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.
Hello Traders,
Often times I share my own personal trades that I use from my price action course strategies, but today I wanted to share some from a student who has banked over 1640+ pips in just the last two days, using our strategies. This student (we’ll call him Stan) had joined our course only a few weeks ago, and has already paid for it several times over. How Stan came to me is quite interesting and worth noting.
He took another course from someone else on price action just this last January and had the following to say;
“I started a course from him in January, and I do not want to waste any more time on his course. I like your forex videos, but moreso wanted to learn from your unique perspective on trading and life, so I’m going to join your course.”
He joined on March 10th of this year.
For the next two weeks, he did nothing but study and ask questions, really digging himself into the material and constantly getting feedback. He without a doubt has the passion and drive, and is using these to fuel his growth without a doubt.
After a few weeks of study, questions, practice and feedback, he emailed me on April 4th with the following;
“I have been watching the videos on the price action course, and today I nailed 3/3 trades which I’m still in at the moment. I just want to thank you for being such a good teacher and gifted instructor. Thank you for passing on the knowledge.”
Making a good chunk of money to have the time and freedom to do what you want is one thing – but having an impact on another person’s life is a completely different thing. This is what I strive for, as making money is not difficult, but being able to impact a person’s life like this student – is as rewarding as it gets.
Stan made these trades the day before NFP, and was up over +1060 pips heading into the big announcement.
After a few back and forth discussions on how he should handle the positions, Stan stayed in them through NFP, and has profited even more – currently up +1640 pips on just those three positions.
Here are the trades below from the screenshots he sent me on Thursday:
CHFJPY 1hr Chart
USDJPY 1hr Chart
GBPJPY 1hr Chart
As you can see, Stan got pretty darn good entries on the positions considering the JPY volatility – but has also held his nerve as they developed, which has allowed him to make several multiples of R (reward) per trade, with some over 10:1 reward to risk plays.
As of Friday just after the NFP report came out, Stan sent me another screenshot of him holding the positions, and even adding onto it using one of our price action setups.
As you can see buy the date and time on his broker platform, Stan was still in the position heading into NFP and added more. If you include the new position he added, he’s up another 221 pips, so a total of +1861 pips in the last two days, and each trade is no less than a 7:1 reward to risk play, with one being over 10:1.
Keep in mind, Stan only joined the course a few weeks ago, and has learned tools and methods to take advantage of these huge moves in the market. The irony of it is, he was not the top performing trader in the course this week, who banked over +6300 pips this week from trading Gold and Silver!
Perhaps you have not been profiting lately in the markets, and having trouble catching these great price action setups and large moves. But seeing the above, I hope you realize how you can profit from trading the market, with the right education, study and practice.
Making money in the markets is a real thing, and its not just something that I do, but my students do as well, and continue to do. My belief has always been – if they can do it, then there is no reason why you cannot as well.
My job is to give you the strategies, training and mindset to be successful, but you must meet me on the path. I can only do so much, and my job is really to do 50% of the work for you (although it ends up being like 75%). But for those that meet me along the way, and do their part, the rewards are there, just like they were for Stan in his excellent trading above.
Hopefully, you will be next.
Kind Regards,
Chris Capre
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
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
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.
One of the more difficult aspects for traders is placing highly effective stops. Either most beginning traders place stops too tight or too far away. Place stops too close to your entry and they are likely to get hit. Too loose and they unbalance your risk/reward ratios.
In today’s article, I’m going to share 2 tips for placing highly effective stops and how these can help you increase your accuracy and profit potential.
1) The Reason You Entered the Market
You should always have a reason to enter the market. Ideally it based on a price action pattern that has repeated itself in the past, and will likely do so again. All patterns have variables that repeat themselves, and it is this ‘repeating‘ we want to happen again, thus allowing us to profit from a predictable event.
If the reason you bought a pair was because the dynamic support and 20ema was holding on the 4hr chart several times, then your reason to exit should be a violation of this.
I recently wrote in my market commentary how the S&P 500 bounced 4x off the 20ema. If the reason for buying was the anticipation price would bounce off the 20ema again, then my reason for exiting would be the opposite of this happening. Today this is exactly how it played out, bouncing for a 5th time, and offering a trader to profit from it greatly (see chart below).
Now if the price action breaks and closes below the 20ema (something it has not done in 11 days), then the pattern has broken down, and it is no longer a tradable event.
But in terms of placing a stop with this trade setup, we could have looked for the largest breach below the 20ema over the last 11 days, and placed our stop just below this upon entry. Had you done so, you could have easily grabbed a 3x reward play on the last 20ema touch.
2) Stops Are Best Placed Above/Below Support & Resistance Levels
Institutional traders place their orders around levels more than anything else. When many orders from a lot of players with a lot of money, occur at a particular price, it often creates a strong reaction at a level. And when price ‘reacts‘ to this level more than once, it often becomes a key support or resistance level.
Thus, stops are best placed above or below key support and resistance levels. It is here that the larger players are placing their orders, and thus likely to defend your entry and stop.
If you do, then in following the logic of rule #1, we should be getting out of the trade if the level is clearly breached.
Lets take both sides of a potential trade below and see how we could have placed our stops effectively buying or selling.
EURUSD 4HR Chart
Starting with the left side of the chart above, we have a strong impulsive price action bull run, that finds sellers just below 1.3400 , or point 1. This selling pulls back to A where it finds support around 1.3250, and then re-attacks the sellers just below 1.3400 again at point 2. Now if you were a seller, and had seen price hold just below 1.3400 2x, and sold at pt 2, the logical place would be to put it about 10 pips above the round number, while targeting the buyers around 1.3250.
Why 10 pips above 1.3400?
Because this is a round number, statistics show typical stops for selling orders placed at round numbers are often within the first 9 pips above (so 1.3400-1.3409). Of course, always make sure price action confirms this, but this is a general rule you can use.
Now if you want to be a buyer in this case – taking a with trend continuation play, then buying at B or C, with a stop 10-15 pips below 1.3250 would have also worked out, targeting the resistance at 1.3400.
Now trades will not always be this clean in terms of support and resistance levels, which leaves you two options;
1) Only trade when the price action is really clean
or
2) Learn to place really efficient stops
I understand the latter may be more difficult to do, but you can find more high probability setups by adding a key component.
Impulsive Moves
One way to increase your chance of having a profitable trade, and placing an efficient stop, is to trade with trend more than counter-trend. When trading with trend, the majority of the order flow is already on your side, so look to consistently trade with impulsive price action moves, not corrective ones. If you can do this, then you will build your confidence in placing efficient stops, because you are getting in with the larger players.
A great example of impulsive and corrective moves is in the chart below.
You will clearly see how much more profitable one would be selling the impulsive moves (white boxes), and not the corrective moves (green ones). When you can learn to spot and trade with these moves, you will find your stops tend to get hit less, and your full profit targets achieved.
One Final Note
It should always be noted, when a beginning trader looks at a trade, they see profit first, and risk second. A professional on the other hand, looks at controlling risk first, then profit second. So once you have a trade idea and potential entry, figure out your stop – which should be placed where the market should not go if you are correct.
From here, calculate your risk in pips, and then find a target which can be easily achieved with consistency. If the math works, then pull the trigger, and let the trade play out.
In Summary
Placing stops tends to be one of the more confusing things for beginning traders, as they are often placed too far or too close to your entry. By learning to place stops close to key support and resistance levels, you will find they are more well defended than it no-mans land.
Also, by placing stops based on what the market should not do if you are correct, then you will find your stops get hit a lot less.
Lastly, when trading with impulsive moves, you increase the probability your trade will be profitable since you are trading with the flow of the larger players.
To learn rule based systems for placing effective stops, limits, entries and exits – make sure to check out my Price Action Course.
Kind Regards,
Chris Capre
Today’s price action tip article is designed to give any beginning, or non-profitable trader, 2 critical tips to help accelerate your learning curve and avoid the pitfalls almost everyone falls into. If you can learn to follow these two beginner forex trading tips, then you will find yourself making more winning trades, along with less mistakes that tend to get you in trouble.
Trading is already hard enough, regardless of your level, so integrating these two tips will help you to make more winning trades.
Tip #1: Trade Only When The Price Action & Direction Is Clear
Although this may seem confusing for the beginner, as price action rarely seems clear, there is actually a simple model to determine whether the price action and direction is clear.
The model I use daily to determine the direction/clarity of the market is looking for impulsive price action moves. To briefly sum it up, impulsive price action is when the institutional players (those that move the market) are either heavily buying or heavily selling the market. You can spot these moves by three simple characteristics;
1) The bars are quite large
2) They are mostly one color
3) They have closes towards the highs or lows (in the direction of the move)
When you see these three things, you almost always have an impulsive move. And when you have an impulsive move, those that move the market are predominantly pushing it in one direction, which is the direction you want to trade with. When you can find the correct direction, and trade it, you give yourself the greatest probability of making money.
An example of some impulsive moves are below, and you will see when looking at the chart, you will definitely want to be trading in that direction.
Silver 4hr Chart
Looking at the chart above, you will see two colors of boxes; White and Green. If you look at all the white boxes above, you will all notice they have the three characteristics of impulsive moves described above.
Compare them to the green boxes – these have the opposite of the 3 characteristics of impulsive moves. These are called corrective moves, and for beginning traders, they should be avoided as a whole. When in doubt, if you do not have a clear market or impulsive moves, avoid trading.
Often times for beginning traders, finding the right direction is difficult, and it seems like you tend to find the opposite side of the move. By learning to only trade with impulsive moves and the price action is clear, you are saying to yourself, ‘I’m only going to fish when the easy fish are around’.
Tip #2: When Trend Trading – Best to Buy or Sell When the Prior Bar Closes in Your Direction
This is a general rule I suggest to use until you get really good at trading trends. The reason for this is simple;
a) If you are looking to buy in an uptrend, you have a greater chance of being correct when the last bar to close, closed bullish.
b) If you are looking to sell in a downtrend, you have the greater chance of being correct when the last bar to close, closed bearish
If you think about it – when looking to buy in an uptrend and the last bar closed bullish, it is a confirmation for the last candle (and time), the bulls were in control. This bullish close is more likely to inspire bulls the trend is still alive.
Contrast this to buying when the bears demonstrated control on the last bar. This means they dominated the order flow for that bar, and may be pushing against your orders. This increases the chance the bulls will take profit after seeing a bear bar as opposed to a bull bar (continuation).
However, if the bulls demonstrated control on the last bar, then they are likely still present pushing the market in your favor, so this gives you a greater probability to have follow through on your trade when you enter the market.
Two examples are below.
GBPJPY 4hr Chart
In this chart, we clearly have an uptrend, which offers a couple of with trend pullbacks. In these pullbacks, you will see two PBL’s (Pullback Lows), which led to a breakout of the prior SH (Swing High) for the trend. You will notice in both of them, the low for the pullback was a bull candle, and the follow up price action was a strong series of bull candles to follow.
Another example is in the chart below on the EURJPY 4hr Chart
In this chart, we have 3 major with trend pullbacks, and in two out of three of them, the PBL’s had a bull bar at the bottom, also demonstrating this principle. As a general rule, bulls will feel more confident buying a pullback (or breakout) in a trend, when the last bar closed bullish. This is a stronger communication the bulls have been able to take control of the price action and order flow for the last bar.
In Summary
Trading is already challenging enough, and finding the right direction is one of the most crucial aspects to making good trades. In the beginning, you already have enough to think about, so try to keep it simple, and trade when the direction is clear. Look for impulsive price action moves as much as possible, and when you find them, trade in that direction.
However, when the price action is not clear, try to stay out until a clear signal and market emerges.
When trend trading, you have a much better chance in the beginning, if you buy/sell when the last bar closes in your direction. This closing in your direction is a clearer communication from the market, the bulls/bears are more likely in control, and in your favor.
I hope these two beginner forex trading tips help you.
To learn more price action techniques and systems, make sure to check out my price action course where I have a large community of traders, posting live trade setups daily, and I teach them how to read and trade price action.
If I had to follow only one simple rule of price action, it would be to understand impulsive and corrective price action, and if I could only trade one type of move, it would be impulsive moves hands down. They offer the most profit potential, communicate where the institutional players are buying and selling, whether they are buying or selling, and what the dominant trend is.
This is not to say one cannot make money trading counter-trend, but that far more money and profit will be had trading with the trend, but to be more specific – trading impulsive moves.
The Base of the Pyramid
If I had to look at price action as a structure, it would be a pyramid, with the base being how price action is a reflection of order flow (particularly executed transactions). The next part (or level above) from that base would be understanding price action through the lens of impulsive vs. corrective moves.
I will briefly describe what impulsive and corrective moves are, giving the key characteristics of each type of move. Then I will discuss what they generally communicate from an order flow perspective. After this I will talk about what is the general pattern they will form, and how you can use this for trading impulsive moves.
What Is An Impulsive Move?
An impulsive move is one whereby the market moves quite strongly or heavily in on direction, covering a great distance in a short period of time. These moves tell you when the imbalance between the buyers and sellers is really strong and there is heavy participation from the institutional side.
Logically, more money can be made during these impulsive moves, as they cover more points or pips in less time. They are generally more volatile, and thus provide us with great opportunities to get more R (reward) with less risk since the market will stretch more easily in one direction. But no matter what, we want to be trading with these moves as much as possible, not against them.
Three Characteristics
Impulsive moves tend to have three characteristics common among all of them. These three can help clue you in to when an impulsive move is starting, or in play. They are;
Let’s examine all three points.
1) Large Candles communicate to us there is strong participation and order flow behind this particular candle. Strong imbalances during a candle will translate into larger candles than the norm. When you see large candles forming consistently in one direction, they indicate strong order flow behind them from the institutional side. Since the larger players are behind them, they give us a clue of the direction we want to take, essentially surfing the waves they (institutional) are creating. Take a look at an example below.
Image 1.1 – EURUSD 1hr Chart
Notice how in this chart, the candles that stand out the most are the red ones, particularly the ones towards the top left? They are the largest in this entire series, communicating strong order flow behind them.
In fact, if you look at candles 1-8, all but the blue doji in the middle are solid in size. Yet candles 9-17 are all contained within the highs and the lows of last 2-3 candles in this down leg, communicating weak order flow and participation behind them.
As a whole, impulsive moves tend to have large candles (bodies and wicks) behind them.
2) Mostly of One Color – this ingredient is also common among impulsive moves as it communicates something critical to us – time. More specifically, how the bulls or bears were able to maintain control of the price action over time.
In the chart above from image 1.1, you will notice in the down leg, there is only 1 blue candle, meaning for 8 out of 9hrs, the bears had complete control of the market (almost one full trading session).
By maintaining control over time, the market is communicating who is the more dominant side because they are not allowing the other to take control of a candle for that time period. The greater the imbalance is between the bulls and bears over time, the greater the dominance is from either the bull or bear side of the market.
It is important to look at price action not just based on structure of the candles, which is one dimensional. Price doesn’t just move in a vacuum, it moves in time, and HOW price moves over time can communicate a lot of information to us as traders.
3) Closes Towards the Highs/Lows of the Move – If you think about it, when the market is in a strong trending move, let’s say using a 4hr chart, and the candle that closed in the direction of the trend (in this case uptrend) has a very small wick, thus a strong close towards the highs, what does that communicate?
It should communicate that there is very little profit taking from the players behind that candle. If they were worried going into the close of that candle about an upcoming resistance level holding, or perhaps the bears may take control of the market, they would likely close their position, or take profits right before the candle closed.
But when you have a strong close with a very small wick, this usually indicates very little profit taking, thus a confidence the move will likely continue. This is highly useful to us as traders, and will be common among impulsive moves like in the chart below.
Image 1.2 GBPUSD 4hr Chart
Starting with the top left of the chart using candles 1-4, the price action moves in a sideways corrective fashion until candle 5, which if you notice, increases in size tremendously (rule #1 of impulsive moves). From here, price continues on selling for the next 9 candles, 10 total in a row, or 40hrs of selling (rule #2 of impulsive moves).
But looking at the candle closes, you can see most of them are towards the lows, showing very little profit taking along the way, thus suggesting likely continuation.
Only until candle 11 do we get a strong rejection, and from here price then moves sideways in a corrective fashion until candle 16. But what happens at candle 17? The candle expands (rule #1) telling us the trend will likely continue.
So these are three examples of the common characteristics of impulsive price action moves.
What About Corrective Moves?
The good thing about corrective moves is they are easy to spot, since they have the inverse characteristics of impulsive moves. Meaning, they tend to have;
Thus, if you apply the logic of impulsive moves, you can easily understand and identify corrective moves.
How Do They Relate to Each Other?
Generally, impulsive and corrective moves tend to have a common pattern or dance with each other. The general pattern that tends to play out between them is the following;
1) Impulsive moves about 75% of the time are followed by corrective moves. These corrective moves can either be horizontal, slightly against the impulsive move, or even slightly in the same direction, but they denote a change in the order flow and participation.
2) 75% of the time, these corrective moves are followed by impulsive moves in the same direction as the original impulsive move. Why?
Because those who are in control, rarely give up control unless encountering a strong counter-trend force. Even then, they usually make a second attempt to take out a recent swing high or low before giving up.
Only when they fail a second time will they usually exit the market, either waiting for a new chance to get in on a pullback, or reset completely. This is why V-Bottoms are quite rare and only form about 10% of the time. Usually there is a 2nd bottom, which is could be a LL (lower low), HL (higher low) or a similar low.
3) This series between the impulsive vs. corrective moves will generally continue until the market encounters a counter-trend impulsive move, which usually translates to an equal or greater force on the opposing side of the market. Very similar to Newton’s Laws of Motion about an object in motion will stay in motion until acted upon another object with equal or greater force.
Let’s look at an example below.
Image 1.3 AUDUSD 4hr Chart
Glancing at the chart above starting with the bottom left at move A, you can see how it was an impulsive move, followed by a corrective move (B). This series continued until…it hit a counter-trend impulsive move in G. It was only until here did the bulls finally relent control as the opposing bears took control of the price action with the bulls likely taking profit or exiting all together, especially after the low point from move D was taken out. Ironically, what followed move G, was a corrective move after, followed by the bears continuing the down-leg.
An Example Trading Impulsive Moves
Today gave a really good example trading an impulsive move. Gold was a perfect example of a textbook impulsive-corrective series, offering a great setup to go short for a large reward to risk play.
Take a look at the chart below which is the 1hr chart on Gold. Starting with the top left of the chart, we can see a consolidation over line A which is a corrective move. Then at candle 1, we have more selling in one hour than total buying for the last seven, which starts an impulsive leg down at B, selling off about $25 in 10hrs.
At candle 2, we see a corrective move (C) whereby price climbs about $8 in 12hrs, so less than 1/3 the climb from move B which took more time. This is a clear example of how its less profitable to trade counter-trend than with trend. This is not to say we cannot trade counter-trend, but there is far less money to be made.
Image 1.4 Gold 1hr Chart
The corrective move at C ends with a pin bar rejection just $.50 below the 20ema, then starts another impulsive leg down at 4, dropping over $18 in 3hrs, also ending with a large pin bar. I actually bought off the lows and made a quick profit, but there was far more profit to be made in less time selling from 3 or 4, then buying off of 5.
In terms of knowing whether to buy or sell, if you can learn to find an impulsive move, followed by a weak corrective move, often times that corrective move will offer a pullback setup into the 20ema or a prior support/resistance level. These offer high probability low risk high reward setups. Anyone selling the pin bar rejection at 3, or the pullback into the 20ema at 4, with a tight stop above the 20ema, targeting either the low at 2, or waiting for the pin bar close at 5 would have made anywhere from a 3:1 reward to risk, up to 12:1 reward to risk.
These opportunities show up in the market all the time, and if you can learn to read them, you can make a considerable profit by trading with the institutions impulsive buying or selling. This is why it is critical to learn to read these moves, as they will help you not only trade in the right direction, but find highly profitable setups.
In Summary
This is just an introduction to how I approach price action and how I use this model as a base for understanding price action. When you can learn to read impulsive and corrective moves, you will find they are highly effective for many things, such as;
There are many other facets and subtleties to trading impulsive and corrective price action, but this is a good introduction to my base theory and model for trading price action. If you can learn to spot the impulsive and corrective moves in the market, they can greatly enhance the odds of your trades along with helping you spot key characteristics in the markets.
To learn more about trading impulsive and corrective price action, visit the Trading Masterclass.
Today I am going to give a lesson on how to find some of the best support and resistance levels in the market. If I had to say – I think there are three types which are the best support and resistance levels you could find. But it would take a long time to go into each type, what are the characteristics of each, what they mean from an order flow perspective, and how to trade each type.
So I am going to cover in today’s lesson, what are some of the most critical variables to look for when evaluating support and resistance levels. If you can learn to spot these levels, read the price action and key variables before the market reaches these levels, you will greatly enhance your trading, by finding better entries, knowing how the market is likely to react off a level, and how to increase the probability of your trades.
By first learning to read these key variables which I will list below, they will provide you with a lot of information in terms of;
-how the order flow is relating to them
-how these levels will improve the probability your trade or rule based price action system
-how you can trade these key levels
Note: I want to hear your feedback on this lesson, like what key points stood out for you, what you found useful, how you can apply this to your trading, or…even if you want to throw tomatoes at me, I want to hear your comments 🙂
I will start this lesson by talking about what are some key things to look for when evaluating support and resistance levels. I will then describe with some details how each variable informs you of the order flow behind the price action. Then I will go over some basic methods of how you can trade them. I will also give examples to demonstrate how these elements work, then end with a brief overview of what we covered.
Key Things To Evaluate Support and Resistance Levels
If I had to list what are the key things I use to evaluate support and resistance levels, it would be the following;
1) How price reacted to this level in the past (held, became a breakout – pullback level, bounced violently or timidly off of it)
2) How significant is it (lower time frame, higher time frame, held for how long?)
3) How is price reacting or responding to it now
4) What is the speed or impulsiveness price is approaching it now
5) What is the price action context prior to this level
All of these things communicate information to me about the uniqueness of this level, how the buyers/sellers reacted towards this level in the past, how likely they will respond to it in the future, and what they are most likely to do at this level.
Zones & Areas
It should be noted that I do not consider support and resistance levels to be lines in the sand, but more of a ‘zone‘ or ‘area‘. That means I do not consider a resistance level to be one price, but likely several pips on either side. This could be due to differences in price feed, server time, what other traders think of that level, and how they would play it.
A scalper will more likely get as tight to the level as possible, but scalping orders rarely are large in volume or market movers. However, a swing trader or large institution will likely be getting in at several levels, and the level you might be spotting may be one of them they are placing a large order at.
Because of this and all the different ways institutional players relate to these levels, support and resistance levels for me are zones or areas which could be anywhere from a few pips wide to 10+, maybe more depending upon the time frame the level relates to.
Obviously a level from a weekly time frame over years would have a little more play then an intraday level on the 1hr chart so take this into consideration.
What Each Variable Communicates
Although I could spend an entire treatise writing about all the things each variable above communicates, I will go over the key points here.
1) How Price Reacted To This Level In The Past – this is a big one as it tells me what the major players thought of this level. Was the pair highly over/under valued here and it produced a violent reaction in the past? If so, then the first time it comes back to this level, we can expect a strong reaction. Why?
If the reaction off a level was fast, that translates into heavy buying/selling with some large player initiating the rejection. This is followed by other players quickly rushing in to get as close to that price as possible, essentially chasing for the best price, but agreeing with the initial rejection. These levels are defended with a lot of money, and if price does not come back for some time because it traveled fast and furious off this level, then the next time it gets there (especially if it’s the first time back), expect a strong reaction.
Exhibit A – Gold Daily Chart
When gold sold off massively due to huge margin increases by the metals exchanges, it crumbled hard and everyone was wondering where the bottom was. It found it eventually at $1532 where in one day, it opened at $1640, jumped up $23, dropped $130, then bounced $96 from the lows which was quite an amazing rejection inside one day. This is a violent reaction, so traders were definitely taking notice of it the next time it approached this level. Can you guess what happened when it got there again?
Second Approach Gold Chart
As you can see, price held this level with a tiny breach, then bounced the next 4 days in a row, suggesting strong follow up buying on this rejection. The first time back usually is a slightly lesser bounce since many know of the level, and thus less traders are trapped (or surprised) from a violent rejection the first time around. But usually, this level will hold.
Remember, this is one scenario of how price has related to it in the past. All the other types of reactions communicate a different story.
2) How Significant Is It (lower time frame, higher time frame, etc) – this really has to do with time as all support and resistance levels have what I call a ‘time degradation‘ to them. Simply put, traders have a memory, but they are more inclined to take recent information as more valuable then information a while ago, especially if they are short term traders. Generally, higher time frame levels will dominate and last longer than lower time frame levels. Also, when possible, I’m more interested in drawing levels that are more likely to maintain the trend as that is the more probable scenario. I particularly relate to these when reading the impulsive vs. corrective moves in the market.
For more information about understanding impulsive vs. corrective moves, make sure to watch the video here.
But once you have established the trend according to the impulsive vs. corrective series, look for breakout pullback level where the trend continued, or major swing highs/lows where the trend paused and pulled back to. These will often present great opportunities to get in with trend.
3) How Price is Reacting To It Now – Is price closing on a support level, and just sitting there, with smaller and smaller bounces off it? If so, a breakout through the level is more likely as there is no strong buyers able to push back, and the sellers continue to squeeze them out of the market. Was there a strong pin bar reversal off this level? If so, it could be telling you it will likely hold on a second attempt and start a reversal, hence look for an entry close to the level. How price reacts to the level in the moment can tell you if it’s likely to hold or not, but this analysis should be done before it reaches the level.
Often times the market will demonstrate a price action reversal signal at these levels. Keep in mind, this is the ‘effect‘ of how players responded to the level, not the cause. Order flow was the initial cause, and the level was the location. Everything else was a response to the initial reaction off this level. Hence these price action triggers are often ‘secondary entries’ (or sub-optimal) regarding the level. Sometimes a price action trigger, say a pin bar on a 4hr chart can be an engulfing or piercing bar on a 1hr chart. So sometimes it helps to look at a lower time frame to see what the more micro responses off this level are, or what the price action context was leading up to it.
But no matter what, there will always be clues as to what the major players are doing at this level, and what the more likely scenario is. Look for impulsiveness (strength) off the level, or weakness (corrective price action) off this level for initial clues.
4) What Is The Speed Or Impulsiveness Price Is Approaching The Level – this will really tell you a great deal of information whether a level is likely to hold or not. If you are trading with trend, and with the move when it is approaching a level, how strong the move is heading into it, and what is the underlying characteristics behind the price action (speed, acceleration, etc), will tell you what is more probable.
If a level is an intraday level, or one from only a day ago, a really impulsive move is likely to break through it. If it’s a daily low or high, or a level that held for a week or longer, it will have a better chance of holding. Think of it like a moving object. Consider the size of the object in relationship to what the obstacle in its way is. Normally, force x acceleration (& mass) will tell us whether the obstacle ahead will cave or not. Unfortunately, we do not have exact information about the orders at a level, such as the number and size of them which would equate to mass and volume of the object. Level 2 quotes would help in this fashion, but if you don’t have that, then what?
Why not use the other principles above, such as;
-how did price react there in the past
-how significant is it
-how is price reacting to it on first touch
Weigh those against the force, or impulsiveness of the move, and you’ll be able to get a better idea.
A good example would be the following chart below of the AUD/USD on the daily time frame
Price approaches the level with some volatility, as there are solid moves on both sides of the fence with bears maintaining control on the way down. Price bounces off the level with a piercing pattern and then a second attempt forming a pin bar reversal. But then after a small retrace, price attacks the level with vigor, selling off 4 days in a row, taking out the last 13 days gains. Does this resonate strength to you? Do you think it will break? See the chart below
Exhibit B
As you can see, price was exhibiting a lot of strength and impulsiveness heading into the support level. There were definitely some clues ahead of time this was going to break. Such as how price barely lifted off the level each time, and attacked it twice without ever gaining much ground to the upside.
Keep in mind, the trend was already down leading up to it, so with trend traders used these pullbacks to get back in the trend. The last time they said enough is enough, and went to take out the barriers at this level. The buyers at the support level likely exhausted themselves on the first two rejections which failed to gain traction.
Putting all these components together would have communicated a breakout was likely, which would have helped your current short, or give you a second opportunity to get back in on a textbook breakout pullback setup for a high probability-low risk trade.
In Summary
So there you have a few key variables to look for in finding the best support and resistance levels. Remember, price action patterns form at these levels and are the ‘effect‘, not the cause of the move. They do communicate information to us as traders, what we are looking for is the price action context before we reach these key support and resistance levels. Hence, it is these key levels where orders are being placed first.
Thus, by learning how to read the price action and the key variables I listed above, you can greatly improve your ability to spot good setups, improve your entries, placing trades where weak players are getting in, and the stronger players are looking to enter.
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