Tag Archive for: order flow

,

Trading Support and Resistance Key Levels

Today’s article will focus on forex trading support and resistance key levels as this seems to challenge many developing traders. Learning how to trade support and resistance key levels is critical, because in essence, this is where;

a) you will be placing your stops and targets, and

b) this is where the institutional traders are getting in

In reality, forex support and resistance trading levels are like ‘doors’ or ‘walls’, either they will be open or closed – either they will break or they will hold shut. Your success in support and resistance trading will be in determining when they will hold, and when they will break.

trading support and resistance key levels breaking through resistance 2ndskiestrading.com

Thus, it becomes essential to learn how to read key levels so you can have a well defended stop, a highly efficient entry, and also have proper timing.  In this resistance and support trading strategy article, I will cover two powerful tips for finding these key support and resistance levels.

#1: Minimum of Two Touches
Before you can consider a level to be used as support or resistance, you will want a minimum of two touches.

Why?

Imagine you are in a strong downtrend, and the pair rejects off a particular price heavily – perhaps via a long tailed pin bar.  You have to consider, with trend traders are just going to see this as a test. The bears know there are buyers off the price where the bottom of the pin bar formed, but they are not going to give up control of the trend just from a simple pin bar.

They are going to retest this level to see if the buyers there are strong enough.  If they break it, then the trend and profits will continue.  If not, then they will take profit, but it’s unlikely a reversal will start immediately.  A good example of this is in the chart below.

GBPUSD Daily Chart
pin bars support and resistance key levels price action 2ndskiestrading.com

Looking at the chart above, we can see the pair is in a strong downtrend.  In the middle of the chart at A, it forms a counter-trend pin bar. Now although the pin bar body is at the prior support area, the tail is way below, and its the bottom of the tail where the buyers entered in, not at the support area.

Thus, the bulls at the support area were likely stopped out when price dipped 100 pips below, & the rejection from the pin bar occurred at a place with no two touches. So this would not be a pin bar to buy as you can see failed whether or not you used a 50% retrace entry (which can be quite inefficient).

You will also see the same later on with the pin bar at B, which also had a low at no known support area or formed a second touch.  This also would have been a loser.

Now notice the pin bar at C which is with trend. You will notice the pin bar formed a second touch off the level two candles back.  This would have been a good price action setup to get in because the second rejection would have confirmed the level.  And you will notice, it turned out to be a winner.

So the main takeaway from here is look for the two touches, because with a one touch, the with trend traders will re-attack that level. And it should be noted there is a far more efficient entry than the 50% retrace entry which I will discuss in next week’s article, but keep in mind, after long tailed pin bars, you don’t have to worry about missing the entry.

Why?

Because if it is going to reverse, the greater probability is that a re-balancing, or ‘re-distribution‘ of the order flow will begin.  This mostly likely will creating a range, or a corrective pullback.  This is also why when you have an impulsive price action move, followed by a corrective price action move, it is more often followed by another impulsive price action move.

This is also the reason why an impulsive price action move is rarely followed by a counter-trend impulsive price action move. From an order flow perspective, this is because if the sellers are heavily in control, the buyers will have to overwhelm the sellers, and this requires a lot more money and orders then the current bears in control.  This is the reason why V-bottoms are more rare than common.

#2: Trading With Trend Increases the Probabilities
You might have noticed with the chart above, that trading with trend was more powerful than trading counter-trend. As a whole, counter-trend trades are a lesser probability trade, so they take more skill, experience, and precision. This is simply because you are trading against the majority of the order flow, so the odds are already stacked against you.  For those still having trouble getting consistency, I’d recommend trading with trend as much as possible.

Now if you are in a range, then there is no dominant trend, so trading reversal type plays are suggested, particularly at the tops and bottoms of the range. But when a strong trend is in play like the one above, you will find greater profit potential and accuracy trading with trend instead of counter trend.

This also holds true for trading support and resistance levels.

Why?

In a strong trend, the larger players are just looking for key levels as areas they can get in with trend.  This is traditionally known as a breakout pullback setup, and generally does not need two touches off the level to confirm its effectiveness.

Why?

Because likely, in a trend, there will be a support or resistance level that is already being challenged, which would confirm there are buyers or sellers at the level trying to defend it, while the other side is attacking it. Once it breaks, the with trend traders often look for a pullback towards this level to get back in with trend. A great example of this is in the chart below.

AUDJPY With Trend Setups 4hr Chart
breakout pullback setup trading with trend price action chris capre 2ndskiestrading.com

Using the chart above, starting with the bottom left, price climbs consistently, gapping up, but then forming a resistance area at A. After a brief pullback, we can see price breaks through forming a new SH (swing high).  The market then pulls back to the level at A, and at A’, forms an aggressive engulfing bar which starts the next up leg for over 400+ pips before forming a pullback.

The pullback at B which forms the next resistance high, dips just below the 20ema and forms a with trend pin bar. This marks the new impulsive leg up towards 95.00. Then price pulls back towards the level at B, and at B’, double bottoms (two touches) and starts another leg up and a nice with trend entry.

After a marginal break higher, price pulls back and forms another with trend pin bar below the 20ema, which starts another up leg towards a resistance at C. Sellers enter at C, and after a short pullback, break above it, with a brief consolidation at C’, offering a great breakout pullback setup to get in with trend.

Keep in mind, in all of these with trend pullbacks, the market pulled back towards the levle that it hat the strongest rejection from at A, B and C. The strong rejections at those levels are counter-trend players, trying to stop the trend. But when the bears tried to get past the last major resistance, now turned support (forming a role reversal level), the bulls used this as an opportunity to get long.

Yet in almost every case where the market formed a resistance, when the market attacked that level again, the sellers failed to hold the level. This is because they were going against the major order flow, which highlights how much easier it is to find key support and resistance levels that work when you are trading with trend, and not counter trend. So hopefully this highlights the difference.

In Summary
Finding key levels, and major support and resistance trading levels is not some Da Vinci code type endeavor. Two key things which really help this are using the two touch rule, along with trading more with trend than counter trend. Of course, there are other key clues to understanding support and resistance, but if you can employ these two techniques, they will greatly enhance your ability to find key levels, and make highly effective trades around them.

,

Price Action, Breakouts & Order Flow

Today I am writing a potent article about pre-qualifying forex breakouts, particularly understanding them from a price action & order flow perspective.  When you pre-qualify a breakout, you put yourself in a position to identify it as a high or low probability breakout. To do this however, you have to understand what makes a successful forex breakout trade both from a price action and order flow perspective.

In my prior article 3 Keys for Identifying Breakouts, I talk about 3 such parameters for pre-qualifying forex breakouts.  They are;

1) Well Defined Support/Resistance Level

2) Pre-Breakout Squeeze/Pressure/Tension

3) 20ema Carry

When you can identify these prior to a potential breakout, you highly increase the probabilities of trading a successful breakout. But let’s dig into this a little deeper as to why from a price action and order flow perspective.

Order Flow Behind Breakouts
From an order flow perspective, breakouts generally start with an initial balance between buyers and sellers.  This usually results in a range of sorts, with two clearly defined support and resistance levels. When you get several touches on these levels, this clearly communicates where both sides of the players are parked (and likely their stops as well).  The more touches on these barriers, the more players are brought in.

Those who are bullish will get in on the bounces off support, while bearish players on rejections off resistance.

However as time goes on, tension starts to build between the two camps as someone will eventually want to take control. In almost all cases, the side with the largest number of orders and money behind their camp, will win this tug of war.

This usually manifests in a higher low (HL) or lower high (LH) being formed inside the range, and more aggressive pushes towards the other line in the sand, while less or no touches on the other side, almost as if the sellers or buyers could not reach the other support or resistance level.  It usually looks something like the chart below.

EURJPY 5M Chart
price action breakouts and order flow chris capre 2ndskiestrading.com eurjpy

Looking at the chart above, you’ll see a clearly defined support and resistance level with a minimum of two touches on each side. This tips us off to where the bears and bulls are parked on the chart with stops just above/below the levels.

Now you will notice each rejection at A & B minimally went up to 125.05 before coming back down and touching the same support level at 124.80.

C pushes price back up to 125.05, but this time the rejection fails to reach 124.80, and can only make it to 124.85.  From an order flow perspective, the buyers are starting to get more aggressive and confident their level will hold, so they are buying up higher (at a more expensive price).

The next pullback at E is also higher, so we are seeing a continual change of hands by the bulls buying higher from support (and their defenses at 124.80).

Now notice every push up from B, C, D, and E only makes it to a maximum price of 125.05.  But with F, it goes to 125.10. There were probably some intraday bears shorting at 125.05 (now stopped out), while the rest were still short at 125.15.

Now that price is pushing up towards the resistance without ever touching the support, this communicates the bulls are taking control of the price action with more orders and money, and will likely continue to squeeze the bears out.

This price action squeeze takes out smart sellers early as they recognize they are about to get stopped out if they stay in. The slower players stay in until they are at breakeven, while the slowest and most stubborn bears stay in till they are stopped out.

EURJPY 5M Breakout Chart
price action breakouts and order flow chris capre 2ndskiestrading.com eurjpy 5m breakout chart

Using the chart above, we see the final stage of the breakout which is the 20ema carry in Box A.  This “20ema carry” is a common price action formation prior to a good breakout, as it shows;

a) the mathematical representation of price gaining

and

b) gives bulls who haven’t entered a chance to get in prior to the breakout

This is followed by a strong breakout bar at B. This large bar should be curious, for why would bulls buy up so strongly heading into a resistance level if they were worried about sellers parked there.  Usually, institutional traders can smell an upcoming breakout like this, so will push really hard to take out any stops as they go after the barrier.

A “strong breakout bar” is usually a really good sign the breakout will continue as it means stops were tripped above the resistance level, and price jumped aggressively in one bar.  More ideal is if it has a good “clearing distance“, for if it does, then it increases the chances all the stops were tripped by going further away from the resistance level where most of the stops were near.

Tripping The Stops
It is this latter part – the stops getting tripped, which helps fuel the breakout even further, because those bears who were short now have to buy back, and this buying back to exit out helps further fuel the upside breakout. This is why if you ever watch the prices on your actual platform during a breakout like this, it generally reads (using 4 decimal places);

1.2999
1.3000
1.3001
1.3002
1.3003 (stops tripped)
1.3006!

You can always tell where the stops were parked and tripped, because price then jumps a few pips in a shot. The reason for this is – there were no sellers between 1.3003 and 1.3006, meaning the brokers could not print a price there since there were not enough orders there to hold that price. The stops being tripped at 1.3003 were sellers who now had to buy back, and when they did, they helped to push the next market price up 3 pips in a single tick or print.

When you see this, it usually means the breakout will likely continue – as long as you have done your pre-qualifying ahead of time.

One Final Note
Like all things, we have to pre-qualify a forex breakout using several price action characteristics ahead of time. The ones listed above are just a few of the ones we use in my Course, and there are several others which will clue you off and enhance the probability of the breakout being successful or not.

When you can pre-qualify them correctly, you will find breakouts quite easy to trade and accuracy levels around 60-70% as this is what my more profitable students are doing consistently just trading breakouts.

But, you have to pre-qualify them, like any price action setup.  We never just trade them in isolation, as we are not pattern traders. We are price action traders, and we always trade setups & price action in context.

Any good system can perform badly without the proper context. Pin bars can be a highly effective system, if traded in context. But without understanding the type of trend, or volatility levels, you will likely lose money trading pin bars in isolation, even if you trade them at key chart levels.

Thus, we are never just trading patterns on a chart. We are always trading them in context, and this is exactly the same for breakouts, so always pre-qualify them ahead of time.

Look for the three characteristics above, try to trade them with trend more often then counter-trend, and you’ll find they can offer highly profitable trades, with some of the better reward to risk ratios out there, such as 3, 4, 5, or many reaching 7 or 9:1 reward to risk ratios.

,

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?
hunting for the one system setups, price action and context 2ndskiestrading.com

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.

dreaming of money 2ndskiestrading.com
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.

boredom interferes with learning process 2ndskiestrading.com

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.“

trading ideas 2ndskiestrading.com

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

,

Price Action Trading Role Reversal Levels – Price Action Trading Strategies

This is our newest price action trading strategy video talking about how to trade ‘forex role reversal levels’ using the breakout pullback setup. We share some advanced price action elements on how to read the order flow and price action, along with what are the unique elements in a good breakout.