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Understanding Price Action Context

Want to Increase Your Profitability? Try this powerful approach

If you want to find high probability trades, and skip those with a low probability of working out, you’ll need to develop a core skill. Does this sound interesting? Then keep on reading. What is this skill you ask?

I am talking about trading with price action context.

Good Trading Decisions Are Based Upon Context

First, let’s define the word ‘context’. Context = understanding and approaching a situation based upon the ‘context’ (or environmental variables) around it.

In price action, the ‘context’ is a way of describing the overall environment, and using that to help you trade with the underlying order flow. We have 3 filters to understand the price action context in our Trading Masterclass Course. For the purposes of this article, we’ll talk about impulsive and corrective moves.

Impulsive and Corrective Moves

Now I’ve already done many videos and articles on impulsive and corrective moves. For a more in-depth study, you can watch this video on impulsive and corrective price action, or this article on impulsive and corrective moves. But to sum them up briefly:

Impulsive moves = large bars + majority of bars 1 color + closes towards the highs/lows

Corrective moves = smaller bars + mix of colors + closes towards the middle

An example of an impulsive move is below:

Impulsive move 2ndskiesforex

And an example of a corrective move is below:

Corrective move 2ndskiesforex

As a whole, impulsive and corrective moves communicate a lot about the price action context, such as the underlying order flow behind it.

During impulsive moves, the order flow is relatively ‘imbalanced’, meaning it’s dominant towards one side (buying/selling) which causes strong directional moves.

During corrective moves, the order flow is relatively ‘balanced’, meaning there is no strong winner between the buyers/sellers, hence the market goes mostly sideways.

Using Impulsive and Corrective Moves to Discover the Price Action Context

Now that we understand the basics of impulsive and corrective moves, we can use them to discover the price action context of the market.

As a general rule, an impulsive move (the majority of the time) is followed by a corrective move. If the impulsive move is with trend, then the next move after the corrective move will more often be an impulsive move in the same direction.

Two good examples of this are below:

Example 1: Impulsive and Corrective Moves

Impulsive & Corrective moves 2ndskiesforex

Example 2: Impulsive and Corrective Moves

Impulsive & Corrective moves 2ndskiesforex

Now what do impulsive and corrective moves teach us about price action context?

They give us an underlying sense of what the dominant order flow is. If you see a potential trend in place, along with a good series of impulsive and corrective moves, then you can feel confident the overall price action context is bullish, and thus you should be looking to buy more often than sell.

Now instead of waiting for a pin bar, fakey or some other 1-2 bar confirmation price action signal, look at the impulsive and corrective moves for trade opportunities as they will often offer you many.

You don’t need a 1-2 bar candlestick pattern to know if the market is bullish – just determine the overall ‘context’, and trade with the impulsive and corrective structure as much as possible.

NOTE: If you want to learn how to find high probability trade setups using impulsive and corrective moves, check out our Trading Masterclass course.

The bottom line is – many of those 1-2 bar candlestick patterns (pin bars, fakey’s, inside bars, etc) don’t form that often. Yet if there is a strong trend in place, why are you waiting for a pattern that may never materialize, when the overall order flow is already bullish?

Get into that trend and make some money. Just make sure the price action context is in your favor. A great way to determine this is to make sure you can read the impulsive and corrective moves.

The most favorable situation is when you are trading in the direction of the impulsive moves (not against them) because you’re trading with the dominant order flow in the market. It also means you can make money faster because impulsive moves travel farther and faster than corrective moves.

Hopefully you can now see how price action context, particularly spotting the impulsive and corrective moves, can give help you find better trade setups.

Want To Learn More About Price Action Context?

While impulsive and corrective moves are a crucial part to determining price action context, they are not the whole. We have two other key factors to determining price action context and what the dominant order flow is in the market.

To learn more about these two, check out our Trading Masterclass Course where we teach you higher, lower and multiple time frame context with clear rules to understanding them. In fact, our entire 1st section of lessons is dedicated specifically towards understanding price action context.

To get access to these lessons within minutes, click here. Inside the course, you’ll also learn how to read other critical (or more advanced) price action structures and find more trade setups.

Keep in mind, trading with price action context is a skill that works on any instrument, time frame or environment. If you’re learning a price action strategy or approach that only works on specific time frames, then it’s a limited strategy that doesn’t really understand price action or PA context.

Until then – I look forward to your comments and feedback.

Trading Strategies

5 Reasons Why Hedge Funds Aren’t Trading Confirmation Price Action Signals

This article is going to be a tad ‘controversial‘ to many developing traders out there. It is not meant to be negative in tone or start arguments.
It is to get you to question what you’ve been told about price action. It is to open up a dialogue, about another way of approaching PA beyond the typical narrative.
The general price action story spun out there goes something like this;
To make any buying/selling decisions and pulling the trigger, it ultimately comes down to one final piece of the puzzle.
This final piece comes in the form of a ‘confirmation price action signal‘. And said ‘signals’ only arise in the form of a 1 or 2 bar combination.
They come in many names, such as pin bars, inside bars, fakey/false break setups, or engulfing bars.

And the follow up to this magical fakey pin bar signal…

Regardless of the name, the idea is the same. You should not enter the market till you see one of these famed 1-2 bar price action patterns.
Thus far, everyone spinning this narrative are derivatives. What do I mean by this?
Those who preach confirmation price action signals, copied all they knew (with minor adjustments) from someone else.
Many of them were students of one individual (Nial Fuller). A little investigation will reveal Nial Fuller’s price action strategies are also derivatives.
He was a member of J16 and copied all he knew from there, again with only minor adjustments.
If you look at most of the price action mentors, you’ll see the overwhelming similarity & repetition. Now you know why the narrative around PA sounds the same.
Essentially, they are either a derivative (copy) or a derivative of a derivative (copy of a copy). What you’ll also notice is none (or almost none) of them have institutional experience.
What’s really being sold here is a ‘green light buy/red light sell‘ methodology. It’s targeting easy prey who don’t want to do the work, who want understanding price action to be easy, who want to be lazy traders (in their own words).
Yes, with just three simple setups that are easy to find, you too can make profitable buying and selling decisions! Or so you are told…
The reality is far different from this (especially in institutions and hedge funds). By the end of this article, I’m guessing you’ll start to see why.
Below are my 5 reasons why hedge funds don’t trade confirmation price action signals.

Reason #1: Paying 5-6 figures To Train Their Traders?

photo: smbtraining.com (does it look like he’s sitting there just waiting for daily pin bars to form???)
The skill and time required to identify pin bars, inside bars, fakey’s and engulfing bars is minimal (a few months max). Shoot, you can even build an algo to do this for a few hundred dollars.
Bank traders on average will make 2000-4000 trades before they can trade the bank’s money. Hedge funds will also spend large amounts of money and time either training or finding talented traders.
If trading is as simple as finding these three patterns to enter the market, why spend so much to find/train traders what a $300 algo could do?
There is a reason for this.
Because reading and trading PA goes beyond confirmation price action signals. Because buying and selling decisions aren’t as simple as these 1 and 2 bar patterns.
If they were, there would never be the need for such expensive and exhaustive training programs. Would you ever spend that much training someone to trade daily pin bars?
My guess is no.

Reason #2 Macro + Technical

If a fund is not trading algorithmically, most likely they are incorporating a combo of macro (read fundamental) + technical analysis.
I talked about this in my article Book Review: Cultures of Expertise in the Forex Trading Markets. The author (Leon Wansleben) is a sociologist who followed forex traders at a top-10 German bank desk for over a year.
Never once are the words ‘pin bar’, ‘engulfing bar’, ‘inside bar’ or ‘fakey’ mentioned in the book.
What you do find is traders working a combination of macro/fundamentals + technical analysis into how they trade.
They also discount the ‘lower time frames are noise‘ meme pretty quickly. Why?
Because most bank traders have to be reading the intra-day price action (due to flow trades, which accounts for about 70% of their trades).
By the end of the book, you realize entering the market goes way beyond pin bars, engulfing bars and inside bars. You realize they aren’t even trading those to make their buying and selling decisions.

Reason #3 Confirmation Decreases Accuracy and Profitability

“I was in (insert derivative name here) price action course and quickly realized how weak it is compared to yours.
I’ve made over 20% in the last few months using your methods. I’m glad you poked giant holes in his price action strategies.
Otherwise I’d still be waiting for pin bars and inside bars, missing hundreds of pips.“
After posting my video How A Typical Pin Bar Entry Is A Retail One, many struggling traders started to see price action differently.
They realized how many times they were sitting on the sidelines doing nothing when others were making money. They also realized how waiting for ‘confirmation signals’ decreased their accuracy and profitability.
To learn why this is the case, watch my video below.

Reason #4 Waiting for Confirmation Price Action Signals is Passive Trading

Hedge funds and bank traders are (if anything) passive when it comes to entering the markets.
Institutional traders would not (and could not) be making trading decisions once a daily pin bar has formed.
If they were doing this so consistently, they’d be picked off by HFT’s or predatorial funds who could see their entries a mile away.
This is on top of the fact they’d all be competing for the same liquidity and relative price, which would only mean a worse entry and lesser profits on the same trading idea.
A little investigation into how predictable these entries are will change your perspective on trading.

#5 The Pepsi Challenge

Ok, let’s say you are a devout believer the real way to trade price action is via confirmation price action signals.
Let’s say the above 4 reasons didn’t convince you. We can simplify this through a pretty simple test – The Pepsi Challenge.
Your challenge, should you choose to accept:
Walk into a dozen or two hedge fund offices, bank trading desks and prop trading firms. Then ask them these two simple questions:

1) If you don’t see a daily pin bar, engulfing bar, or inside bar, are you staying out of the market?
2) If you do see a daily pin bar, engulfing bar, or inside bar, are you loading up on your position even more than usual?

I’m willing to bet the answers to the above questions will be a resounding NO.
More likely, you’ll get several laughs, along with someone perhaps escorting you out of the office.

To Date

As it stands right now, nobody has taken me up on this litmus test (let alone proven otherwise). I’m still waiting as I posted this challenge many months ago.
I am confident(while open to being wrong) that after you take this test, you’ll look at price action differently.
Once you let go of the current narrative, you’ll be forced to examine how order flow and the balance/imbalance between buyers and sellers is reflected in the price action. You’ll begin to see how liquidity impacts the PA and volatility.
And you’ll start to trade contextually, meaning through the price action context.
That is when your real training in PA begins, when you let go of the freshman narrative. You’ll also realize trading those 1-2 bar patterns does not build your trading skills.
If trading pin bars really built PA trading skills, then bank traders would be going through thousands of reps on those alone.
It takes no skill to find those signals and spend your time looking for them. And doing so discounts all the other candles in the process.

About All Those Other Candles…

All those other candles is what forms a structure. This ‘structure’ is (by and large) a representation of the order flow.
The order flow gets reflected in the PA, and this PA forms the price action context.
This is where your study should be.

In Conclusion

Looking for 1-2 bar patterns doesn’t make you a price action trader. It makes you candlestick trader, and that is a different approach to the markets.
When you investigate it, hedge funds aren’t trading via confirmation price action signals. And when you stop waiting for confirmation, you’ll find yourself getting better trade locations and higher + R per trade.
Looking at the market contextually will change your mindset. You’ll start trading and thinking in probabilities.
You’ll also discover how waiting for confirmation is a retail traders mindset.
With all that being said, do you agree or disagree with these forex confirmation price action trading misconceptions? Can you see how hedge funds aren’t trading price action signals this way?
Even if you don’t agree, please do comment and share below (in a non-negative tone por favor).
Regardless, I’m hoping you’ll really open up to other ways at trading price action.
Until then – may good health, trading profits and success be with you.

Setups, Price Action & Context

If you think this article is going to be about learning a price action setup, you’re wrong, but it will be about something more powerful. For your future, for your learning process, and for your sanity, keep reading this article if you are not consistently profitable.

Of all my articles, the most popular and commented ones are always on some specific setup or system.

Why?

Because almost all of you have been hunting for the one system, that edge which will turn your trading around. That edge which will print money into your account day after day, week after week without much effort. You’ve probably amassed dozens of patterns and systems, yet still aren’t making money.

Sound familiar?

If so, don’t worry – that was me 12 years ago.

But I think it points to a problem for those hunting through forums, websites and videos looking for your pot of gold. All of your focus and energy has been on finding a ‘system‘ or ‘price action setup‘ that makes money.

Sure, everyone wants their own ATM machine – who doesn’t? But what is also going on is you want the market de-mystified. You want trading to be simple and easy, i.e. thinking three simple setups will solve all your trading problems and help you understand the market.

Regardless, this underlies two things which will trip you up in trading;

1) The fallacy three simple price action setups will consistently make you money if you have good money management.

2) Being uncomfortable with uncertainty.

Today’s article will be focused on the first point, and the next article will be focused on the latter.

Three Simple Setups? Really?
To begin, it is a complete fallacy that if you learn what a pin bar, inside bar and a fakeout system is + good money management = making money…that you understand and can trade price action.

How convenient that a market which has brought traders to its knees, crying, jumping out of windows after losing fortunes, that three simple setups and good money management (plus a little psychology) is all you need to be a profitable trader.

If that was the case, why isn’t everyone doing it?

Why are banks spending thousands of dollars, and months, if not years on end, training their traders, when there is such a conveniently packaged solution available?

My programmer was recently at a algo conference with some of the top hedge funds. He told me they are spending hundreds of thousands of dollars re-programming their algos every 12-24 months to keep a competitive edge.

Why would they do this if they could just learn what a pin bar was, inside bar and fakeout setup is? Wouldn’t that be easier?

Newbie traders want to hear the market can be simplified into three price action setups, that trading with the trend and good money management is all you need. It perpetuates a dream which is actually a false reality.

This is why I have always talked about learning to read the price action in real time, that you cannot rely upon systems alone. Yes, a pin bar can be a highly effective method for trading various price action situations. But it always has to be taken in ‘Context‘.

Two Scenarios
To demonstrate this point, lets take two scenarios;

1) A bullish pin bar forms after a long trending move. This trending move ended with an exhaustive candle which then proceeded to form a double bottom off a key support level. The pin bar closed bullish and formed on the 2nd bottom also creating a 3 pip breakout below the lows. Am I going to buy that pin bar if I get a corrective pullback towards the double bottom?

Absolutely!

I see that – I’m going to buy that. The pin bar was a very good setup and price action cue for me. But remember, pin bars can be both cause and the result of order flow.

However, we have the other pin bar scenario….

2) Price action has dropped 1000pips in the last two days. Then in the middle of the Tokyo session forms a tiny pin bar on the 4hr time frame that closes bearish. Am I going to buy that pin bar expecting the price to reverse? NO!

Why???

Context!

You have to understand, there is nothing wrong with the pin bar by itself. It can be a highly effective signal, or it can lead to losses.

What is the difference?

It’s not money management, or trading with the trend, or your psychology.

It’s the context with which it forms. But to understand these differences, you have to learn to read price action in real time, and what it has done in the past around those levels. That is the context you have to learn how to read.

Passive vs. Active Learning
To be sitting there passively, waiting for days on end for your three simple price action setups is trading in passive mode and flat out boring. And boredom will actually interfere with your learning process.

If you can only find one setup a week, you’re not looking hard enough because there are plenty.

There is no active learning, and active learning is what you need. In active learning, you are engaging your resources, your current level of knowledge and applying it. In passive learning, you are not engaging any of your knowledge and seeing how it works in real time, learning from the feedback loop called the markets.

If you are sitting on the sidelines for days on end, just waiting for your three simple setups, you’re wasting your time. You could be learning, trying, studying, and participating in the market which is what facilitates learning.

I didn’t just learn what an inside bar was and then trade it based on what it should do. I spent dozens of hours studying 1000’s of inside bars and pin bars, to see what was different between them all, and how did price action form after each unique one.

I have pages of notes about pin bars, how each one forms, its size in relation to the prior bar, where it forms in relation to the prior bar, in the trend, near the 20ema, in relation to the surrounding price action, support/resistance levels, etc, etc, etc.

I don’t just trade pin bars like a robot. I trade them in context, and that is what gives me an edge, to be able to read the price action in real time, and what the market has done around current levels.

A Student
One of my students wrote just yesterday on this subject:

“I am at that point where I know I want to be a full time trader. I absolutely believe that the strategies, models and methods we are taught in this course can lead to profitability, because I’m using them everyday and they lead to good profitable trades.

However, I have moved away from just seeing a pin bar or some other signal and just pulling the trigger, because I have moved toward understanding price action the way Chris talks about in his lessons, like he has done on breakouts, the aussie price action, the USDX, etc.

I believe that as traders we can trade these strategies and make some money, but we will not evolve as traders if we don’t begin to read and understand the price action that is occurring around these different setups.“

When I read this, I was nothing but smiles as the light went on. This student gets it, and gets what I have been teaching. He understands that pin bars, inside bars, and all the other methods have a purpose – but they are not the road and vehicle towards profitable trading.

Although they are highly informative about what the order flow is behind the price action, he understands they are both cause and result. This means he understands sometimes they are the cause of order flow, and other times, they are the ‘result’ of order flow. They are not simply just one or the other.

It also means he is spending his time learning to read the price action in real time, to understand what kinds of order flow would create such price action. He is not passively waiting for setups, and then pulling the trigger like an automaton. He understands that these setups have to be taken in context.

In Summary
Don’t waste your days on end in waiting mode for your simple three setups to occur. Understand three simple setups will not lead you to profitable trading, nor understanding price action. If it did, everyone would be doing it and that is all they would be teaching at banks and hedge funds.

Understand trading price action means learning to read price action in real time. It means being an active and deliberate learner.

Understand that price action setups are highly valuable tools – but they have to be taken in context. You have to learn to read what kind of order flow would create such price action, and how to trade this flow.

I hope this helps and that it changes the way you look at price action and your learning process.

Please make sure to leave your comment, like and share this post.

Kind Regards,
Chris