Price action

Trading Systems Free Forex Trading Systems
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Hello everyone,

I want to shake things up today to promote some discussion. Let’s change the way we think about Forex (if only just for a second). I’m gonna drop some bombshells. Here goes nothing…

[B]1) 99.9% of Technical Indicators are USELESS [/B]

Technical indicators will lose you money in the long run. Why is that so, you ask? Because technical indicators can only plot the past, and can never tell you the future. The price action influences the technical indicators - never the other way around. By the time a trade sets up according to your indicator, you’ve already missed the big movement. The only reason your indicators showed a valid entry is because the price already moved in one direction or the other. Indicators lag behind price. Indicators show you the signals too late. Trading based on indicators means you’ll always be one step behind. You’ll be forever jumping into the market too late.

Want a concrete example? By the time your moving averages cross, you’ve already missed out on the action (which is what causes them to cross in the first place). How much you’ll miss out on depends on the time frame you’re trading, but it could be anywhere from a few pips to a few hundred pips. In other words, you’ll be too late to make any real money on the trade.

I said 99.9% of technical indicators are useless. The only one worth using is the 200 EMA. This moving average will point out trends, support and resistance points, and give you clues to the price action. You should ditch all other technical indicators.

[B]2) Money management is PRIORITY #1 of any system[/B]

Money management, done right, can turn even the worst systems into profitable ones. You need to establish your S/L and T/P rules before entering any trade. Your money management should only allow you to risk a certain percentage of your capital with each trade (e.g., 2-3%).

Furthermore, the exit point is more important than the entry point. You need to know exactly when you are going to exit the trade, whether it goes in your favor or turns against you. The system must have a good risk / reward ratio (R:R ratio). How many losses would it take to wipe out one good trade? If you use a 1:3 ratio, then 3 losing trades in a row will cancel out 1 good trade (e.g., an average S/L of 50 pips and T/P of 150 pips).

Your money management should be based on how many trades you expect to win (e.g., 60%) and how many pips on average you aim to win (e.g., 100 pips). Then, just factor in the amount you are willing to lose per trade (e.g., 2% of your account), and go from there to determine all the parameters. This is not an easy thing to do, but the time invested will be worth it. I recommend working it all out mathematically before trading and sticking to it.

[B]3) Learn to trade based on PRICE ACTION[/B]

Is the market trending or ranging today? Will the pair find support at its new price or will it encounter resistance? Are there any price patterns on the chart? What does the 200 EMA tell us?

These are the elements of trading you need to master. You have to identify the market conditions (e.g., trending, ranging, breakout, whatever) based on previous price action and the 200 EMA. You’ll find that the price bounces around off the 200 EMA. In an upward trend, it will bounce of the moving average and continue upward. Other times, it will reach its peak and descend downward toward the moving average. Other times, it will stay within a range for a few days before deciding what to do.

Price action does not lag. Price action is raw trading based on pattern identification and being able to identify market conditions. Learning to trade this way is worth the effort. People talk about “the market changing over time”. Trading with price action never changes. The principles always remain.

In short, you need to become a chart expert. Look at the past price action based on the 200 EMA. Find patterns in how the price will find levels of support and resistance (e.g., Fibonnaci retracements).

[B]4) Never trade below the 4H chart.[/B]

You need to identify the big picture, and trade accordingly. The smaller time frames will just lose you money, especially when you factor in the costs to place the trade. The daily time frame is preferred when trading price action. Get in early, and ride out the profits.

[B]5) Do NOT trust backtest results based on an indicator[/B]

It’s an illusion to see the price going exactly the way your indicator would have predicted and to get excited over backtest results. For instance, look up any moving average system and you’ll see that the price follows nicely in sync with the moving averages.

The same could be said for many other systems. The problem is that the indicators are still lagging behind the price action. They are not predicting anything. The price will move in a certain direction, and your indicators are basically just telling you that: “Yep, the price moved either up or down”. It’s impossible to tell what the price will do based on indicators.

In any moving average system, for instance, the lines may cross but then immediately uncross. Or they may become intertwined. Or they may cross and then cross in the other direction. Yet, when you look at it through a backtest, it’s easy to say that “The moving averages were messy and I wouldn’t have taken this trade”. But in the exact moment, you may have taken it. It’s impossible to know because initially the trade looked appealing. This is the danger of indicators. They suggest one thing, but can be entirely incorrect. They can only plot the past price movements, when it’s too late and when it’s easy to have hindsight bias.

And YES, these criticisms apply to ALL indicators, including MINE that I’ve recommended in other systems.

[B]RECAP[/B]

Give up on technical indicators. They’re a lost cause. Just look at all the ‘holy grail’ systems out there based on technical indicators. They’re a dime a dozen. But they can never predict the future price action.

Work on money management and practice trading price action. The exit is more important than the entry - remember that.

Study the charts and look for patterns. Try to trade just based on the 200 EMA on the daily time frame (use a simulator to practice). You’ll be surprised.

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May you please provide your definition of “price action”?

What about indicator divergence?

How many systems have you personally seen where a “good risk / reward ratio” is consistently applied across all trades? I.e. Every trade works out to be clean 1:3, every single time.

I don’t agree that your exit point is more important than an entry price level. They’re equally important in my eyes- no single price point has precedence when it comes to Entry, Stop, Limit.

Again, I’d defer to your definition of price action.
You mention patterns- a pattern isn’t a pattern until the relevant candles close. Furthermore, most price action theories dictate awaiting [B]candlestick signals[/B] before entering the market- is this what you advocate?

Don’t even know where to begin here- there’s not enough time in the day to refute this point.
It’s an inaccurate fallacy touted by “price action experts” to never drop beneath the illustrious “H4”.
I’ve never met a professional trader who has touted this message- it’s simply ridiculous.
Here’s a thread I started months ago- The myth of lower timeframes = “noise”.

I’d challenge you to read through that, and point out anything you see which can support your argument.

I agree here. I don’t “trust” back-testing anything, at all.
I believe in trading live, bottom line.

What patterns do you “look for” to trade?
There really isn’t much of a difference between an ascending wedge, and an overbought environment on a stochastic indicator.

I think the problem boils down to lack of education.
People don’t understand how most indicators are even supposed to be used, let alone how the data is compiled and represented.

Looking forward to responses,
Jake

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Price action describes how the price changes over time. We look at past history including swing highs and swing lows, trend lines, and support and resistance levels. It is a method of predicting price based on actual patterns in how the price has moved in the past.

I do not understand what you mean by “indicator divergence”. Please explain.

Regarding risk/reward, I’m not saying that every trade has to be 1:3. What I am saying is that every trade needs to have a defined level of risk before entry. Obviously, there is no reason to cut profits short at the 1:3 level if you expect bigger movement. But you need to have a minimum level of T/P to keep your R:R in good balance (i.e., if you consistently cut your profits short for fear of a market reversal, your R:R will start to decrease toward 1:1 or lower).

Entry is not nearly as important as your exit. You have to be able to let your profits run and cut your losses short. Identifying a winning / losing trade and knowing when to pull out is infinitely more important than trying to find the best “entry” point. Your trade can turn on you very fast, and learning to get out at the right time is what makes a system a winner. Exit is what determines your losses and your profits, which comprises your money management, which determines the success of your trading system.

Patterns - any price action movement that occurs consistently over time. For example, the price will always find resistance and support levels and will often interact with the 200 EMA in very specific ways. In my opinion, if you are waiting for a single candlestick to close to dictate whether you enter a trade or not, then you are not zoomed out on your chart far enough!

Regarding the “myth of the lower time frames”, I’ve read your thread and I’m not impressed. You are splitting hairs here. Your idea is that the lower times can be used as ENTRY points. That means that you are still trading in the direction of the trend on the bigger time frames. All you’re doing is using a lower time frame to find your entry point. I’d say it’s a waste of time, but there’s nothing inherently wrong with doing that because you’re still trading based on the big time frames. Really trading the lower time frames, in my opinion, means ignoring the large time frames and trying to detect price action solely on the lower time frames. You must always start with the big trends (e.g., daily chart) and go from there.

Back-testing is rubbish, especially if it’s based on indicators. On the other hand, trading simulated data can be very informative.

You bring up “patterns” numerous times. Do you know what the word means? Or are you wanting concrete examples? I’m assuming you’ve seen an EMA line with the price bouncing off it before? Or how a ranging market can retrace to Fibonacci levels? These are patterns. There are many more, but it’s basically any kind of recurring price action movement that you can detect.

I do not know what you mean by “ascending wedge” vs. “overbought stochastic indicator”, so I can’t comment on that. But I’m speculating that what you are talking about how price action patterns and technical indicators can mirror each other. It’s true, but the indicator will always lag behind the price action. Indicators give you a false sense of security and provide people with the courage to jump into the market. Their courage is actually based on what the price just did, and not what it’s about to do. If only more people understood this fact.

You talk about the “problem” being “lack of education”. To what problem are you referring to? People don’t need to understand how indicators are “supposed to be used” and how the data is “compiled and represented”. All they need to know is that indicators lag behind price, and have no predictive utility. Problem solved.

Thanks for the discussion.
-FP-

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In an effort to separate personal opinion from fact, Babypips should implement a new “post” disclosure requirement.

It should read something like this,

[B]“The Information I’ve posted on this thread is opinion based on my own experience and should not be accepted as fact/facts. [/B]

ForexPhantom, just because you haven’t had success trading with technical indicators doesn’t mean indicators are useless.

And, because you haven’t had success trading shorter time frames doesn’t mean money can’t be made trading them. :wink:

PS all that fib retracement stuff is crap, I’ve NEVER had any success using them. :17:

.

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Whats the difference between an indicator “lagging” (as you put it) and “looking at past history…trend lines…how the price has moved in the past”? Isn’t “price action” a lagging indicator of the current level of price?

“I do not understand what you mean by “indicator divergence”. Please explain.”

How can you claim that technical analysis via the use of indicators is useless 99% of the time and not know what divergence is?

Agreed on the R:R comments.

Faster timeframes are not solely used for entry points.
I’ve taken many trades off a 5 minute chart without ever looking @ a slower chart ahead of opening/closing the position. High frequency trading and many strategies most professionals use are meant to take advantage of small movements in price, in very small timeframes.

Regarding patterns- typically, when a “price action” trader uses the word pattern, they’re referring to a price action structure such as a wedge, triangle, channel, etc (or, even a candlestick signal). You’re using the term to describe behaviors (i.e. bounces off MVAs, FIB levels). Yes, I’m constantly on the lookout for behaviors which may be repeating themselves and love finding scenarios where the market is in a nice predictable rhythm. I personally rely heavily on the 20EMA- 200 is way too big picture for my style.

Again, regarding your comment: “I don’t know what you mean by ascending wedge vs. OB stochastic”. You make some pretty harsh/strict claims after that sentence, and you’re really off-base with what you’re trying to say (r.e. “…if only more people understood this fact”). A bearish/bullish divergence on an indicator is one of the only leading signals of price action you’ll ever see out there.

Regarding my lack of education comment and your response. I disagree 100%. If someone is using an indicator, whether it be a moving average, pivot point, FIB, stochastic, RSI, MACD- they 100% need to be completely aware of how the formula supplies a result and how that result is supposed to be interpreted given the current market environments and price levels.

The problem is far from solved. Indicators have an immense predictive ability when used properly, alongside other strategies to read movements in price (supply demand, structure, environment, etc etc).

I’d end with asking how you use price action to enter/exit the market. What is your sole strategy on finding a trade setup (regardless of where you’re looking to book profit)- how do you scan the charts for a signal?

Jake

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Here’s a link to StockCharts chart school with a detailed explanation of the stochastic oscillator.

Stochastic Oscillator [ChartSchool]

Carefully read and study the section on divergence. :wink:

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Like the guys whom trade price action claiming indicators are rubbish because they lag. Do you not understand candles are also indicators. Your presious daily indicator lags what mmm 24 hours lmao.

And for the record I trade PA

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Hello and welcome.

While I understand the spirit of your comment, think about it deeply for a moment. There are no “facts”, “universal truths”, “holy grails”, or anything else of the sort in this market (dare I say, the world?). There’s an exception to every rule. If we implemented what you are saying, every piece of text, thread, tweet, message, book, document, movie, poem, and song would need your disclaimer. Therefore, it’s assumed and not necessary.

This market is incredibly nuanced. If you can make money trading those time frames with indicators, by all means go for it. I’m very happy for you. Please, share your strategies. Don’t be bashful!

Money can be won or lost in an instant in any endeavor, be it investing or gambling or whatever. Are you confident enough to say that your system will stand the test of time over a period of 10 years? Does your system still account for the larger time frames? Do your indicators serve any other purpose than to help you spot a trend?

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No, this is not correct. Candlesticks are not indicators in the sense that I’m using the word. Candlesticks show you the history of the last trading day. When in formation, they show you the current price unfolding before your eyes.

If you want to play word games, then everything (even our eyes we use to see the charts) are indicators. Let’s not go down this path!

I’m talking about technical indicators (e.g., moving averages, stochastics, MACD, RSI, etc.). People look at these indicators as if they are the secret and the holy grail to trading, without considering the actual price history on the chart, the current daily or weekly or monthly trend, what the market is currently doing, etc.

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He did not say “divergence”. He said “indicator divergence”, as if referring to a specific indicator (out of the numerous ones out there).

Thanks for the link though. I’ll check it out.

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Bro, if it looks like a duck, walks like a duck, quacks like a duck then its probably is a duck. The moment you look open your chart regardless of what’s on it you are looking a lagging indicators displaying past history. Past history is excately that, history. Your precious 200ema, do a study. 50% of the time price rebounds, 50% it moves straight through. Knowing why you trade is more important that the how. I reckon this thread with die of natural causes

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Price action is not a lagging indicator (at least not how I’m using the term). Indicators plot and react to the history of the price. Price action isn’t lagging - it’s the actual price history. If a candle was bullish yesterday, then the pair went up yesterday. Nothing more to it than that. Contrast that, for example, with trying to study a technical indicator to figure out what the price did. A moving average cannot tell you what the price did yesterday, it can only tell you how the average changed based on yesterdays price. Do you see the distinction I’m making? Price action is the actual price history, whereas technical indicators are the reaction to that history.

You said, originally, “indicator divergence”. I assumed, based on a literal interpretation of what you wrote, that you were referring to a specific indicator that had something to do with divergence. If you’re talking about divergence in general, then I think it’s not necessary to use any indicators to spot it. There are 4 stages to any pair / stock / commodity / whatever: base phase, up trend, stabilization, and down trend. Pretty much just like a bell curve, only you have to figure out how big the bell will be, when it will reach it’s peak, and so on. You can spot a trade break out without stochastics indicator or any other indicator targeting “divergence”. This is where a larger moving average comes in handy. If the moving average is sideways (i.e., the price has remained stable over a period of X), then it’s reached a support level. To spot the break out, the price will go beyond the current support level (and, the moving average indicator will tail up, but of course this happens after the price jump). That’s your signal to buy aggressively because the price is breaking out of it’s comfort zone.

To trade a smaller time frame with high frequency, you either have a broker with extremely low spreads or a large amount of starting capital. Even so, those variations in price still align with the larger time frames, and I would imagine just as much money could be made with less energy investment by trading the big time frame.

If you believe that indicators have such strong predictive validity, then maybe you should get rid of the candlesticks on the chart and trade only looking at your indicators. Cover up what the price is doing and just use your indicators to place trades. Make it entirely mechanistic --> if X, then Y. I’d be very interested in those results.

Finding a good trade = identifying what the pair is doing. Analyze the chart and figure it out. That’s it in a nutshell.

I appreciate all the feedback I’m getting from everyone. It’s very helpful to me. Thank you all very much. I hope we can all make lots of pips together.

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Price is the price. If yesterday the price closed at X dollars, that’s a fact. If the previous price was Y dollars, that’s a fact. These are truths. We know the past price history - it can be represented numerically.

We also know the current price at any given moment. Again, it can be represented numerically.

What I want you to realize is that an indicator (even the 200 EMA) only reflects the history of the price. What you’re trying to say is that the price only reflects the history of the price. That’s a bit silly, don’t you think?

Indicators lag behind the price. They have no predictive utility. If they did, everyone would be an instant Forex millionaire superstar by just blindly following indicators. Yet, this never happens.

Please refute what I’m saying. Give me 1 indicator that has predictive utility that can be used to base an entire trading system on. Just 1. We’ll all be rich!!

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What I’m say is price is determined by a nations economic climate. Not the past momvement. Know that climate ie fundamentals and you half way there. What you do after that is of your concern only. So what works for you certainly won’t work for me. In fact you will probably have chickens when I say I solely trade of tick charts. No need to worry about the past. Fundamentals n the here and now. Simple

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Can’t do that… guess that proves your statement, “99.9% of Technical Indicators are USELESS” is 100% correct. :56:

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Of course! As an aside, I’m geographically close to you. We should have a trading pow-wow to figure this market out?

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What is your strategy?
How do you find trade setups?
How are you entering the market, what is your signal?

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It’s basically stage analysis. You identify what the pair or stock is doing and trade accordingly. It can either be in an upward trend, downward trend, or ranging inside a stability zone. Of course, even during a trend there can be regressions toward the moving averages (this is why they are useful to detect retracements).

For instance, if a pair has reached a support level, you must wait for it to break out beyond it’s current “high” in this support zone. This is usually coupled with it trading above a longer period MA and an increase in volume.

If it fails to break out, you don’t trade. If it closes below the previous low of the support zone, and it’s below a longer period MA (e.g., 30 SMA), then it’s a good sign the pair will go bearish.

You stay in the trade until the price reaches a new stability zone.

Every pair has a continuous life cycle made up of detectable stages. You just need to find out what part of the cycle it’s in and react.

You can also use other methods to detect the trends and retracements (Fibonnaci lines, for instance). Notice that with those, it’s a manual object that you must personally plot on the chart (and not a brain dead technical indicator).

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Ok, good luck out there.

See you around,
Jake

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You too. Best of luck to everyone!!