about “leading” and “lagging” indicators. These indicators serve a purpose in showing us how current price action relates to prior price action. But always remember that “Price Action is King." Use indicators to show you levels where historically significant price action has occurred and anticipate that similar price action could occur at these same locations. Current price action is the most important thing.
Daily and weekly levels are particularly important. That’s why I mark those levels on my charts.
If you can identify a trading range early on (defined by 4 points, 2 up and 2 down), you can play reversals at the up and lower levels of the range. You can continue to do so until there is a confirmed break of the range. Then you can trade in the direction of the break. You can watch the price action as it approaches the edges of the range and see how price exhaustion (RSI) affects and is affected at these levels.
I had a mentor who taught me how to scalp. He used to say that you should always be prepared to trade when the price is extremely out of place and when the price is where it shouldn’t be. Those times happen when unexpected news occurs. Sometimes they just happen. Remember that these are usually just quick in and out opportunities. Especially if they are identified on shorter time frames. Just remember that each long candle “wants” a 50% retracement. The market must breathe. Be ready when it takes a breath. Many of these trade opportunities can be confirmed with the Strike 3.0 Reversal signals (see the next example.)
If you’ve been in our trading room for very long, you’ve probably heard me mention the 123 Reversal setup. I’ve traded these regularly for many years with quite a bit of success. They are based upon trader emotion and can be relied upon to provide a great statistical edge from which to glean a few pips of profit.
The Bull-Bear Flag occurs when the market is taking a breath from a hard-up or downtrend. The flag appears as a channel in the opposite direction of the preceding trend but signals a trend continuation.
Don’t hesitate to use price action signals in addition to the Strike 3.0 tools for picking trades.
Trading Time Frames
We recommend this strategy for swing traders and day traders. Anything under an hour time period you will not see us using this strategy. The reason we have to develop day trading strategies using price action patterns is that the price action signals behave more consistently on larger time frames. That doesn't mean this method won't work with a scalping strategy. But with our testing, we revealed this price action strategy works best on a one hour time chart and above.
Benefits of Price Action Trading Strategies
Price action trading is ideal for day traders for several reasons. Because these strategies require very limited use of technical indicators, they are simple and can be applied in all markets. Some traders, especially day traders, believe these indicators are incredibly “noisy.” Minimizing the amount of noise you are taking in will make it much easier to make quick, educated decisions.
Additionally, price action strategies are ideal for day traders because they are clear and actionable. Once you can effectively distinguish the dead zones from the red zones (explained below), the lines for trading will be clearly drawn and you can trade automatically. The purpose of these strategies is to eliminate the need for speculation while also protecting you from trading risks.
Price Action Strategy
In this price action trading strategy, we'll cover dead zones, red zones, and end zones. These zones will help you determine how to time your trades and take calculated risks. Let's dive into how to spot these different zones.
Price Action Setups: The Dead Zone
Nobody likes the dead zone in trading. This "dead zone" indicates that the price action is going nowhere. It's not making higher highs or lower lows. The buyers and sellers are at a standoff and no one is winning the fight. It's almost like in a soccer match when the two teams play an entire game only to end up in a tie or draw.
They fought the whole game only to end up with a mediocre result. This could be interpreted to us traders like this. We entered a trade in the dead zone only to come up with a 3 pip winning trade or a 0 pip trade that you held onto for six or so hours. We do not want mediocre results we want to WIN. Winning is our main objective so this "dead zone" we want to avoid at all costs.
In many ways, your stop-loss orders function as a sort of the “back of the end zone.” These orders help create a range where acceptable losses can be risked and acceptable gains can be achieved. By carefully timing the market so you are in the red zone, you will be in a position to take advantage of channel breakouts. Spotting these channel breakouts will allow you to achieve low-risk, short-term gains. This is the entire objective of price-action trading.
Here is what a "dead zone" in trading looks like in trading:
So if you see this occurring, you know that no indicator on earth will make you 1,000s of pips here. Scalpers will enjoy those small retracements, but for this price action strategy, we are not interested in this small channel or consolidation.
Let's dig a little deeper as to what is really happening here.
As you can see, buyers get on a short run only to get taken over by sellers. Then sellers get on a run and then hit a floor and get take over by buyers. There are no higher highs or lower lows being taken out. This process will go on and on until a district winner is validated. It's simply traders making trading decisions!
So since we now know what the dead zone looks like, we can go to step #2 in this price action analysis process and determine where the "RedZone" is.
Price Action Setups: The Red Zone
If you know anything about American football, you know that the red zone the area between the 20-yard line and goal line. As you can imagine, this is where all the action happens. At this spot on the field, the offensive team is most focused because they can see the finish line. They only need a few more yards until they reach their goal of a touchdown. Same can be applied to this price action approach. We saw that the dead zone was stagnant and boring. Hardly any movement and not many pips to come by. But once we get in a red zone, traders get razor-sharp in their approach to get to their end goal of a 20, 60, maybe even a 100 pip winner!
Let's take a look at what a red zone will look like:
Using our example, if the price would have hit our red zone and continued to the upside, we would have been interested in a buy trade. This is because price reached a new higher high and gave us an indication that this will become an uptrend.
Same with when the sellers took over. If the price would have hit this red zone and continued to the downside, we would have been interested in a sell trade because there were new lower lows and it gave us an indication that this will become a downtrend.
To explain how you draw a red zone, you simply find a "dead zone" currency pair, stock, etc... Then you draw a red zone rectangle above the resistance and below the support. I highlighted these zones in one of the images above for reference. This could be anywhere between 10-20 pips wide. Here is an example of this:
Let's go a little further in time and see what happened when it hit the red zone:
As you can see when the price action broke the dead zone, if you would have placed a buy entry order you would have grabbed about 35 quick pips if you would have closed the trade right away.
Have you ever heard the saying, "A picture is worth 1000 words?" That statement is true with the chart image above. You can see on this hour time chart many traders got in at the Red zone and pushed the price up only about 40 pips. Then they got out immediately. As a result, the price continued to draw down to our red zone again and now is hitting a new support level. Remember, resistance in the past means support in the future.
Now, since we know what the red zone looks like and how to identify it, let's get into the last step which is the "Endzone."
Price Action Setups: The End Zone
This is our end goal. We want to go from the red zone to the end zone consistently with this price action strategy. To do this, simply draw a rectangle on your price charts similar to our drawings. You only trade these zones with this price action red zone trading strategy. I like to draw the red zones anywhere from 10-20 pips wide, but you can adjust these accordingly. This gives a little room for the price action to do its normal "retracement" before heading to the upside or downside.
So looking back at our price action trading example, here is what you would have done:
This red zone is where many traders are making buying or selling decisions. Once you determine that the price action will not return into the dead zone, you can go ahead and make the buy trade here.
Note**If the price action was in the lower red zone then we would be looking for a sell trade.
Using our example, we saw a breakout candle occur from the red zone so this is where you would have entered the trade.
Place your stop loss in the lower red zone. If the price action would make its way down to the lower red zone, then the trend is obviously not going up anymore and you want to get out this trade immediately.
You can exit the trade when you see that the trend is most likely over (due to consolidation in price action.) We saw that the price bounced off if this resistance so that is why you would have exited this trade in profit.
This price action strategy is a great day trading price action strategy to use. There may not be hundreds of price action setups a day, but when you find a trade that follows the Price Action Red Zone Trading Strategy you should see great results. Here are 5 key things to remember about price action:
- Useful alongside technical indicators (RSI, MACD, Fibonacci, etc.)
- Ideal for short-term decision making.
- Helps avoid the “noisy” behaviors of securities.
- Entry and exit points are easier to identify.
- It's a perfect blend of speculative and quantitative analysis.
Another reason why this strategy is so popular is that it can be easily adjusted according to each trader’s personal preferences.
Be sure to leave us a comment below and tell us what you think of this strategy, and how you trade using price action analysis. Also, make sure you check out one of the most popular strategies that we call the 80-20 RSI strategy.
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