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 technical indicator to be leading, it would have to include either crystal ball technology or time travel technology. It could be argued that some fundamental indicators can be considered leading, in that traders will take trades in a certain direction based upon those “fundies”, but 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.
Price action is exactly what it sounds like: the action of the price of a currency pair (or other instrument.) 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 involves taking trades when 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 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 all the price action patterns and so on, 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.
AUD/USD Price LevelsEUR/USD Price Levels
Daily and weekly levels are particularly important. That’s why I mark those levels on my charts.
EUR/USD D1 Price Levels
GBP/AUD M15 Price Levels
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.
AUD/CAD Trading Room
I had a mentor who taught me to scalp. He used to say that you should always be prepared to trade when price is extremely out of place. When 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.)
EUR/GBP Extreme Movement
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.
Ugly 123 Reversal
CAD/CHF H1 123 Reversal
EUR/GBP M15 123 Reversal
The Bull-Bear Flag occurs when the market is taking a breath from a hard up or down trend. The flag appears as a channel in the opposite direction of the preceding trend, but signals a trend continuation.
EUR/USD H1 Bull Flag
EUR/USD H1 Bull Flag
Don’t hesitate to use price action signals in addition to the Strike 3.0 tools for picking trades.