Why You Should Avoid Confirmation Price Action Signals

Why confirmation price action signals crush your trading profits and success.

Transcript:

Do you believe that or have heard the idea that confirmation price action signals, such as pin bars, inside bars, fakies, and all these other one and two-bar patterns, have you heard or believed the idea that these signals will generate trading profits consistently and lead you to a long-term successful trading career?

I’m here to tell you they won’t, and when you’re done listening to this recording, you’re going to see why. I’m going to give you three reasons why you need to stop trading confirmation price action signals now.

To be clear, these price action signals, or candlestick patterns would be a much more appropriate term, are really a stage and a gateway. You’re not meant to stop and stay there permanently, just like the truck stop on the side of the road isn’t your destination on your vacation. These price action signals and candlestick patterns are actually a gateway, and they’re designed to make some parts of price action simple. You have to start off any time you’re introducing somebody to a very complex thing right off the bat, you actually have to start off simple, knowing that it’s actually more complex as they evolve. This is the same for music, learning a language, archery, and trading.

To target newbies, and to go after people who really don’t understand or have an introduction into the market, it’s much easier to say, “Hey, you can make money trading this market, and I’m going to show you these very simple one and two-bar patterns, these candlestick patterns that are super easy to identify. You don’t have to spend hours learning them. They’re very easy to spot on the chart. You can make money trading these things.” It’s a very manipulated way to approach newbies and people who aren’t really that well-informed, because once somebody does become that, they realize it’s not simple. It’s actually more complex than that. Price action is much more complex.

To expect the financial markets, as complex and as intricate as they are with millions of participants, all with varying reasons to be getting in the market, some speculative, some not. Every type of player there is in the market, to expect all these things, HFTs, prop firms, hedge funds, speculators, multinational corporations who have to hedge through forwards, or options, or speculating on price changes, because they deal with different currencies across the world. To expect all of their interests, and all of their movements, and all of the order flows that they create, and the price action that the result of that, to expect all that to be simple is naive at best.

There are no magical one and two-bar trade signals that generate profits ad infinitum. If there were, hedge funds and banks wouldn’t spend six figures training their traders. They wouldn’t spend six figures hunting good traders either, because it doesn’t take a brainiac or six figures to train somebody to spot these patterns. That is a fact you need to understand. With that being said, I’m going to give you three reasons why confirmation price action signals like pin bars and fakies will kill your profits and trading success.

Number one: the majority of institutional orders, if you look at them, are occurring in either the London session, the WM/Reuters Fix, or during the New York Session. I want you to think about that. The majority of all the institutional orders are placed during London session, WM/Reuters Reuters Fix, or during the New York session and the majority of those orders are limit orders, they’re not market orders. They are placed well and advanced of any pin bar forming on the daily chart or any sort of pull back happening on a pin bar. Why is that? Because banks, hedge funds and prop traders are looking for trade locations based upon price action context, and order flow, and information.

A pin bar is the result of an already existing order flow in the market. These are orders that were already there. Whether they are market or limit orders, whatever orders were behind creating that pin bar were already there well in advance. What that means is any rejection from sent pin bar is from the larger institutional players who already decide upon their trade or locations in advance before the pin bar formed. What that also means by implication is that any 50% retrace tweak entry will be a worse entry than the actual trade location where then larger players had their orders waiting. You combine this to the whole theory that you must use New York closed charts is a complete myth, because the majority of order flow is happening in London or in Reuters WM fix or in New York.

If the New York close chart is so important, then why aren’t the orders coming right after that? There’s no statistical evidence out there, not one piece of statistical evidence that demonstrates New York close charts are superior. In face, when you think about it intuitively or logically, it doesn’t make much sense. The very fact the majority of orders are during London and New York session before any daily in pin bar forms should tell you the daily close of New York isn’t important. If it was, FX trading desks would orient themselves to get the best price just after the daily close. However, that doesn’t work now, does it? Liquidity during Asian is weak at best. Other than some new spikes, maybe out of China or Japan or Australia or New Zealand, very few directional moves occur. When you have few directional moves occurring, that communicates there is an absence of order flow. That means an absence of major institutions buying and selling in that time. When you start to think about this, this completely contradicts the New York close chart’s theory.

Moving on. Number two: a poor feedback loop. If you think about it, the amount of trades you’ll get, and you’ll probably know if you’ve been trading these for years now or even five, six months, the amount of trades you’ll get waiting for pin bars, engulfing bars, inside bars, and fakies will be low at best. What this means is a low frequency of trades equals a slow feedback loop. I’ll explain that shortly. To be clear, you’re going to need at a minimum of 100 to 500 plus trades before you have a sufficient baseline just to know if your model and pin bar strategy is working or not.

If you look at your past months trading these one and two-bar signals, you’re getting maybe five, ten trades a month. Anybody who kind of purports that idea or markets that idea is saying the same thing. They’re saying they trade less than ten times a month. Some of them less than five. Let’s look at that then. If you’re doing five to ten trades a month, that means at least one to three and a half years before you hit that 100 to 500 trades. In other words, one to three and a half years before you even know if your strategy makes you money or not to even know what the baseline of that strategy is. That is a very long time to wait just to discover if you have a positive expectancy and edge. Most people after they do that, they find actually this doesn’t work out. I wasted that time.

Also, and getting back to this main point, the feedback loop you get from the low frequency of tradings means your learning process is stunted in the live markets. Each trade you give, each trade you do will give you feedback on what you’re doing, correctly or incorrectly. I’m not talking about wins or loss. I’m talking about the execution of what you’re doing. If it takes you one to three plus years for a solid feedback look to emerge, your learning process is too slow to really grow. Any professional trading environment, you can examine them all, look at sports. Look at tons of different sports. Look at business. Look at trading. Look at musicians. Look at martial arts. They all have very active feedback loops.

There’s a reason for that. The faster your brain or your body, in some sports, can assimilate the data and the patterns behind successful trades and successful execution, the better and faster you build your trading skills. Hence trading only five to ten times per month is a very poor and slow way to learn to trade the market. You won’t get many trade signals just waiting for pin bars, and inside bars, and fakies each month. Case in point, one of my students, who is currently up about 12% alone in the last three months has over 200 plus trades since the end of August. In other words, he’s done more trades in the last two to three months than a confirmation price action signal trader will do in a couple years, one to two years.

Now imagine what that person’s feedback loop is in the markets and how fast he’s digesting the price action and building his pattern recognition skills, being exposed to this wide variety of situations, putting himself on the line, his money on the line, and seeing did he execute correctly or not? He has a much faster feedback loop. His learning process is faster, and he’s exposing himself to a wider variety of situations. When you confine yourself to just a small two, three candlestick patterns, you’re not going to get much engagement in the market. Your feedback loop is going to be very slow and very inactive. That’s not how professional trading environments, sports, business, trading, poker players, martial arts, musicians, they don’t just practice once and then come back in a few days, maybe five, ten times a month. They’re practising everyday. Tiger Woods would often hit 500 golf balls a day everyday. What does this mean? Trading confirmation price action signals will create a very poor and low feedback loop. This is a key point you have to understand.

Number three: profitability is based upon your edge and expectancy and trade frequency. In my advanced price action course, I have this lesson called “Your trading edge expectancy and trade frequency”. Expectancy is very easy to break down as a formula. It’s based upon accuracy and your plus R per trade. The formula, which you are seeing now, is the percent winners times the dollar you have made per winner. That subset, you subtract it, or parentheses, in other words, you’d subtract that from next parentheses, percent losses times the dollar amount per loss. Those two numbers equal the X times the number of trades.

I’m going to give you an example. What you’re looking at on the screen now is kind of some example to give you an idea of different perspectives. What we have is four strategies, and the rules are they’re risking 1% per trade. There’s a minimum of 100 trades. You’re risking $100 per trade, and the risk of ruin on all of these is zero, which means mathematically all these are going to make money. The first strategy has an accuracy ratio of 60%, and it’s averaging plus 1 R per trade. The second strategy has 45% accuracy and is averaging 2 R per trade. The third trade, it has 30% accuracy, the lowest percent accuracy out there, and it’s averaging 3.75 R per trade. The last one is 90% accuracy, but it has a very low plus R of .15.

When you start to plug in those numbers to the actual equation I gave you earlier, what that means is strategy one has an expectancy of what they call $20 or .2 would be the measurement. Strategy is .35. Strategy number three is .47, and strategy number four is .035. Any positive number will determine that you have a profitable system. However, expectancy alone doesn’t determine overall profitability. While you may have a positive expectancy, that will not determine how much money you’re making. This is where trade frequency comes in, and this is where trade frequency matters.

This is the same for online poker professionals. You have to ask if you look at any online poker pro, you have to ask why do they trade the maximum number of tables at the same time? The answer is simple and straightforward. If they have an edge, the more Xs or the more times that you use that edge, the greater your profitability. If I have an edge playing at, say, the 2050 Texas Holdem tables, and I can handle four tables in an hour, or four tables at a time, if I have that positive expectancy in one table, I’m also going to have it on four tables. The more tables I’m doing, the more I’m multiplying that edge. The more times you use that edge, the greater your profitability is.
I’m going to give you some examples of some other of the expectancies, which I talked about, but then we’re going to look at … We looked at the expectancies of strategies one through four. Now we’re going to show you how trade frequency comes into play, because right now strategy three has the highest expectancy, and then strategy two, and then strategy one, and then strategy four, in that order from top to bottom, most to least expectancy, but all positive. In other words, they’re all making money. Once we start to look at trade frequency, you start to see how this matters and how this effects profitability.

Now this next screen we’re looking at is why trade frequency matters. We are looking at the same strategies, one through four, with number three having the highest positive expectancy. Number two, number one, and then number four in that order. When we look at the trade frequencies, we’re going to start to see a difference in how this has a huge impact upon profitability. The first one, which was plus 1 R per trade is doing 500 trades a year. The next one, which had a little bit higher plus R per trade in the twos is doing 225 trades a year. The third one, which had the highest plus R per trade is only doing 150 trades a year. Then the last one is doing 1,200 trades a year. These are the different trade frequencies for these different strategies.

I’m not saying this is what it should be, but let’s look at the numbers. If you’re averaging 3.7.5 R per trade, you’re probably not trading too frequently. Even if you’re trading the high end of the range for your confirmation price action signals, which is ten trades a month, you’re only doing 120. We were a little generous and made it 150 to kind of buff up the stats a little bit. With that being said, you’re now going to see why trade frequency matters, in terms of profitability.

The first strategy, which had the most amount of trades, 500 trades at plus 1 R a year, that one was making $10,000 profit. The next strategy, which had the plus 2 R and was less active, but still more active than number three made $7,875 for the year. The third strategy, which had the highest expectancy did 150 trades a year. Ask yourself, let’s be honest, you’ve been trading. If you have been trading confirmation price action signals, have you really done 150 trades in a year? Most likely not, but let’s say you did. Let’s say you were averaging plus 3.75 R per trade, which is very unlikely trading confirmation price action signals. We statistically tested them. Maybe one on one pair in one time frame is actually doing that kind of plus R return, but it happens so infrequently it’s not really useful to measure. We’ve tested them statistically.

I’m pretty sure any one of you who has been trading confirmation price action signals will even admit, and be honest, yeah, plus 3.7.5 R per trade is probably pretty high, probably above your average. Let’s say you were averaging that. You’re still only making $7,050 a year. Then the last strategy, number four, which had .15 R per trade and 90% accuracy, you’re only making $4,200 a year. The strategy, number three with the highest expectancy actually made 30% less money than a strategy with lower expectancy, lower plus R per trade, but higher trade frequency. This is important to understand. This is why trade frequency matters.

Besides the poor feedback loop, besides the fact that institutions aren’t waiting for those signals, because they’re trading in the middle of sessions often, or before any daily pin bar had formed, besides that, trade frequency matters. It determines profitability. If increasing the frequency didn’t matter, poker players wouldn’t be doing it. They would just play one table. It’s way more stress to trade multiple tables than it is one. It’s a lot more calculations they have to do, a lot less deep thinking you can do. You kind of just have to go on autopilot, to some degree. That requires an immense amount of training to turn those skills into subconscious skills. Why do they do it? Because they know the more tables they have the more tables they can express their edge on, thus make more money.

Those are the three reasons, but I actually have a fourth bonus reason, which is that, and this is a reason why you shouldn’t be trading confirmation price action signals, the reason is that trading mostly pin bars and inside bars will give you very poor price action context skills. Why is that? If the majority of your time is waiting for these very infrequent one and two-bar patterns to occur, then you’re not building your price action context skills. You’re not engaging them actively.

How do you build price action context skills? It’s by continually reading and trading the price action in real time. It goes way beyond learning these three candlestick patterns. Context, 99% of the time, 99.99% of the time, price action context is not determined by these one and two-bar patterns. The context is determined by the structure, by the order flow, by how the price action is formed over time across dozens of bars. That doesn’t mean you have to analyze every single individual bar, but you have to understand structure. You have to understand order flow. If you only examine really the order flow by a small amount, a few three or four one and two-bar candlestick patterns, you’re saying those are more important than the rest of all the price action order flow that’s come before that, which is a major mistake that’s disregarding a massive amount of information.

To demonstrate this point, let’s take a look at two pin bar examples rejecting at a key resistance level. You can see on the chart here scenario A is a false break where the wick goes past the supporter resistance level. Scenario B is the example of how the wick or the tail ends at the key supporter resistance level. In scenario A, if the wick of the pin bar goes past that key supporter resistance level, you have to ask yourself why did it go past that, and why did it reject there just beyond it?

The answer to the later of why rejected has to do with acclivity and that the institutional players put a max or extreme value on the price at that point in time. Whatever the top of that wick is, that is the maximum or extreme value of that price for that instrument. What it means is that the larger institutions didn’t want price to go past that particular level or past that particular price. They felt it was either overvalued or undervalued at that point.

What this implicitly means is the larger players pretty much for the most part had their orders there in that location in advance before the pin bar formed. Remember, the majority of institutional order flow is coming during London, Reuters WM fix, or New York session. It’s not happening after the daily close. There is an absence of liquidity after the daily close. There’s hours of very low liquidity, but that doesn’t really make much sense. If the New York close charts are so important and if a pin bar is so important, and they know where their 50% retrace tweak entry is, then the liquidity in the order flow should be increasing during the Asian session, because that’s their chance to get the best price.

It doesn’t happen then. FX desks are not oriented around the Asian session. They orient around the London. The majority of these desks are oriented around the London and the New York session. If you think about this, what this means is one, they have their trading locations chosen in advance, two, they’re not waiting for the pin bar to form, and number three, any 50% retrace tweak entry that is placed is a later entry. Thus it’s more likely to be a poorer or worse entry, a retail entry with a lower reward and higher risk.

Have you ever heard what I just described from your authority or guru on price action? Most likely not, because if they are trading those one and two-bar patterns, and I’m guessing they are, they talk about them all the time as if they’re everything, if all you’re doing is spending your time looking for these one and two-bar patterns and you’re not really entering the market without them, you’re not really engaging the market that often. Therefore you’re not building your real-time price action skills by exposing yourself to other environments. That’s why you won’t hear that from them, because they’re not engaging price action deeply, otherwise you wouldn’t be claiming these one and two-bar patterns is what price action is about. It’s so much larger than that. Context is so much more than one and two bars. 99.99 plus percent of the time, one and two bars does not determine the price action context.

In scenario B where the wick and the tail stops at the key resistance level, let’s assume the perfect scenario for you pin bar traders where the wick rejects at the level, thus supposedly … You picked a level ahead of time. The market hits it, hits that resistance level. Bam! Stops on a dime, sells off and closes, forming a pin bar. Or we are pulling back gently into support, and we touch that support level [inaudible] market in advance, and the market just takes off. The bottom of the wick is right at the level you picked, and it forms that pin bar. That’s your pin bar traders wet dream. That’s like pin bar porn.

The tail of the pin bar is at the level. If you think about this, the only way that tail could form is by the large players having orders there, rejecting, saying, “Okay, we think this is a trade location that is an optimal trade location. We’re willing to put our money on the line to do this.” They’re generally not doing market orders when they place that. That would create a major problem for the larger funds in liquidity. The orders were there ahead of time, and the bottom is at that support level, and the top is at that resistance level. If you’re taking a 50% retrace tweak entry, you’re taking a worse entry by default. It’s not where the institution said this is the max value. It’s far away from that.
The people who did get max value, those are the ones who have the highest profit potential. Also, if you think about it, any orders the banks in hedge funds had already there to stop that movement and form that wick rejection was already in place. It means they chose their trade location well before you even got the pin bar. They picked this. They said, “Look, based upon our analysis and our strategies and our reasoning, this is our optimal trade location. This is where we’re going to get in. Let’s put our orders there. Anything father away from that is, by default, a weaker entry.

Everybody knows retail entries get in late. When you get in late after the institutions, you’re probably behind. Retail traders traditionally get in late in comparison to the institutions. You have to reverse that. You have to get your timing and price action context skill set to a degree where you can spot those locations and those times. That’s what your goal should be. That’s where the greatest amount of profit potential is. Everybody can understand this. This is just super straightforward and crystal clear. That’s your goal. Everybody knows most retail traders are late to get in trends and moves. By the time they do, they often turn.

Just the fact that the strategy, by default, implicitly admits it’s getting in late, and it’s getting in in a worse location, this should tell you waiting for pin bars or all these other candlestick patterns will give you a weaker entry and lesser profitability. I’ve demonstrated his before with a video on my life price action trade showing how I’m up plus 2 R before the person with the 50% retrace tweak entry even got to break even. That means a higher profitability ratio for me and a worse one for you. There is a greater chance that the market can turn against you than it will me. There’s a greater chance if it does turn, you will lose money, and I will still walk away with money. This should communicate how trading confirmation price action signals crush your trading success and profits.

Those are my three plus bonus reason, my four reasons why you should stop doing that right now, and why you need to train and really start to look at price action in a different perspective and a unique perspective, not this carbon copy, cut and paste one and two-bar patterns that you see. All these people who came under one group, the J16 group, the first person to really come out of there decided, “I can replicate a course like this. Great. This is super easy. I can explain this. Anybody can explain this. It doesn’t take a brainiac to do that.” They took the same thing, copied it, re-branded a couple things, but it was the same thing. Then a couple others did that. That’s why you see so many of them, yet none of them has been able to show that their students make money.

We have, and I have more students that continually send me their Myfxbook accounts all the time showing me they make money. We’ve done it before. We’re continuing to do it, and we will continue to do that. Nobody is showing that their students are making money. We are over long periods of time. After listening to all this, you should see now how trading confirmation price action signals will kill your trading profits and success. It should also give you an insight on how the institutions are trading differently, and how they are not waiting for pin bars.

Remember that Pepsi challenge I did when I talked about this last year? The Pepsi challenge was hey, if you think confirmation price action signals are so great, walk into five hedge funds, five prop trading firms, walk into any of these desks. Then ask them the following two questions: number one, do you only trade when there’s confirmation price action signals, such as a pin bar? Two, if you do see pin bar on the daily close of the New York charts, do you load up your position because it’s such a higher probability trade and higher profitability?

If the answers to those two are yes, then that should tell you, okay, the institutions are using it, but the answers will consistently be no. If a confirmation price action signal was so powerful, led to so much more profitability, they would be loading up more, just like a poker player loads up more when they have pocket aces verses pocket deuces. If it’s such a statistically stronger method, they should just be loading up to the hilt on that. If they’re not, and if they are making trades outside of daily pin bars, more often than they are those daily pin bars, and they are, then that should tell you that’s not what they’re using. They’re using something else. They’re using price action context and order flow and information.

Anybody who’s taken me on this challenge, what I predicted would happen is what happened. They all got laughed at. They all felt like, “What is this, a joke? Are you really seriously asking us this thing?” That’s what’s happened, and that’s what will happen when you do this. I’m willing to be wrong. I’m willing you to go in there and record the whole thing, and hey, and talk to the different traders and say, “Yeah,” ask them those two questions. I’m willing to be proven wrong. Nobody has done that yet. It’s been almost two years. It’s hundreds of opportunities that could have been taken for people to do it. Nobody’s been able to do it. This should tell you trading confirmation price action signals will crush your profits and success.

With that being said, if you like this video, give it a thumbs up and share it with people that you think need to hear this, social media, Facebook, forums, get it out there. This is paying it forward. This is helping other people not waste their time and money on something that’s just going to take them two years to discover, “Oh, that was a waste. I didn’t get anywhere with that. I didn’t see any progress. Nothing.” What are your thoughts and comments on this? I want to know. Share it in the comment section below. Do you agree? Disagree? Make sure you do, it’s neutral or positive. None of this negative like, “You’re an ass,” or anything. There’s nothing constructive to that.

If you’re going to disagree, disagree constructively, and do constructive criticism. “Hey, I agree for these reasons. What do you think? Based on this, this, and this, does this make sense? This is what I see, but what do you see?” That’s constructive criticism. That’s disagreeing in a very adult manner. We’re all adults here. Let’s be adults. None of this other hate mail stuff or whatever. It’s ridiculous. It doesn’t benefit you. It actually hurts you. Nobody benefits from that. If you want to have a dialog, let’s do it constructively.

Also subscribe to my channel. Check out my newsletter, website, dev2ndskies.wpengine.com. We have tons of free articles talking about how we trade price action differently, and how you can learn to read price action context. With all that said, I look forward to hearing from you. I look forward to your comments, questions, and thoughts, and the discussion that happens around this. Until then, be well, make money, and I’ll see you inside the website, and for those of you members, I’ll see you inside my course. Take care, everyone.