Featured Article – Page 3 – 2nd Skies Trading

Live Price Action Trading | Sep 22

This week I wanted to share several trades over the last few weeks from my students, and one of my personal live trades. Our members have adapted quite well to the changing volatility levels, playing ranges, trends, breakouts, pullbacks, intra-day and swing trading on the daily and 4hr charts.

I’ll share several live price action trading setups, giving both commentary on the trades themselves, along with pointing out any adjustments I would suggest.

The goal of this article is to show you what kind of trading you could be doing with the right training and skill set. If you have been waiting around for 1-2 bar patterns the entire time, you would have missed most of these trade signals sitting on the sidelines. Hence hopefully this will give you a different perspective on trading.

I’ll conclude the article by sharing some insights about my own trading, along with discussing the topic of ‘over-trading‘. There have been many ideas put out there as ‘truth‘ about over-trading, which are really just confusion and mis-understanding. When you are done with today’s article, you should have a new perspective on what over-trading really is (and what it is not).

For now, let’s get into these live trade setups from myself and members of my price action course.

Trade Setup #1: EURUSD Setup for +3R

Here the student recognizes a corrective pullback offering a good opportunity to trade with the trend. He astutely enters at a short term role reversal level that holds and sends the pair lower continuing the with trend move.

What I like about this trade is how he didn’t wait for a pin bar, engulfing bar or any 1-2 bar pattern to get into the trade. He had the confidence to purely trade the resistance level and sell there.

Hence no ‘confirmation‘ via a signal, and thus giving himself the best risk to reward scenario. He placed his stop 10 pips above his entry and captured +30 pips in less than an hour.

Now you may be thinking, ‘big deal…this is just 30 pips. He missed the big move in the market‘. Sure, you could say that. But in terms of catching big moves in the market, how many pips or points you take home is irrelevant.

If you make 600 pips on a trade, but had to have a 300 pip stop, you only captured +2R. So although you caught the ‘big move’ in the market, your return was the same as someone who made 100 pips of profit with a 50 pip stop. There is absolutely no difference.

So make sure not to make the freshman mistake of thinking you need to capture ‘big moves in the market‘ to profit because the same 100 pip winner can make the same profit in your account as a 600 pip winner, all by having the same +R gain. Food for thought.

Trade Setup #2: +2.6R on EURUSD 1hr Chart

In this trade, while the EURUSD was in a consolidation the last few days, it formed a false break on Sept 17th and pulling back into the consolidation. In our members commentary on this day, we anticipated a pullback into the consolidation before it pushed lower.

Working with my price action analysis in the private members area, he looked for a short trading with the trend. His overall result was +56 pips with a 20 pip SL, so a +2.R in about 8 hours.

What I like about this trade is ability to spot the key level the market would stop at before sellers absorbed the bids, and sent the pair for another leg lower. I think his target was pretty well placed just shy of the former support level and swing low, thus being safe if buyers stepped back in there.

The one thing I’d change was his entry. I’d prefer getting in near the resistance level near 1.2927. This would improve the risk to reward on the trade, along with give him greater protection in terms of trade location.

However, I understand his theory, which was he wasn’t sure it would reverse there, and wanted to see a close below the 20 EMA before getting short. He used the 20 EMA pullback to get short, and was still able to have a small stop and solid profit. So overall, a good trade here.

Trade Setup #3: Trading the Range for +5R

Here we’ll start with the two trades from the middle to the left of the chart. As you can see, this member deftly outlined the range, and felt comfortable after the false break just before, that the range would hold and thus give him a good range play.

He bought off the bottom of the range, took first profit halfway through the range, and final profit at the top of the range. Notice how his entry on the range bottom was not a price action signal, meaning he wasn’t waiting for a 1-2 bar price action pattern. He simply played the range lows without needing ‘confirmation’.

On this trade alone he walked with +4R in less than a few hours.

His second trade on the top right of the chart was playing a breakout pullback setup to the top of the range. Reading the price action in real time, he correctly suspected a breakout setup was available. So he bought at the range support (again, with no signal), and was able to profit +1R in another few hours, thus profiting +5R on the day across two trades.

Trade Setup #4: +138 Pips on GBPJPY M30 Chart for +2R

Here the trader was playing a setup shortly after the market open, taking advantage of the gap and the market eventually filling it. His stop was well placed as the market got close to it, but shortly after the trade went towards his take profit for +138 pips and +2R.

I think what most impresses me about this trade is the student holding through it, after being nicely in profit, then watching the trade go negative, only to come back and hit his profit target. Shows maturity, patience and discipline and thus a successful trading mindset.

Trade Setup #5: S&P 500 Intra-day Trade for +2R

This is one of my personal live trade setups using the same strategies from my price action course. What I was reading in real time was how the S&P 500 formed a swing high, then an LH (lower high). Notice after the swing high was made, there was some impulsive selling.

After attempting to make a set of new highs, the US index failed, forming a lower high, and then selling off aggressively. This second failure, along with sellers coming in more aggressively the second time, suggested some new lows were going to be made on the day.

My line in the sand for the bulls today was the support level drawn just under 2000. Notice how the index formed a pin bar signal here, then broke lower. A pure pattern trader would have bought this and lost money quickly. This is why you have to read price action context in real time.

I entered on the break of the pin bar lows, which is where the stops of anyone buying on that pin bar would have been likely placed. Within 10 minutes, the trade was in profit and never went negative again.

I spotted ahead of time the 1992 level, which had been strong support before over the last several weeks. If bears were going to take profit heading into a level, or bids around wanting to step in, I suspected they would do this here.

You’ll notice the downside wicks heading into the support level on the bottom right near 1992 for 4 candles in a row. This was the price action communicating to me buyers were in this area and would attempt to push back on the price. After the last rejection off the level, I exited for +105 points on a 51 points of risk, so a total profit of +2R in about 1.5 hours.

After this, the index consolidated for the next 6 hours at this level, not making any new major lows, so I was able to catch the lows of the move for the day being an intra-day trade.

A Brief Comment on Over-trading

For the day, I have a total of 3 closed trades and 1 live trade running at the moment. In my pending orders list, I have 9 trades waiting. Here they are below;

All of these trades (live and pending) are a mix of intra-day and swing trades using daily and 4hr strategies. I do not just trade one style (intra-day or higher time frames). I trade all time frames. When you have the skill and training to read price action in real time, you can trade any and all time frames.

That does not mean you will make money on all of them, or that you won’t be better at one vs. the other, but with the right skill set, you can as it all comes down to training.

Now according to those who espouse only trading higher time frames, trading as much as I have today (including pending orders waiting) would be ‘over-trading’. The theory is over-trading occurs when you trade on lower time frames. Please tell that theory to every bank and prop trader, and let me know what response you get.

After you’re done humiliating yourself with such a question, you’ll realize what you’ve been told about ‘over-trading‘ is a confusion.

There is no set number of trades whereby once you cross such a maginot line, you are over-trading.

You are only ‘over-trading’ when you’ve violated any of these two conditions below;

1) You are trading a strategy not in your trading plan
2) You are trading outside (i.e. above) your risk parameters for the day

That is it!

That is the only definition of over-trading you’ll ever need. So let go of the idea that over-trading has to do with the time frame, or number of trades you make.

If you are trading 1x or 10x on the day, as long as you are trading setups only in your trading plan, and staying within your risk parameters for daily risk and overall risk, you are NOT over-trading. That is simply taking advantage of market opportunities which is your job sitting in that chair every day.

So the next time you hear someone writing how trading on lower time frames causes over-trading, just realize they do not know what they are talking about and do not understand trading.

I did only 3 intra-day trades today. Every trade was within my trading plan and risk parameters, so there was no over-trading.

The time frame you trade on has absolutely nothing to do with you over-trading. Only when you a) trade outside your trading plan and b) trade outside your risk parameters are you over-trading. And keep in mind, that can happen on any time frame!

Key Closing Points

Catching big moves by themselves are over-rated if you have a large stop and make the same R profit as someone with 1/2 the pips and 1/2 the stop.
Trading profitably can happen on any time frame from the 5m up to the daily.
You don’t have to wait for a price action signal to catch a good trade. And you will often miss good trades waiting for 1-2 bar price action patterns
Trading the level can offer you a great risk to reward ratio on a trade and give you a great trade location
Over-trading has nothing to do with the time frame. It has to do with trading outside your plan and risk parameters. Nothing more.
Your job sitting in that chair is to pull the trigger according to your plan while properly managing your risk. If you are not doing this, you are not trading.

So ask yourself how many opportunities you spotted today. How many trades did you miss because you were waiting for ‘confirmation‘ or a pattern to emerge? And do you pull the trigger when trade setups arise?

With proper training, you can do all of the above and learn to trade the market consistently.

A Trading Quiz on Price Action Trading Part 2

Last week we posted a trading quiz on price action trading which went over 3 charts on 3 separate instruments. I did not show the prices, nor the time frames of the charts, so you had to rely upon your pure price action trading skills to read the charts.

The task was to analyze each chart and determine if you would either a) trade with trend, b) trade counter-trend, or c) no trade at all.

You were also asked as to why you’d trade each chart the way you did, at what levels, and what you saw in the charts from a price action perspective.

We got a lot of really good answers, and I offered a $50 discount off any course to the ‘winner‘ (i.e. the person I thought offered the best overall answer closest to mine).

Before I get into the winner, I’m going to share with you how I traded each chart (or didn’t), what I was reading in the price action, and why I traded the way I did.

Let’s jump into the charts. First I’ll post below the charts I shared last week. Then I’ll show you the actual instrument, time frame, along with how I traded each chart.

Price Action Chart #1

Price Action Chart #2

Price Action Chart #3

Details Around Each Chart

All the charts you saw above were the 1hr charts. In order, they were the:

1) German Dax 30
2) French CAC 40
3) Japanese Nikkei 225

The blue line was my typical 20 EMA which I often use as dynamic support and resistance. Let’s show each chart individually as to how I traded it and what I was reading in the price action.

Chart #1: German Dax 30 (No Trade)

In the chart above, we have the large breakout candle and long upside wick at the first blue arrow in the top right of the chart. I was looking for a counter-trend pullback, but wanted the price action to drift correctively up towards the wick highs. However, this never happened as it just remained inside the middle of the candle and lower edge of the wick (hence in the middle of a range).

Selling near 9650 was a potential option, especially with 3 wicks near there before the sell-off, however, if the heaviest sellers were up at the top of the wick, i’d have to put my stop above there, and thus would have had a poor risk:reward ratio since the natural downside target would have been 9578.

Including the spread, the most R I could have gotten out of the trade (if 9578 was going to hold) would have been ~1.4R, which is not what I like to see when trading counter-trend.

Ideally I can get 3-4+R per counter-trend trade, otherwise it’s not worth it due to the lower probability nature of CT trades.

Hence, I let the counter-trend short go.

Regarding the with trend trade option, the best trade idea would have been to buy at 9578 assuming it would hold. I actually did not buy this, mostly because I was already in trades on the other two charts and this one seemed the least ‘favorable‘ to me.

To be frank, I probably would have gotten stopped out if I did. Why?

Because I would have placed my entry near the 9578 level with no more than a 20 point stop. The reason for my stop placement in role reversal setups off a level, is if the level is truly going to hold, then you should not need a large stop above/below it.

Depending upon the volatility and price action around the level will determine how big my stop is. 20 points should have been more than enough. Regardless, had I traded this, I would have been stopped out easily.

As you can see, the pullback became quite impulsive heading into the level, and went 1 full bear bar past it, sub 9550. Had I traded this, I would have lost 1R.

You will notice a red line near the top left of the chart. This was a 2nd entry option to trade with the trend, but I missed that one as well. I like to mark certain places on a chart where I could have added a position, or taken a trade.

The reason for this is, when you review your trades at the end of the week, looking at these patterns will eventually go into your trading database in your brain.

By seeing these charts with potential trade ideas, the next time a similar setup comes up, you increase the chance you’ll a) recognize the trade opportunity, and b) pull the trigger.

Chart #2: CAC 40 (Buy off Support on Corrective Pullback)

In this chart above, you’ll notice at points 1 and 2 the price action reacted really cleanly off the round number and 4400 level. Notice on the pullback after point 2, we see strong buying interest emerge from the bottom of the consolidation just below 4400.

This leads to a strong breakout up to A, and then a very corrective pullback. If you contrast this to the Dax chart above, minus the 1 large bar bar in the corrective pullback from A to B, the bars heading into the 4400 level were not getting bigger, but smaller.

This usually means the selling pressure is being absorbed by the buyers. If the sellers are increasing in strength, the candles should be the same size, or getting larger. But instead they weren’t, signaling the order flow was still with the bull side as they were likely buying a few points above the level.

When I see corrective pullbacks like this heading into a key level, I’m going to buy that in favor of the trend with a stop below the key level.

Including the spread, my entry was 4405 and targeting 4495, which I had mentioned in prior commentaries. I chose 4495 as I wanted to be a few points below the big figure at 4500. With a 15 point stop and 80 point target, total profit was +5.3R in 5hrs.

Chart #3: Nikkei 225 (Counter-Trend Sell)

In this chart above, I felt this was the most prime for a good counter trend trade. Why?

Looking at the chart above, notice the triple rejection off 15804 with the blue arrows A-C. What interested me in trading this one counter-trend, was two key points;

1) The impulsive selling after the rejection at 15804 at B, and
2) The long tailed pin bar rejection at C

To be honest, the best setup was at c, placing an entry to sell at this level. This offered the higher risk to reward setup, especially if the impulsive selling from B was sellers truly taking control.

I missed this trade, and feel like I should have gotten it, but I didn’t.

But then the pullback after the long tailed pin bar from C was incredibly corrective. This matched the impulsive selling at B theory the bears were taking over control short term.

The weak corrective pullback after c also suggested the bulls were unlikely to re-attack 15804 after failing 3x. If anything, they’d wait for a deeper pullback level, which to me was 15645.

As I was watching this corrective pullback just before my entry, my gut was telling me this was going to sell off towards 15645. The key now was where would I place my stop.

The only way this would have worked out with a healthy R:R ratio, would have been with a tight stop. And that option really only existed if I could place my stop above the prior bull candle to my entry.

Basically I was sensing the corrective pullback was about to end, and if my timing was right, I could have a tight stop and solid R profit.

I placed my entry at 15755, with my stop 20 points above, and a 100 point target.

Turns out my timing was right, as the index sold off, and never recovered above the 20 EMA. 15 hours later, I hit my target of 15655 (just a few points above the projected support for +100 points and +5R profit.

You will notice the pullback to the level was a little ‘slow’, meaning there was a mix of bear and bull candles. This is common in counter-trend trades, because you are fighting the natural order flow in the market (in this case bullish).

Contrast this to the with trend trade on the CAC 40 which was all bull candles, thus virtually no selling orders present in the market on the way up.

Now could I have bought off the 15645 key support level for the Nikkei 225 chart? Probably, and that would have been quite prudent of me, especially if I was assuming the uptrend was still favored.

Whether I would have lost or won that buy is irrelevant. One trade by itself is irrelevant. The question is will that trade profit over 100 or 1000x, and my read is yes. This is why you have to trade and think in probabilities.

You will notice many of these charts were all displaying similar behavior. When presented with several charts displaying concordant price action context and opportunities, I always prefer to trade the ones with the most clear setups, and the greatest strength in favor of my trade.

The strongest counter-trend trade to me was the Nikkei 225. The strongest with trend trade was the CAC 40 trade, hence why I traded them.

In Closing

We cannot be afraid to trade counter-trend. There are times when trading counter-trend offers some really good opportunities, and we have to take those trades.

As a whole, counter-trend setups are a lower probability setup in contrast to trading with the trend.

Because of this fact, I prefer looking for larger R trades because the lower accuracy will be offset by the higher profit long term.

We also want to make sure there is a confluence of price action elements in our favor when trading counter-trend. If you were just a typical pin bar, engulfing bar, or inside bar trader, you would have missed all these setups.

It is the most ludicrous idea to me (and other professional traders) that you only take trades when 3 simple patterns emerge.

This faulty assumption is that there are only 3 good trade setups in this giant market, with all the different incarnations in the price action.

I’m not sure about you, but that sounds like a ridiculous idea to me.

(NOTE: For some great book which annihilates the idea there are only 3 price action patterns to trade, read Mike Bellafiore’s book The Playbook)

You will also notice I was trading pure support and resistance levels, not any particular price action 1-2 bar pattern. I was reading the price action context in real time, not sitting idle waiting for some simple patterns before I’d engage the market.

By waiting for some magic 1-2 bar patterns to emerge, you isolate yourself off from really good trade opportunities that occur all the time. In many cases, these other price action setups I speak of offer higher risk:reward setups than the patterns themselves.

Also, you will notice how clean the price action was in many of these charts. They were all on the 1hr chart, but you will see these types of setups on any time frame from the weekly down to the 5 minute (or 1 minute chart).

The skill of learning to read and trade price action in real time can be applied to any time frame. However, if you spend your time only trading 1-2 bar price action patterns, you will never build this skill set.

Lastly, you do not have to wait around for days to gather a +2 or +3 R trade. Waiting for weeks or almost a month to get a simple + 2R is a complete waste of time and your capital. The feedback loop before finding out if your trade was correct or not severely slows down your learning process.

Imagine a football player, golfer, or piano player waiting for weeks or months just to find out if one play, golf-stroke or run of the keys was correct (or not). That should point to you how damaging this is for your learning process.

Food for thought.

Announcing the Contest Winner:

There were some really good answers here with many of you showing really good price action skills. Because of this, I’m giving a $50 discount to the winner (off any course), a $40 discount to 2nd place, and $30 off for everyone else who participated. For those that did, make sure to email me for your discount via the Contact Page and how to take advantage of it.

Based on all the answers, I’d give the nod to Falco for the best answer (most complete and closest to mine). Hence Falco can get a $50 discount off any course. I’d give 2nd place to Larry, so he’ll get a $40 discount off any course. Congrats to both of you!

I’d like to thank you all for participating, taking time to really think about this, and dig into your price action skills. Trading in hindsight is always easy, but having to make decisions when the charts don’t look perfect or form the ideal setups is where you are really challenged. Ironically, this is how the price action looks most of the time on your charts.

This is why it is helpful to engage in many learning opportunities, other than watching videos, reading lessons, and then making trades. Your learning and training has to be multi-faceted, including live forward simulation trading, time to review your trades, along with building your pattern recognition skills.

As traders, we must always test our skills, no differently than a professional athlete is constantly testing theirs. This constant training and testing (which never stops) is what elevates our abilities to profit in this market, and continually find a greater edge. This is what is required for those who want to trade successfully.

Featured Article, Forex Strategies, Price Action Trading

A Trading Quiz on Price Action Trading

In my Price Action Course, I am often sharing my personal live trades, using them as a learning experience for the private members.

My goal is to help them learn price action, so one of the methods I will employ to help them with this is create trading quizzes.

Today I want to share one of those forex trade quizzes on an actual live trade setup I took.

Before taking the trade, I was looking at 3 different charts, so I took screenshots of each chart I was considering trading.

I will often do this when reviewing my trades at the end of the week, or examining the price action to increase my pattern recognition skills.

If you want to learn price action and how to trade it, that learning process must come from many sources – not just trading or watching videos.

The Trading Quiz

Below are three charts, all of which I was considering trading last week. Each one presented opportunities, both trading with the trend, some counter-trend, while others both long and short.

For this price action forex quiz, examine each chart in detail. Look at the overall price action context and structure. Some are offering with trend setups, some are offering counter-trend setups, and some are offering both (or none at all).

Your job is to decide which ones to trade, where, and how.

Hence your answers are the three possibilities:

a) Trade With Trend
b) Trade Counter Trend
c) No Trade

For each trade, fill in your answer (using a, b or c for each chart), what you see in the price action, and why you will take this trade. You can choose A and B as appropriate answers.

This is a great opportunity to see how well you understand price action, how well you can spot with trend or counter-trend setups, & what opportunities you can find in the charts.

There will be no prices marked, nor will I tell you what instruments they are (so you cannot cheat :-). I did however mark some key support and resistance levels I am looking at to give you some small hints.
But by and large, this is just pure price action trading and analysis.

Here we go.