If you missed the earlier ones, you can check them out here…
1: The 3 Biggest Reasons Why Most Traders Fail And How You Can Avoid It
2: Price Action Trading Myths: Did You Fall For Any Of It?
Now, let’s move on…
Today, you’ll discover a simple but effective trading strategy which allows you to profit in bull and bear markets—without relying on indicators, news, or opinions.
Cool?
Then let me introduce you to you… The MAEE Formula.
You’re wondering:
“What does it mean?”
Well, it stands for…
Market structure
Area of value
Entry trigger
Exits
Let me explain…
#1: Market structure
Market structure helps you identify the current market condition so you know whether to be a buyer, seller, or to stay out of the markets.It can be broken down into 3 categories:
Uptrend
Downtrend
Range
Uptrend
A market is said to be in an uptrend when the price shows a series of higher highs and higher lows.
Here’s what I mean…
S&P 500 Daily Timeframe:
Likewise, when you spot a market in a downtrend, you want to look for selling opportunities because the market is likely to continue lower.
Now you might be wondering:
“Where do I enter in a trending market?”
I’ll get to that in a moment.
For now, let’s have a look at a range market…
Range
A market is in a range when the price is contained with the highs and lows (kind of like “stuck in a box”).
When the market is in a range, you can look to sell near the high of resistance or buy near the low of support.
At this point you might be wondering:
“Ah, this is simple.”
“I’ll just wait for the market to be in an uptrend and then buy!”
Well, not so fast guys.
Just because you’ve identified the market structure doesn’t mean you should enter a trade immediately.
Why?
That’s because the price could be overextended and about to make a pullback (or a reversal).
And this brings me to the next section…
#2: Area of value
Area of value refers to an area on your chart where buying (or selling) pressure could step in and push the price higher (or lower).There are many ways you can define an area of value. But one useful technique is to use support and resistance.
Let me explain…
Support
Support is an area on your chart where buying pressure could step in and push the price higher.
So, when you combine market structure and area of value, you can look to buy support in an uptrend.
Resistance
Resistance is an area on your chart where selling pressure could step in and push the price lower.
Likewise, you can look to sell at resistance in a downtrend.
Does it make sense?
Great!
Because in the next section, you’ll discover when exactly to enter a trade.
Read on…
#3: Entry trigger
So, what is an entry trigger?This is a specific price pattern that tells you the buyers/sellers are momentarily in control.
When you spot such a pattern, you can then enter the trade (assuming all other conditions are met).
One way to define an entry trigger is using candlestick patterns.
This could be things like:
Hammer
Bullish engulfing pattern
Shooting star
Bearish engulfing pattern
Let me explain…
Hammer
A hammer is a (one-candle) bullish reversal pattern that forms after a price decline.
It tells you the buyers have overwhelmed the sellers and they are now in control.
Little or no upper shadow
The price closes at the top ¼ of the range
The lower shadow is about two or three times the length of the body
Next…
Bullish engulfing pattern
A bullish engulfing pattern is a (two-candle) bullish reversal pattern that forms after a price decline.
It signals the buyers have overwhelmed the sellers and they are now in control.
The first candle has a bearish close.
The body of the second candle completely “covers” the body of the first candle (without taking into consideration the shadow).
The second candle closes bullish.
Next…
Shooting star
A shooting star is a (one-candle) bearish reversal pattern that forms after an advance in price.
It tells you the sellers have overwhelmed the buyers and they are now in control.
There is little or no lower shadow.
The price closes at the bottom quarter of the range.
The upper shadow is about two or three times the length of the body.
Next…
Bearish Engulfing Pattern
A bearish engulfing pattern is a (two-candle) bearish reversal pattern that forms after an advance in price.
It signals the sellers have overwhelmed the buyers and they are now in control.
The first candle has a bullish close
The body of the second candle completely “covers” the body of the first candle (without taking into consideration the shadow)
The second candle closes bearish
Now, let’s have a look at our final component of The MAEE formula…
#4: Exits
When it comes to exits, there are two parts to it:Stop loss: exit when you’re wrong
Target profit: exit when you’re right
Let’s get to it…
Stop loss: Exit when you’re wrong
As much as you want every trade to be a winner—that’s not possible.
That’s why you must have a stop loss in place, to contain the losses should the market move against you.
As a guideline, your stop loss should be at a level which invalidates your trading setup.
This means if you’re looking to buy at support, then your stop loss should be a distance below it, such that if the price reaches it, then support is broken.
Stop loss a distance below support
And the same concept applies to resistance.
Your stop loss should be a distance above it, such that if the price reaches it, then resistance is broken.
Target profit: Exit when you’re right
When it comes to target profit, you want to be smart about it.
Set it too far away and the market is unlikely to reach the level—and you’ll watch your winner become a loser.
The solution?
Set your target profit at a level before opposing pressure steps in.
This means if you are long at support, then you want to exit your trade before the nearest swing high (or resistance) where selling pressure could step in.
Likewise, if you are short at resistance, then you want to exit your trade before the nearest swing low (or support) where buying pressure could step in.
Does it make sense?
Good!
In the next section, you’ll learn how to use The MAEE Formula to profit in bull and bear markets.
Let’s go…
The MAEE Formula (Trading Examples)
A quick recap…
Market structure tells you what to do, whether to be a buyer, seller, or stay out of the markets.
Area of value tells you where to look for buying or selling opportunities.
Entry trigger tells you when exactly to enter a trade.
Exits tell you when to get out of a winning and losing trade.
So far so good?
GBP/JPY is in an uptrend as the price made a series of higher highs and lows (market structure).
Then it made a pullback into previous resistance which could become support (an area of value).
At this point, you’ve no idea if the market will slice through support or reverse higher.
That’s why you’ll use candlestick patterns to gain further insight. In this case, the price formed a bullish engulfing pattern (entry trigger) which signals the buyers are in control.
This means you can enter on the next candle open with your stop loss a distance below the swing low.
As for target profit, you can exit before the recent swing high.
Now, let’s have a look at a stock trading example.
Houghton Mifflin Harcourt Company (HMHC) is in an uptrend as the price forms a series of higher highs and lows (market structure). Then it made a pullback into support (area of value).
Again, you’ve no idea if the price will reverse at support or break through it. That’s why you wait for an entry trigger to time your entry.
In this case, the price forms a piercing pattern (a type of bullish reversal candlestick pattern) which signals the buyers are in control.
This means you can enter on the next candle open with your stop loss a distance below the swing low.
As for target profit, you can exit before the recent swing high.
Now at this point…
You’ve learned The MAEE Formula and how you can use it to profit in bull and bear markets.
Of course, there’s more to price action trading than just a formula.