Hi guys,
I’m watching 3 potential setups for next week, please share your thoughts about the setups and the analysis.
Cheers!
P.S.: The EURAUD and AUDCHF are nicely mirrored graphs, which is logical due to the EURCHF correlation, but it shows nicely when putting the graphs below each other 
This also means that when considering these setups you might split risk between these too.
Haha Benedict would love that, he’ll do anything to get back on TV, he’d even appear on ‘Come Dine With Me’ if they’d let him.
I’d also like to know about a position size calculator for commodities and indices, I don’t really understand pip value etc when it comes to anything from sugar to the FTSE 100 and would be very interested to learn.
Check the Tesco daily chart out below:
Some crazy stuff right there…
Well, D2 charts contain a lot more information, so, yes, I could call them more reliable, if that makes sense. For example, D2 time-frame consists of six 8H candles. The longer the time-frame, the higher probability setups you can get. In my opinion. D1 and D2 are the way to go, because we are swing traders and looking to hold the trade no more than ~2 weeks (apart from Weekly setups). I might sometimes take setups on Weekly time-frames, but there is this thing, if you go higher than Weekly time-frame it becomes dissipated meaning that it isn’t that accurate anymore.
LOL, have fun trading this mess and good luck in finding sr lines and spotting high probabiltiy signals !
I quite like the EURAUD and AUDCHF charts, not only are they engulfing bars but they are also nice looking pinbars on the W2 (we are moving into long term investment here). A good way to trade them to avoid huge SL would be to enter at 50% retracement. Let’s wait and see what Aaron says about it as it is him who introduced this way of trading.
I don’t really like the USDJPY, it went down to 96.7 very recently and I think that is where the sr line belongs to which makes it a small pinbar in the middle of nowhere.
I want to add that looking at all AUD and NZD charts on the weekly, it looks like these two are going to suffer in the near future. there are BEEBs, BUEBs or 2BRs on almost all of them.
I’m seriously considering shorting one of the two next week.
Yves
[QUOTE=“Piping Hot;556439”]
LOL, have fun trading this mess and good luck in finding sr lines and spotting high probabiltiy signals ![/QUOTE]
Haha Think I’ll stick with FX for now until Benedict can get his hands on that Enigma machine he keeps talking about.
BA
Step 3:Watching for Price Action at Key S/R Levels
Three steps to finding price action setups
1.Identifying a Trend
2.Finding Key S/R Areas
3.Watching for Price Action at Key S/R Levels
What are Price Action Candles?
Price action is simply price in action and encompasses every tick movement that price makes. Price action isn’t contained to certain candlesticks or time frames. As price action traders we make sense of price by grouping price action together in various time frames and viewing it in the form of candlesticks. These price action candles tell us the story of how the market is treating a given asset. Price action tells us if the market is bullish/bearish, if a reversal is looming or if price is winding up for a break out. We don’t need indicators; price alone gives us the most pure picture of what the market has already done and what it may do in the future. We can look at the entire candlestick chart to get an overview of how the market has historically treated a given asset, and we can also watch individual candles forming to get an immediate look at what the market is doing.
Watching candles form on the chart is like getting an up to the minute news report on what the market is doing. Because the information is so telling and at times so clear, it can almost seem wrong. The reason why people have such a hard time believing price action works is because it is such a simple approach to the markets. Humans have a way of creating overly complicated solutions, and because of that many people believe price action doesn’t work.
Why do Price Action Candles Work?
The reason price action works is because it tells us exactly what the market doing and thinking, and it does it in real time. Price movements are the result of supply and demand. Because humans are predictable and tend to buy and sell in patterns, we can use that predictability to make trades with high probabilities of success. I will explain price action using this simple illustration. I live in Iowa, and as cold weather starts moving in the animals begin acting in a certain way. The actions and habits of various animals begin to change depending on the upcoming season. Even before the actual cold whether arrives some animal’s sense the warm season is coming to an end, and begin acting differently. Even when it is 90 degrees outside, I know once the animals begin acting a certain way, the cold season is right around the corner. As it gets closer, the changes in the animal’s behavior become more obvious. They repeat this behavior every year, and because of this we can link their behavior to the weather and seasons with fairly high probability.
In the exact same way the market also acts in a certain way before reversals or breakouts. We can see price begin to act in a certain way as it approaches a key S/R level. As price gets closer to these key levels, the market becomes more aware of it, and can react in ways that tip us off to predictable outcomes. For example, when price is trending strongly and runs into an S/R line, the market can form a pin bar. This tips us off to a rejection of higher/lower prices and can tell us with fairly high probability that a price reversal is right around the corner. We can use certain price action patterns and candlesticks to predict future movements in the market, and it is all because of the predictable and repeatable nature of the market.
What are Price Action Candles Actually Telling Me?
Price action candles can signal both reversals and continuations in price. When certain candles form at key S/R levels, they can tip us off to what the market is planning on doing in the near future. In the example of a reversal, if price is moving in a strong bull trend, reaches a key S/R level and forms a large bearish pin bar at that level; that can tip us off to a potential price reversal. The same pin bar candle can also signal a continuation in price. If price is in a strong bull trend, pauses and then forms a large bullish pin bar; that can tell us that the market was taking a break but is ready to resume the trend. Another price action candle that can tip us off to future price movements is the inside bar. If there is a strong bull trend and price breaks through a key S/R level then forms an inside bar above this level, it can mean the market is taking profit before the next move higher. In the same example of a strong bull trend, if price reaches a key S/R level but the inside bar forms below this level, it can mean the market does not have the strength to break through the level and is getting ready for a reversal.
As you grow in your skills of price action you can learn these candle formations and the chart context that they form in to help you trade in line with the markets predictable movements. While they don’t always play out, they do have a high probability of success. A high probability setup is called having an edge. This “edge” is what we rely on as traders to make consistent profits. While a single trade may fail, if you trade with an edge, your long term profits will outperform your losses. Candlesticks by themselves can have multiple meanings, but when we combine these price action candlesticks with key support and resistance levels, the trader’s edge is greatly increased. This is why price action traders never just trade S/R levels, and never just trade price action candles, but we wait for those price action candles to form at the key S/R levels to give us the greatest edge.
Bringing it All Together
With the 3 steps laid out we now know the basics to finding price action setups. First we find out the overall market structure (is it trending or ranging). This helps us figuring out “what“ support and resistance tools we will use, and also helps us find out “what” direction we need to trade to have the greatest edge. Next we find the key S/R levels. The best levels will be those at the daily and weekly timeframe. The S/R levels tell us “where” to be looking for price action. Once we have identified the levels we are looking to, we wait for price to reach these key levels and form our price action candlesticks. These candlesticks tell us “when” to enter the trade. With these three steps we can know the “what”, “where” and “when”. The only thing we are missing is the “why”. All three of these steps together tell us the why. If you were to ask yourself “Why does this trade have an edge?” these three steps can answer, “because it is with the trend, and it has formed at a key S/R area, and a high probability candlestick has tipped me off to what the market may do in the near future”. Now that we have the what, where, when and why we now have the basis for finding high probability setups using price action.
Conclusion
These three steps are all that is required to identify price action setups. These steps are at the core of what I do as a price action trader. No matter how advanced my trading knowledge becomes, these steps are always at the core of what I do. Many price action traders may be doing part or all of these steps without realizing it. I think once traders are aware of these steps they can begin focusing on strengthening their ability to find high quality setups. Once a trader has mastered these core steps they can start focusing on the various dynamics of each trade to help them make even better trading decisions.
Specific Price Action Setups
There are many different price action candlesticks and price action patterns. Here I will briefly cover a few of the most popular price action candles and how they can be using to find continuations or reversals in price.
Pin Bar
The pin bar signals a rejection of price. In the example below the large upper wick shows that during the time frame of this candle, the market pushed prices high and then pulled it right back. When pin bars form at key support and resistance levels it can tell us that the mainstreet traders jumped in because they thought a breakout was occurring, and the savvy trader pulled prices right back. Because the savvy and institutional traders are often on the right side of price movements, and the mainstreet traders are often on the wrong side, we can use these types of price action setups to trade in line with the savvy/institutional traders. Not only do we know the story behind why pin bars form, but we can also know why they can play out so well. The reason pin bars can play out so well are because many mainstreet traders are still holding onto their positions in hopes that price will make a second successful breakout. As prices begin moving farther against these traders they begin liquidating their postions. This type of sudden liquidation is called a long/short squeeze. These squeezes can create a firestorm of buying/selling and fuel a reversal.
Inside Bar
This price action candle can also signal a reversal or continuation in price. While inside bars can be more difficult to trade because they can have many meanings, if traded in context of the trend and S/R lines, they can still give the trader an edge. An inside bar can show the market is taking a break after a strong trend. Mainstreet traders may perceive this break as a reversal and begin taking positions against the trend, once price resumes the trend it can create a long/short squeeze and the breakout of inside bars can be very powerful. This can serve to validate that the trend is not over and price may continue to trend into the near/mid future. In the example below I have shows an inside bar that turned into a continuation signal. Any price action trader who went long at the break of the inside bar would now be with the trend and clearly have an edge with this trade.
Another great article Aaron, looking forward to learning more about continuation patterns and how to trade inside bars.
Thank you!!
BA
Hi everyone. Im a relative new trader and Im learning to trade primarily AUDUSD and USDJPY.
My apologies if I’m posting on the wrong thread, but im pretty curious how does the Chinese economy actually affects the AUD. It seems like the aussie is always very volatile when the Chinese releases some important statistics and what not.
On top of that, I’m shorting the AUDUSD for technical reasons at the moment!
I have a question regarding using different time frames.
Scenario: a pair is in an overall uptrend and hits your support line on a retracement on your daily chart. U look for price action candles on daily and see nothing. So you end up dropping down time frames and see a nice pinbar on the 4hr that makes you want to go long. Do you need to make new S/R lines on the 4hr chart or do u continue to use daily S/R lines? I understand you would use the daily support line at which this 4hr pinbar formed. But do you need new resistance line on the 4hr chart? I guess a better question is do I look at this 4hr pinbar as an early signal for reversal on the daily chart. Or am I specifically looking at the 4hr pinbar as a reversal on the 4hr chart?
I have one other question
Your up trending on your daily chart and are half way btw s/r lines. You look at 4hr chart and it’s down trending (opposite the daily). And I’m at an area of S/r on my 4hr with a pinbar that makes you want to go short with the downtrend. Is this a no-no since its opposite the daily trend? And should SL and TP targets be set up based on the 4hr charts only?
I hope my questions make sense
Hi Rick,
are you telling us that based on your experience, the accuracy of your trade is at its peak using Daily tf, but not at both lower and higher tf than D1? Interesting.
I mean it’s a bit weird to say that Weekly and Monthly timeframe are similar to H4 and H1 tf, that they are getting less and less accurate than Daily tf.
I might be wrong here, so feel free to correct me, Krugman. I thought the accuracy should be higher and higher as you move to the higher and higher tf proportionally, shouldn’t it? If a daily chart is like building a house out of legos, and the lower TFs are like building a house out of cards, shouldn’t the corollary for that is the higher TFs are like building a house out of bricks?
[QUOTE=krugman25;556514][B]Step 3:Watching for Price Action at Key S/R Levels[/B]
Thanks Aaron, great work, very clear !
I’m always amazed how simple it sounds when written down !
Hi jpw,
My answer to that would be: You don’t necessary manage your trade on the same time frame as the PA signal occurs. You can spot a range on the daily, price has reached the high of it, is not showing a PA signal on the daily but there is a huge one on the 4hr. You open based on that signal from the 4hr but it looks like Counter trend on the 4hr. That doesn’t matter because your reason for entering was based on the daily so it is all you should focus on.
But, when you spot a setup on the 4hr, like price has gone up, broken the resistance, moved back to it and found support on it and fired a PA signal like a Pinbar or a BUEB, you then enter the trade based on the 4hr and you stay on the 4hr to manage it. You can still check the daily and I would recommend doing so just to make sure that you didn’t miss out something that could potentially be dangerous for your trade like for example, you find this setup on the last 4hr candle before NY close and the daily is showing you a Pinbar about to form. It shouldn’t happen that often though because the retracement on the 4hr would have to be very big to generate a reversal signal but I have seen it before so it’s always worth checking. If it is all fine, you then move back to the 4hr and “enjoy” your trade from there.
To sum it up, you don’t always manage the trade on the same TF as signal happened but definitely on the TF on which you found the overall setup.
Hope it’s clear,
Yves
[QUOTE=“Piping Hot;556615”]
Hi jpw,
My answer to that would be: You don’t necessary manage your trade on the same time frame as the PA signal occurs. You can spot a range on the daily, price has reached the high of it, is not showing a PA signal on the daily but there is a huge one on the 4hr. You open based on that signal from the 4hr but it looks like Counter trend on the 4hr. That doesn’t matter because your reason for entering was based on the daily so it is all you should focus on.
But, when you spot a setup on the 4hr, like price has gone up, broken the resistance, moved back to it and found support on it and fired a PA signal like a Pinbar or a BUEB, you then enter the trade based on the 4hr and you stay on the 4hr to manage it. You can still check the daily and I would recommend doing so just to make sure that you didn’t miss out something that could potentially be dangerous for your trade like for example, you find this setup on the last 4hr candle before NY close and the daily is showing you a Pinbar about to form. It shouldn’t happen that often though because the retracement on the 4hr would have to be very big to generate a reversal signal but I have seen it before so it’s always worth checking. If it is all fine, you then move back to the 4hr and “enjoy” your trade from there.
To sum it up, you don’t always manage the trade on the same TF as signal happened but definitely on the TF on which you found the overall setup.
Hope it’s clear,
Yves[/QUOTE]
Yeah. Just want to clarify one thing from first paragraph
Uptrend on daily chart
Downtrend on 4hr chart
PA signal on 4hr chart signaling to go long is ok to take against the 4hr downtrend bc our initial S/R lines were based on daily which is uptrend?
and one other thing. it seems there are multiple ways to play it
Daily chart with daily S/R and daily PA signals with SL and TP based on daily SR
4hr chart (as example of time frame below daily) with 4hr S/R and 4hr PA candles with SL and TP based on 4hr S/R
Daily chart with daily S/R, BUT with 4hr PA signal…so this one gets its SL and TP from the daily S/R, correct? Or should I set TP or SL based on 4hr S/R?
[B]Correct, TP and SL should be based on daily S/R for the very same reason as in point 2.[/B]
To jpw,
Just want to show you an example.
Let’s take the EURCHF daily chart:
Doesn’t suggest anything in terms of which direction to trade really. I still find 2 sr lines based on levels where price bounced or has flipped.
I move down to the 4hr chart and this is what we get:
As you can see, the daily sr lines have been respected and it created a trade opportunity at some stage. If there had been a PA signal where the red circle is, it could have been a trade with TP being just below sr lines and SL just above.
The only reason I am considering it is because it happened around daily sr lines. I am not saying that this was a perfect setup if PA had happened, just a general example.
I would then try my best to not pay attention to the 1.2320 area as I believe it is not a critical area as price has broken through it freely quite often. I know it is not easy but it shows afterward that it would have been the case this time as it often is.
Another thing I want to add and this is really personal, I didn’t see it before in here, I set all my charts to daily by default and only move to 4hr if the price touches or has just touched one of my sr lines. Otherwise, I don’t even bother moving to 4hr. That makes it a lot less confusing and also saves some time.
[QUOTE=“Piping Hot;556653”]To jpw,
Just want to show you an example.
Let’s take the EURCHF daily chart:
<img src=“301 Moved Permanently”/>
Doesn’t suggest anything in terms of which direction to trade really. I still find 2 sr lines based on levels where price bounced or has flipped.
I move down to the 4hr chart and this is what we get:
<img src=“301 Moved Permanently”/>
As you can see, the daily sr lines have been respected and it created a trade opportunity at some stage. If there had been a PA signal where the red circle is, it could have been a trade with TP being just below sr lines and SL just above.
<img src=“301 Moved Permanently”/>
The only reason I am considering it is because it happened around daily sr lines. I am not saying that this was a perfect setup if PA had happened, just a general example.
I would then try my best to not pay attention to the 1.2320 area as I believe it is not a critical area as price has broken through it freely quite often. I know it is not easy but it shows afterward that it would have been the case this time as it often is.
Another thing I want to add and this is really personal, I didn’t see it before in here, I set all my charts to daily by default and only move to 4hr if the price touches or has just touched one of my sr lines. Otherwise, I don’t even bother moving to 4hr. That makes it a lot less confusing and also saves some time.[/QUOTE]
Piping
These last 2 posts of yours clarifies a lot for me. Thanks.
But it brings up one question for me.
Ex: your daily S/R lines are separated by 200 pips. Price approaches resistance but no PA signal is forming on daily. So u look at 4hr and see great PA signal to sell.
I believe according to what you said above, I set my SL and TP based on my daily SR. But suppose the daily never forms a good PA signal to sell. Do I continue to use my daily SR lines for TP? I don’t have a daily PA signal that would make me think price would go down to my support
It almost seems like I should use a 4hr support line in this case to take profit before price possibly climbs again. Can u comment on that?
Hi guys. Well, here goes. Gonna try to post a chart. First time. Please bear with me. I need to do this.
I give this a 3 star.
What do you think?
From the chart you posted , I think you must be set your pending before the market close (which is 1 of the common mistake that many have done). Always set a pending after the price close to confirm a signal.
2nd will be , we must find long signal at swing low instead of go for short at swing low.
3rd will be, that candlestick doesn’t seems like a valid signal for me to enter a trade , you should find a big and obvious bullish pin bar instead of indecision candle there.
Lastly , from the volume indicators , we can see that the bullish seems not strong enough as the volume seems lower compared to previous one.
No offense , just my 2 cents. =)
Shane.
You would have to show me an example but if I get it right, I don’t see a problem if there isn’t a PA signal on the daily. Price can reverse without having a PA signal. You get the confirmation from the 4hr and if you were right, the price is going to go down on the daily. Sometimes it evens fires a PA signal on the daily and it is a great feeling as it boosts confidence. It happened last week on the AUDUSD. There was a BEEB on the 4hr and the daily candle also closed as a BEEB.
To set your TP you use the next major support drawn on the daily. In theory, you shouldn’t bother about the small support on the 4hr but again, I am not saying it’s an easy thing to do.
Hope it’s clear now.
