Tag Archive for: order flow

3 Things That Will Make You More Money Trading

What’s Inside?

-Tell me about your instruments
-When not to trade breakouts
-Let’s look at where you take profit

In the world of forex trading, if you’re not making money now (over a decent period of time), most likely you have to make some changes. To make money with forex, you will probably have to change the way you think, the way you trade, and the way you perform.

In today’s article, I’m going to share with you 3 things that will make you more money trading. If you want to improve your trading performance and make money on forex, consider making these 3 changes to your trading now.

#1: What Kind of Instruments Do You Play?

As of today, I’ve seen over 10000+ myfxbook accounts. Now I have an important question for you.

Out of all the students who’ve given me a myfxbook account for their first time, how many of them were trading only instruments they profited with?

Any guesses?

If you said ‘zero‘, you were correct.

Think about that for a moment…the first time you use myfxbook and start tracking your trading stats, the chances you’ll profit on every instrument you trade is likely zero!

In other words, you’re trading forex pairs and instruments you are not profiting from, and most likely won’t.

Below is a screenshot of a live myfxbook account for one of my students ‘Ahmed‘ (who’s well in profit).

instrument performance myfxbook

Notice anything? He’s lost every trade on the AUDJPY.

Now as long as you have a decent amount of trades for an instrument, if that instrument you’re trading has all losses, you should remove it from your trading plan and not trade it again for at least one year.

By taking off the instruments you have the most losses with (from my experience), can add between +3-10% of profit towards your bottom line per year.

That can be the difference between losing money and making money trading. It can also be the difference between making decent money, making great money with forex.

Hence look at your trading instruments by clicking on the ‘symbol‘ tab under your myfxbook trades and isolate the ones you lost the most money on.

Make sure to a) record the number of trades per pair, b) total accuracy %, and c) total profit/loss {in %} for each forex pair. Those 3 metrics alone will likely tell you which pairs and instruments you need to stop trading.

Oh and Ahmed whose trading stats you’ve been looking at?

He made a +300% profit in the last 6 mos (see below).

ahmed 300 percent 2ndskiesforex

NOTE: Do you want to learn how to make money trading price action? Find out more by seeing our price action course.

#2: When Not To Trade Breakouts

I have many different trading strategies, but I definitely trade breakouts. And I’ve shown I make money in forex trading.

I have a unique approach towards trading breakouts which you can learn about here.

But there is a key time to trade breakouts, and places on your chart you should not trade breakouts. Today I’m going to talk about two places you should not trade breakouts from.

1. Don’t trade breakouts in the middle of a corrective structure (range)

If you think about the order flow behind a corrective structure (see image below), you can see there is a balance between the buyers and sellers.

corrective structures support and resistance levels 2ndskiesforex

There is a ‘balance‘ because both sides relatively agree on where the price (or value) of a forex pair (or instrument) should be.

The bulls say the floor of the corrective structure is where they see the most value, and bears see this at the top. That is why the range persists, because both sides are participating at clear levels and zones.

This means their no directional winner in the order flow (bulls/bears). And this is what we mean when we say a corrective structure is ‘balanced‘.

In the middle of any range or corrective structure, there is the least profitability available for trading a  particular direction (i.e. trading breakouts) because there is an approximate 50% chance the market will go up or down in the middle of any range.

So avoid the middle of the corrective structure and range for trading breakouts.

2. Don’t trade breakouts just before a major support or resistance level

Looking at the chart below, you see the top line is a major resistance level, and just below it is a breakout formation.

breakout failures

These often form to create the illusion the market will keep going higher through the major resistance level. It can also form by bulls encountering the first layer of a resistance zone which is why the market kept pausing just below the level.

Whichever the reason (or both), I do not recommend trading breakouts just below/above a key level.

Better to wait till the price action is just below/above the actual support or resistance level. If you have less experience with this, we recommend taking a breakout pullback setup (see below).

breakout setups

#3: Let’s look at where you take profit

There are many components to your trades you’ll need to study, analyze and refine. One of those is where you take profit, or your TP.

Now I’d like you to do a little experiment with your own trading account (demo or live):

I’d like you to look at every trade you made money on. Now look at the data in myfxbook, and see how many of those that a) closed at your TP, b) closed manually before your TP.

Record how many trades you made of each (close manually/hit TP), and see which one made more money.

If it’s ‘a‘, then you likely have a solid grasp of finding good targets you can hit consistently. So no need to close them early.

This is what is called set and forget trading.

If it’s ‘b‘, that means you have a good grasp of when your profitable trades are going to turn around, and should continue manually closing your trades.

One last final metric is to look only at the ones you closed manually before they hit their TP, and see if they would have hit your TP anyways before hitting your stop loss (SL).

If that is true, then you’re missing a lot of profit (losing money) by not holding them to their full take profit and should stop manually closing your trades.

losing money trading

In Summary

We covered 3 main points in this article. They were:

1) Analyze your performance for each forex pair and trading instrument

2) When not to trade breakouts

3) Examine your take profit targets

Now that you know why you need these 3 things to make money trading, it’s time to do the work and find leaks in your game, while increasing how much money you make per trade.

Do you want to learn several more ways to increase your profits and how much money you make per trade?

Then check out my Price Action Course where you get life-time membership, access to the members trade setup forum, market commentary and a free skype session with me, so quite a lot.

To learn more about making money with forex, click here.

Now make sure to tell me what you thought about this article and if these 3 things will help you make money trading.

Confirmation Around A Key Support And Resistance Level: What To Know

key support and resistance levels chris capre 2ndskiesforex

Today I got a question from a student who’s only made a few posts in the course, so just getting started.

They asked a question which points to a critical aspect of trading.

Here is what they asked below:

questions about trading support and resistance

 

I think this is a fantastic question many developing traders struggle with.

How do you ‘know’ if the key level you’ve chosen is the right one?

What happens when the level you chose just got sliced through like Swiss cheese?

And do I look for ‘confirmation’ whether this key level will hold or not?

I’ll address these questions in this article to clarify your understanding of trading with support and resistance levels.

Isn’t Finding Key Support & Resistance Levels Subjective?

I think many beginning traders struggle with the more ‘discretionary’ elements of trading.

It’s easy to want things to be fixed, to be purely scientific or mathematical. That is nice because it means for every situation x comes up, you should do y.

Lamentably, trading isn’t that simple, especially when trading price action. Risk management would be one of those components of trading which is purely scientific. It all boils down to math and the risk of ruin.

risk-of-ruin-formula 2ndskiesforex

However, trading key support and resistance levels is part scientific and part artistic. This means there are rules to trading them, but part of working with them will entail a ‘discretionary’ call.

Hence the answer is yes, there will be a part of your trading with key levels that will be subjective which you cannot avoid.

It should be noted I do not look at support and resistance levels as pure lines in the sand. I look at them as zones of order flow.

Why do I say this?

Because when you look at the order flow and liquidity around key levels, you’ll notice a pattern. That orders and liquidity vary at several prices above & below the key level.

order flow liquidity price action 2ndskiesforex

This is because there are varying institutional players out there who will place their orders at varying prices above or below any key level.

A great example of this is when we consider time horizons for trading. If someone is trading intra-day, then they will likely have a smaller stop.

This will require them to have greater precision in terms of their entry price and trade location. Thus they will be as close to the level as possible.

However someone who is swing or trading long term will not be so concerned with this as a few pips difference on a +500 pip profit target and 150 pip stop loss.

Keep in mind, this is just ONE factor regarding how orders are placed around key levels (as there are many).

But when we look at the order flow around key support and resistance levels, we can see there are going to be orders at many prices above and below a key level.

This is part of the reason why I consider trading key levels to be more like zones of order flow. There are other reasons which I explain further in my price action course.

How Do I Know The Levels I Selected Are Key Levels?

This is another critical question that I often see amongst developing traders. The reason why I say ‘developing‘ traders is because this type of question & wording gives a unique insight into a traders mindset.

They make it seem  like placing a trade around a key level is like jumping off a cliff that is only 15 feet above water 😮

jumping into water

As a general rule, you will never ‘know‘ anything about trading, let alone price action. This isn’t like poker where you have a fixed number of cards in the deck and can ‘know’ the probability of a hand or card being hit.

There are an infinite amount of possibilities -1 that can happen in the charts. You will never ‘know‘ with 100% certainty and you cannot avoid this.

The desire and want to ‘know‘ comes from a beginning traders mindset…of wanting pure objectivity in trading.

“Beginning traders want certainty because they are uncertain of their abilities and skills.”

The want for certainty is an attempt to compensate for their lack of skills and confidence. The problem is, certainty is an illusion in trading, so you are wanting something that does not exist.

I do not ‘know‘ a key level I’ve chosen will work or not. I’m just going on probabilities & my read of the price action context.

I’m guessing an olympic biathlon shooter doesn’t ‘know’ when the wind will blow. But they can take measurements, read the wind speed and direction (constantly in flux), then make the best shot they can.

biathlon shooter 2ndskiesforex

Trading is very similar.

And professional traders will never ask this question about ‘knowing‘. Why?

Because professional traders trade and think in probabilities. They know that certainty is an illusion. They know what you are really working with is ‘probability‘.

Hence the best you can do is align the probabilities in your favor as much as possible.

Are There Ways to Improve Your Ability To Read Key Levels?

Yes, I have an entire lesson dedicated to this in my price action course. We cover how to work with key levels across multiple time frames and context.

Do I Look for Confirmation Whether The Key Level Will Hold?

I’ve talked about this how hedge funds do not trade confirmation price action signals. They give you a worse entry and actually lower your overall profitability and accuracy.

Hence I do not look for confirmation signals at key levels. You can read more about why I don’t trade confirmation signals at key levels here.

In Conclusion

Until the Hal 9000 is available for trading, I’m not sure we will have an ‘objective’ way to trade key support and resistance levels.

hal 9000

It’s important to understand where this mindset comes from and why you should trade and think in probabilities.

It also helps to think of support and resistance as a zone of order flow, not pure lines in the sand.

Most often, traders who struggle with the probabilistic nature of trading are wanting certainty. But this is an illusion in trading. We have to get comfortable with certain parts of trading that will simply be ‘unknown‘.

Your ability to read key levels will improve over time, and there are many things you can do to improve your ability in this. We teach these methods in my advanced price action course and how to increase your skills trading key support and resistance levels.

Eventually you’ll develop the confidence to trade them without confirmation. And when you do, you’ll see your profits, accuracy and profitability increase tremendously.

Your Turn

Have you been wondering how you will ‘know’ if a key level will hold? Do you find yourself constantly looking for ‘certainty’ and ‘confirmation’ around a key level?

Make sure to comment below and share your thoughts.

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

albert einstein not following the crowd
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.
pin bar fakey price action signal failed
And the follow up to this magical fakey pin bar signal…
pin bar fakey price action signal failed 2ndskiesforex
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?

smb training
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

prop tradinng firms
 
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.
pin bar entry is a retail entry
 
 

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

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

waiting 2ndskiesforex
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.

2 Tips You Need to Know About Trading Support and Resistance

One of the more crucial lessons in my price action course is called ‘The 10 Key Tips For Trading Support & Resistance Levels You Must Know‘.

In today’s article I’m going to share two forex support and resistance trading tips from the course lesson which can have a massive impact on your trading and understanding of price action.

The first one will focus on the price action context around key support and resistance levels between higher TFs (time frames) and intra-day TF’s.

For the record, I view the higher TFs as the daily and 4hr chart while the lower TFs to be between the 1hr and 5m charts.
The second key point around trading support and resistance covers the order flow and price action around high probability trades.

Intra-day Price Action Context Can/Often Will Contradict Higher Time Frame Context

Because of the higher time frame myth narrative (which states the only way to trade price action is via the higher TFs), those following this narrative have neglected a key part of price action.  That is learning to understand and read intra-day price action.
Because of this, traders have treated anything in the lower time frames as ‘noise‘ which is a false understanding of price action and time frames.

Lower time frames are just a different lens into price action and sometimes can offer a more nuanced understanding of the order flow behind the PA.

This has led to many traders not understanding that intra-day price action can and often will have it’s own context. This is a problem because we have to understand how the intra-day PA may affect or inform our trades for that day.

What it also translates into is intra-day price action context can and often will contradict the higher TF context.

Hence if we are trading with the intra-day context, but against the higher TF context, our holding times by default should be shorter and we should be anticipating (or be prepared) to exit quicker.

I’d like to share a good example of this principle with the USDJPY which has been in a large 550 pip range since the end of last year.

USDJPY Daily Chart
usdjpy daily chart

What you are seeing above is the USDJPY daily chart.

After a large bull run from 107.50, the pair entered a corrective phase forming a large range near the highs between 115.75 and 121.15.
You’ll see the range marked by the red box and the first two pullbacks into support (#’s 1 and 2) which were around Dec. 16th and Jan. 15th.

In the next chart, you’ll see the intra-day price action context on Dec. 16th via the 1hr chart.

USDJPY 1hr Chart
usdjpy 1hr chart

Notice how the intra-day price action context is completely different from the higher TF context?

By not segregating the two types of context (intra-day and higher) we can often get scared out of these trades as they run into our key levels impulsively.

Many times I hear struggling traders email me how they had a trade setup to buy or sell at a particular level and trade location.
Yet because they were watching the intra-day price action context only, they abandoned the trade.

However right after you let the trade go and canceled it for fear of getting stopped out, the market touches there entry location, bounces right off of it and runs straight to your target.

A great example of this is the USDJPY pair on Dec. 16th (see below)
usdjpy 300 pip bounce off key support

Hours later after not taking the trade, you are wondering why you abandoned your trade plan and missed out on a perfectly good trade.

Has this ever happened to you?

It’s certainly happened to me, and likely all of us at one point.

The key point here is it’s important to understand intra-day price action context can and will contradict the higher TF context.
This DOES NOT mean we abandon the lower TF context for the higher one. We have to understand it is information and can often add to our trade ideas.

But ignoring it and focusing on the higher TFs only is not the approach as this leaves you lacking a key skill – learning to understand and read intra-day price action.

And this skill will be of great value to you in locking in high +R trades when learning to manage them.

Impulsive Rejections & Short Holding Times At a Key Level are a Positive Confluence Factor

This one is important to understand regarding the order flow and PA around (and off) a key level.
Many times the PA will just consolidate around a level before making a move (to hold or break). There are plenty of price action clues we can learn to read which will intimate the more likely scenario.

But anytime you see a very large reaction off your trade location around a key support or resistance level, it usually indicates a positive confluence factor to your trade.

Why?

Because the sharp bounce more often is caused by large institutional players holding/defending a key level with strength.
Being able to reverse the move into a key level takes size and volume, and pushing back with vigor indicates the ability to absorb the pressuring heading into the level (often called ‘absorption’).

By creating a heavy imbalance between the buyers and sellers, this further reduces the counter-move interest and shows the order books are likely heavily stacked to one side which further supports your trade idea and location.
Also the fact the PA spent little time at a level indicates the speed of the buying interest from the institutional side which is also highly supportive for your trade.

The key take home point from this is to a) be able to observe and read the price action and reaction off the level to get an insight into the order flow around the level, and b) understand this impulsive bounce likely indicates a high profit potential trade.

An example of this is in the chart below on a live trade setup for the EURUSD we profited from heavily and I traded with my own money (really can’t believe I have to keep saying this as I’m only always trading with my own money).

EURUSD Live Trade
live price action trade eurusd profits heavy

Looking at the chart above, you are seeing a screenshot of when I was in the trade, showing my entry trade location (1.1075), my SL at 1.1050 and my TP and 1.1250/60.

This trade ended up hitting it’s target, but notice how the pair bounced off the support level quickly forming a pin bar rejection in the process.

NOTE: If you were trading the illusory pin bar 50% retrace tweak entry, you would have gotten a much worse entry location vs. mine.
It is important to understand why confirmation in price action is an illusion and how it hurts your profits.

Regardless, the nice tail rejection + closing on the top of the bar indicates strong buying off my entry location.
The fact the next two bars also repeated the same meant a) my trade almost never went in the negative, and b) the strong impulsive reaction off the level indicates a high +R potential trade.

And that is exactly what happened profiting +186 pips on a roughly 25 pip stop for a +7.5R trade.
How often do you get those trading your daily pin bars?

In Review

Ignoring the intra-day price action context will leave you with a weakened skill level and ability to understand the overall price action context. Yes, intra-day context can and often will contradict the higher TF context, but this does not mean we ignore them.

It is simply ‘information‘ and can be highly informative for us when either trading intra-day, with trend, or counter-trend.
The information can also be informative to us about our trade when you learn to read the subtle price action clues before, and at the level.
Also we have to be aware of highly impulsive reactions off a key level as that could indicate a larger profit potential for our trade.

You may have a typical +2R profit target for your trade, but a highly impulsive and quick reaction (or short holding time) at your trade location may indicate there is a larger move in play (and thus more profit potential).

With that being said, what tips do you use to help trade price action around key support and resistance levels?

Please share, like and tweet these forex support and resistance trading tips along with sharing it on any forums or with anyone you think can benefit.

,

Forex Trading Strategies – Trading the False Break Part 2

Key Talking Points:

  1. False Breaks Offer Great With Trend Trade Setups
  2. Trading the False Break with Pin Bars
  3. Trading the False Break with Engulfing Bars

In my prior article on trading the false break strategy part 1, I shared the basic definition of a false break, covered what is the price action and order flow behind false breaks, and how we can trade them.

In this false break forex trade strategy article, I will discuss how you can trade them using pin bars and engulfing bars, along with entry, SL and TP techniques.

To Recap What A False Break Is
I generally define a false break as one of the two following scenarios:

  1. A break above/below a prior candle that fails to close above/below that candle
  2. A break above/below a key level, quickly reversing that level, and sparking a counter-trend move

Below is another example of a false break:
forex price action false break strategy 2ndskies c2

Looking at the chart above, we can see a clear downtrend, starting with A in the top left of the chart. The sell-off finds support at B, which eventually becomes a role reversal level at C.

Further along at E, we can see the textbook false break setup, just like we defined in the prior article. The pair breaks up above the key level CT (counter-trend), stalls, then sells off again breaking back below, and offering a great false break setup.

This sell off heads all the way down to F for a nicely profitable trade, and is a great example of a false break setup.

Now we will discuss how to trade the false break setup with a pin bar.

The Pin Bar + False Break Setup
Another type of false break setup is using the pin bar reversal pattern. In many ways, the pin bar by itself, can be a type of ‘false break’.

This is true if the body of the pin bar itself is housed within the prior bar. The breaking above/below the prior bar, and then closing back within that bar, is in and of itself, a type of false break.

What we are going to discuss is how we can use this to trade the false break strategy in combination with the pin bar.

A Pin Bar + False Break Example
false break pin bar price action 2ndskiesforex c1

In this chart above, we can see at A (top left), there is a bullish move to the dynamic resistance (20 EMA). The sell off from the dynamic resistance to B only takes 3 bars, which means it was over 2.5x faster then the buying pressure at A.

From an order flow perspective, the sellers are stronger, since it took them less time to cover the same distance.

After breaking below the support level at B, the pair bounces at D’ towards C, (very same support level at A), hence a role reversal level.

Now notice at C how the pair briefly broke above A. If the buyers were really in control, they would have kept pushing prices. But the pin bar formed a false break above the highs of the blue bar (or prior bar).

This breaking above then back below, suggested a likely false break and more selling. The pair sold off from C to D, re-affirming the pin bar + false break setup.

NOTE: Observe how the support level at D and D’ formed another role reversal setup just after? This is a great example of trading with the trend.

Entry, Stop & Limit
If the pin bar represents a real false break, then the with trend direction should continue. Assuming I have read the price action context correctly, I generally like to enter using one of two methods:

  1. On a few pip break back below/above the key level
  2. On a pullback setup to the key level

The first entry method (more aggressive), can protect you from missing the move, as sometimes the false break never offers a second chance to enter.

For those wanting more ‘confirmation’, then I’d recommend the second entry method.

Now assuming the pin bar is the high/low in the move, I’ll put my stop just above/below the pin bar. For my take profit, if there is a prior level which caused the bounce/sell-off leading into the pin bar, then I’ll target that. One can use that as the only target, or as a first TP holding for a deeper move.

Trading the Engulfing Bar + False Break Setup
In reality, the engulfing bar + false break setup is not much different from the pin bar false break. I am still wanting to trade them with trend as much as possible, looking for a false break followed by an engulfing bar.

An Engulfing Bar + False Break Example
engulfing bar false break price action 2ndskiesforex c3

Turning to the chart above, we can see the strong selling stops at A. This forms a price action squeeze, which leads to a breakout and further selling.

The pair pulls back to B (the support level at A), and forms a false break. This is immediately followed by an engulfing bar.

Now ask yourself, if the bulls were truly in control, why did the price action immediately reverse after taking out A? This should have been a clue to watch for a false break.

You’ll notice right after the engulfing bar was an inverted pin bar. This is a failed attempt to rally, suggesting the buyers tried to push higher, but failed. What results is heavy selling from the open of the next bar down to C, and eventually E, resulting in a nice profit.

NOTE: Take a look at the move from C – D. This is a corrective pullback following an impulsive move. The corrective pullback went into the dynamic resistance (2o EMA), and then sold off heavily after.

This would have represented a great pullback setup, and is a good example of how impulsive and corrective moves manifest.

impulsive and corrective price action 2ndskiesforex
Entry, SL & TP
The entry, stop loss and take profit techniques are the same as the pin bar + false break. The only variation, would be if the engulfing bar closes back below/above the key level.

If it does, I’ll look to take a pullback into the engulfing bar, which is far more optimal entry as a whole. For more information on why the pullback is a more optimal entry for the engulfing bar, click here.

To Recap
In today’s false break forex trade strategy article, I talked about how false breaks offer great with trend setups. I then went into two more examples of the false break strategy, showing how you can trade them with pin bars and engulfing bars.

I shared entry, SL and TP techniques, along with explaining the price action and order flow behind these great setups.

These are just a few of the false break techniques available. If you want to learn more about trading the false break, along with other forex trading strategies, you can read more about my Price Action Course & Daily Members Commentary here.

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Trading the False Break Strategy Part 1

Key Talking Points:

  • False Breaks Offer Great Price Action Trading Setups
  • You Can Trade the False Break Strategy with Pin Bars and Engulfing Bars
  • Look for False Break Setups Trading With the Trend

Ever tried to enter on a forex false breakout breakout setup, only to have the trade immediately reverse on you? I’m guessing this has happened to you many times (present trader included).
With the market volatility declining over the last several years, false breaks can and will happen all the time. The key to avoid getting stopped out, and actually profit from these false break setups, is to understand the price action context which often precedes them.
In this two part article series, I will begin today’s discussion by defining a false break. Next, I’ll go over a common false break setup, which is trading the false break with trend. Then I will go over a fundamental false breakout strategy, and conclude by recapping the key points.
What is A False Break?
I would prefer to define a false break as one of the following two scenarios: 

  1. A break above/below a prior candle that fails to close above/below that candle
  2. A break above/below a key level, quickly reversing that level, and sparking a counter-trend move

Below is an example of the first type with a pin bar + false break:
trading the false break strategy 2ndskiesforex c1
In the chart above, you can see the arrow to the top left, showing a bullish move running into resistance. The pair then settles back, and makes a second attempt to take out this key level.
But on the top right, you can see it forms a pin bar + false break.
From an Order Flow Perspective
Looking at this from an order flow perspective, the bulls were in control leading up to the level, and were able to push past it. Either there was massive profit taking on their part, or they ran into heavy sellers a few layers deep behind the level.
Regardless, the sellers over-whelmed the buyers, and pushed the pair back below the key resistance level. After a second attempt to regain the level, the sellers realizing they had control, sold even more, pushing the pair down impulsively.
Trapping Traders
In most false breaks, there are ‘trapped traders‘, meaning traders who are caught long when the pair is about to go short, or vice versa. Those trapped traders once the trade goes negative, will likely be stopped out, & further fuel the counter-trend move.
The more savvy traders will exit manually when they realize they are trapped, while the slower traders will likely get hit for the full stop. There are price action clues to tell when you’ve been trapped, but that is for another article.
Trading The False Break Setup With Trend
It should not be surprising, one of the best false break setups occur when trading with the trend. This is because the underlying order flow is heavily imbalanced, meaning it’s heavily bullish or bearish.
When a false break setup forms counter-trend, it usually runs into buyers or sellers who are happy to take the pullback getting a better price. Their overall strength in the market makes it harder for counter-trend false breaks to be maintained.
This is why false breaks present such great trade opportunities.
Below is a classic example of trading the false break setup with trend:
trading the false break strategy 2ndskiesforex c3
In the chart above, starting with the top left, we can see the heavy impulsive selling. Eventually this leads to a bounce which hits the key resistance level 2x (marked by two red arrows). After forming a new low (red line at bottom), the pair bounces to retest the bears at the same resistance level.
Now note how the pair breaks above this level with a really large blue bar, closing at the highs. Ask yourself, if the bulls were really in control, how come they did not produce any follow through?
The next two doji candles showed no real strength or follow up buying, which should have been a warning sign to any bulls already long. Bears wanting to trade with trend, should have been looking for the false break and close below which they got on the 3rd candle.
Entry, Stop & Take Profit
With such a clearly defined trend and resistance level, there are two general entry techniques;

  1. Sell on Break back below the key level
  2. Wait for pullback setup to the key level

More aggressive traders who feel confident in their price action skills may sell on the break back below the key level. This may or may not offer the best price, but you may not get a second chance to enter if the sellers came in hard on the false break.
More conservative traders can wait for a pullback setup to the key level. If the false break is real along with the level, then the trade should hold and not go much into the negative.
I generally recommend placing the stop above the high (or below the low) of the false break by a few pips, depending upon the volatility and liquidity of the instrument.
The first target should be the other end of the consolidation. If you want to go for multiple targets, then the next key support or resistance level would be suggested.
To Recap
In today’s forex false breakout article, I talked about the price action and order flow behind a false break setup, and why it can be a powerful trade opportunity. I discussed the two types of false breaks and how to generally define one.
Lastly, I covered why to look for with trend setups trading the false break, giving the entry, stop and take profit methods.
When you learn to read price action in real time, you will begin to spot these false break setups more easily. As you get skilled in identifying them, you will avoid the common traps, and profit heavily from them as they offer great opportunities.
In the second part of this article, I will talk about using a false breakout strategy with pin bars and engulfing bars.

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Book Review: Cultures of Expertise in Global Currency Markets

In a new series of articles, I will be reviewing books approximately once a month specifically related to trading. I am a fanatic reader, consuming on avg. 1-3 books a week, and often come across some great reads on trading, or building a successful mindset. Today’s forex trading book review is one my most recent reads Cultures of Expertise in Global Currency Markets by Leon Wansleben.

Book Review Chris Capre Cultures of Expertise in Global Currency Markets
Overview
The book is a solid study of traders and analysts at a top 10 bank in Germany, focusing on the FX desk. The author is a sociologist by trade, spending a lot of time analyzing the interactions between members on the FX desk.

It goes without saying parts of the book are highly ‘academic‘ in nature. This is key, because you will find yourself going through pages and pages of ideas which are aptly named ‘theories’.

We are traders – we deal in the reality of profits and losses, managing our risk models, emotions and mindset. Sociological theories by themselves will have little benefit to us. Regardless, the book has some highly valuable information, so onto the gems inside.

Pros
Want to find out a lot of interesting information on bank professionals? Then you’ll find this book interesting on such things as;
-how bank traders make trading decisions
-interactions with the analysts
-day to day activities

It is clear by the end of the book (if it wasn’t already), bank traders are highly aware of fundamental data/announcements. Sometimes this info is primary. Other times they are strictly concerned with the ‘flow data‘, or order flow and transactions from incoming hedge funds and participants.

Price Action & Intra-day Trading
One thing is clear – desk traders are primarily focused on the price action in real time. They are without a doubt trading intra-day on an active basis, while also building longer term positions in their book.

Hence, any ‘guru’ or ‘authority’ out there touting how ‘higher time frames‘ are the way the institutions trade,  has no idea what they are talking about and spouting  a complete fiction.

live price action trade eustx 50 for 4R in 30mins 2ndskiesforex

Interactions
The author does a really good job providing insights between the traders, analysts, salespeople and how they interact daily. He shows several diagrams of the layout, seating positions & conversations during specific meetings for an inside look into FX trading desks at large banks.

Traits of Top Traders
Another key point you quickly realize, is how the top traders manage risk, are incredibly disciplined, and have emotional courage to perform at the top levels.

Also you’ll begin to understand how critical intensive screen time is to developing a high level of trading skill. For those trading daily and 4hr strategies only, you won’t build a solid base of skill trading just 30 mins to 1 hr per day. Hence, you’ll need to augment this by accelerating your learning process, which I’ll describe how in a future article for those with full time jobs.

The Cons
Being written by a research fellow at a University, the book has a certain academic feel, which unless you are into academic theories, you will likely find these parts uninteresting.

My suggestion is anytime the author launches into a discussion about such theories, you can skip forward till they start engaging how the traders, analysts or salespeople act on a daily basis. This is where the real juice is for you IMO.

Another con is the price. Being over $100 – compared to most trading books, it’s on the upper end. You can ‘rent’ it for 1/4th the price, which would be my suggestion if you just want the nuggets inside.

In Summary
For those wanting an insight into the FX institutional world and how bank professionals trade, this will be an informative book. Most likely, it will change how you trade and approach the markets. That in and of itself means the book has value.

For those feeling like they should ignore fundamentals, you’ll probably find yourself re-evaluating this position. Minimally you’ll want to be aware of such events, and consider studying them a little bit further (without diving too intensely into them).

Along those lines, how do you relate to fundamental/economic events? Do you study them, just know of them, or trade through them? And for those trading only daily and 4hr strategies, what do you do to accelerate your learning curve?

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Sneak Peak Into Our Price Action Course

Here is a sneak peak from a video lesson in our price action course. The third topic of the lesson had to do with liquidity, price action and how that affects trading. We discussed how knowing the liquidity of an instrument is crucial to understanding how to trade it and how it will affect the price action, along with your stops and take profits.

sneak peak price action course 2ndskiesforex

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How To Deal With A Counter Trend Signal to Our Trade

Recently I got a question from a newer student asking the following;
“Right now I’m short this pair. It’s in profit, but it just formed a pin bar against my trade before I hit my profit target. What should I do?”
This is a common question I get about what to do when you see a price action signal that is counter to your trade. The question by itself actually tells me a lot about the student and where they are at in their process (beginning, middle or more advanced).
My response was similar to the following;
“It is important to understand we are not pattern traders. We are price action traders. Being a pattern trader, as in trading pin bars, inside bars, engulfing bars, or fakey’s does not make us a price action trader.
Pin bars are not the death of trends. I can come up with about 50,000 examples of trends both intraday, or on the 4hr and daily time frames whereby the trends ran into a pin bar at a key level, then smashed right through it. I can also come up with thousands where they did the same and reversed.
‘Wait, but those were counter-trend pin bars, what about with trend pin bars?’ 
Same thing, I can come up with 50,000 of those that were with trend, and the market reversed the prevailing trend. I can also find you thousands that were with trend and worked out.
So what was the difference between the ones that did work out and ones that didn’t?
The key was the price action context around the pin bar. How the price action was leading up to the pin bar, and around it (the context of how the pin bar formed) is what will make that signals useful or not.”
This is why it is such a freshman idea and a complete fallacy to think all you need to trade successfully is 3 simple patterns (pin bars, engulfing bars, inside bars). All that + trading with trend at key levels and VOILA! You have your A+ setup and a profitable price action trade.
If it were only that simple (FYI – if it were, a lot more people would be profitable).
So how do you deal with a counter trend signal to your trade?
The answer is in reading the price action context around it. I will share four charts below to demonstrate the point clearly.
Exhibit A
Looking at the chart below, we can see towards the left a double touch off the level R1, then a break through it with a large breakout bar. The market falls heavily and you look to get long around A1 on the bottom right of the chart. Your trade is working out great, but you run into a pin bar + false break (A1) at the key resistance level R1.
price action counter trend trade pin bar key level 2ndskiestrading.com
Minions of the 50% retrace entry on the pin bar are salivating because they think this is a great chance to short as you have a pin bar + false break at a key level, and the 50% retrace is at the level.
Meanwhile, you being long back at A1 see this pin bar and are worried about the market reversing thinking the move is over, so you exit.
Turns out both of you were wrong (see chart below)
pin bar 50 percent retrace entry failed price action context 2ndskiestrading.com
Exhibit B (later on in the same chart)
In this next chart below which is only a couple days later on the same pair, price eventually falls back to the same key level where we bought at A1 prior. It forms a consolidation just above it, then a pin bar + false break.
pin bar false break price action context 2ndskiestrading.com
Great! Time to get in on the 50% retrace entry yes as its at a key level. Or, the other option touted is to get long on a break of the pin bar high yes? Either way, this is an A+ setup right since the pair is in a range and formed a pin bar at a key level right?
See the next chart below
price action context pin bar entry fails 2ndskiestrading.com
Turns out both pin bar entries failed, even though it was at a key level while price action was in a range. Now imagine you were long around the top of this chart, and ran into this counter-trend pin bar signal at a key level. You probably would have taken profit.
But by not understanding the price action context around the level, you would have missed out on a ton of profit, almost double your profit leading up to that pin bar.
This is why its important to graduate beyond the freshman concepts of trading pin bars, inside bars, engulfing bars, fakey’s, or whatever price action patterns. If trading were that easy, as in trading with the trend + key levels + price action signal = profitable trading, then a lot more people would be making money.
The difference between knowing when to take those signals is in learning to read the context and order flow behind the price action. Pin bars are not the death of trends. Nor are the other patterns. In isolation, or even with trend analysis + key level analysis does not make it a good trade.
Thus my answer to this students question about what to do when you see a counter trend price action signal to your trade – my response is to understand the order flow and price action context around that signal. When you begin to do this, your trading will start to turn. You will find yourself winning more trades, and holding onto trades longer. And while others are buying this last pin bar – you are selling it, and you’ll understand why.

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Price Action, Order Flow and Transitions

In this forex order flow video I discuss how to read the price action, order flow and the transitions behind trends or reversals.

price action, order flow and transitions 2ndskiestrading.com