Price Action Method by Alex Nikovsky
Introduction Price Action… I think you already heard these words if you have at least a little of experience in trading financial markets. Do you know the definition of the Price Action? Let’s ask Wikipedia and see what it can offer us?! According to Wikipedia “ The concept of price action
trading embodies the analysis of basic price movement as a methodology for financial speculation, as used by many retail traders and often institutionally where algorithmic trading is not employed. Since it ignores the fundamental factors of a security and looks primarily at the security's price history — although sometimes it considers values derived from that price history — it is a form of technical analysis. What differentiates it from most forms of technical analysis is that its main focus is the relation of a security's current price to its past prices as opposed to values derived from that price history. This past history includes swing highs and swing lows, trend lines, and support and resistance levels.” I also found one more definition on a website called Investopedia and here is what it says about Price Action. So according to Investopedia, Price Action is “the movement of a security's price. Price action is encompassed in technical and chart pattern analysis, which attempt to find order in the sometimes seemingly random movement of price. Swings (high and low), tests of resistance and consolidation are some examples of price action. The candlestick and price bar are important tools for analyzing price action, since they help traders visualize of price movement.”
Then Investopedia says the following “No two people will analyze every bit of price action the same way, and that is why a lot of traders find the concept of price action so elusive. Quite literally, price action is everything that a security's price does, and just like every other facet of analysis, it is purely subjective.”
So as you see Price Action is really so elusive taking into consideration every trader may have his or her own understanding of the matter. But there is one common thing for all traders no matter how they understand the meaning of Price Action. And these are the candlesticks. Dealing with candlesticks and understanding their formations and behavior – this is what important in Price Action and this is what every Price Action trader should understand. Though with the help of my method, you do not need to learn Price Action analysis and all aspects of it in case you do not want to spend years on learning these things. As you already know according to the definitions provided above, Price Action is so big topic and at the same time so elusive so you never know if you learnt everything about it. In fact you even do not need to learn everything on this topic. I have my own understanding of Price Action and my method which you’re going to learn here
is based on the principles of how I understand these two words Price Action. For me Price Action is the correlation of the price behavior represented by candlesticks and the indicators applied to the chart. When we learn how to interpret the behavior of price based on what candlesticks show and at the same time when we take into consideration what our other indicators show – in fact we do Price Action analysis. That is it. So forget those hard to
understand definitions. Also I want you to understand that we can create so many price action strategies based on this or that aspect of Price Action analysis. But it does not matter at all how many things you know about Price Action. It does not matter how many methods you apply in trading. What really matters is only the things which work. In fact all you need to trade Price Action setups is to learn one strategy. And here on the pages of this guide, I will share with you my knowledge on this topic and I will teach you a very good method designed by me. This method was already proved as effective by not only me but by my other fellow traders and investors that I know. In order to trade this method you will need my indicator called Price Action Trader (PA Trader.ex4), Bollinger Bands indicator with standard settings of Period 20 and Deviation of 2. You will also need a Simple Moving Average applied to Close with Period of 200. This method has some similarity with the Breakout Master Method which you’ve already received from me
earlier. So if you are already familiar with my breakout strategy, it will be easy for you to learn this Price Action method. The best thing here is you do not need to learn anything about candlesticks or their formations. The Price Action Indicator will do candlesticks analysis for you. It will plot an arrow when there is a signal. All you need is to learn how to use this indicator with the Bollinger Bands and the Moving Average. That’s it. You will be trading Price Action setups without learning any difficult to understand things. Ok, are you ready to learn this method? Let’s setup your charts then. This method can be used with any time frame and any trading instrument. I mean you can use it with forex pairs, metals, commodities, indices, anything that can be displayed on the chart and anything that is represented by candlesticks. In order to make things simple I have prepared a template file for you called Price Action.tpl. Please note, the template loads the recommended color scheme and the Bollinger Bands indicator with the Moving Average. You will need to add the PA Trader indicator to your chart manually. Once you have loaded the template and added the PA Trader (PATrader.ex4) indicator, your chart should now look like on the screenshot down below.
Trading Setups Once the indicators are loaded you will see blue and magenta arrows which represent the PA Trader indicator. You will also see the Bollinger Bands and the SMA 200 line. This moving average works like a filter for us. We should ignore buy signals if the signal candle appears below the SMA 200 line. And we should ignore sell signals if the signal candle appears above the moving average. Let’s choose the same screenshot and I will show you how to implement
this method in your trading. First rule says if you want to have stronger signals you should take ones only if they are not too far away from the 200 SMA and only if these are several first signals after the opposite signal. Look at the screenshot below.
As you can see price breached the red SMA 200 line and a new BUY signal appeared right above the moving average. The distance between the signal and the moving average is not big, thus we may consider this signal as conservative or we can say this is a good signal because we will not have to use big Stop Loss. Another reason for this signal to be called as good one is in the following. It is the first after the opposite sell signal. Second buy signal is also a good signal because this is not too far away from the moving average and it is the second signal in a row. I usually prefer take into consideration not more than 3 or 4 signals. Also these signals should not be far away from the moving average. As you see the third signal on the screenshot is too far away from the moving average and this is the reason we should ignore it. Ok now let’s see how to trade these signals.
When we have a BUY signal we need to wait for the price (candles) to reach lower Bollinger Bands line. In this example above this condition was met only after the second signal appeared. So when the lower level of Bollinger Bands was touched we may place a trade. Then we measure the distance between the low of the candle that touched the Bollinger Bands and the SMA 200 line. So this distance is our SL. In the example above you can see how good the risk to reward ratio could be in case you traded that signal. Your potential profit could be 5 and more times higher than your SL. In fact I think using 1:2 risk to reward in most cases in absolutely ok. You may also use my other indicators for exit. UTS4 is pretty good to show good exit points. You may also use TP techniques described in my other trading guides which you already have.
Ok, let’s look at some other example.
This is the case when you can enter the trade even if the SELL signal was above the SMA 200 line. This is a breakout type of trade. Look at the horizontal range movement to the left from the magenta arrow. The arrow says there is possible breakout coming. And when we had a bigger candle closing significantly below the price range, this is the sign that breakout has already happened right now. We just measure the distance between the beginning of the new candle and the SMA 200 line. It will be our SL distance. We place a trade right away with the SL calculated. You may use any TP level you like. The simplest way is to choose the 1:2 risk to reward ratio which means your TP is 2 times bigger than your SL.
Now let’s have a look at a new screenshot down below.
This is a recent signal example. We see there is a blue arrow which is BUY signal. We then wait for the candle to touch the lower Bollinger Bands level. Please note in order to stay on the safe side, it is better to wait for candle to touch the line and then close. I do not recommend placing a trade right at the touch but instead when there is touch we should wait for that candle to close. And then we should place a trade in the direction of the signal. As you can see in the picture above, you could make a profit several times higher than your SL if you followed all the rules. Please also note it is always better to give a bit more freedom to your SL. I would recommend using a bit wider SL to avoid false SL triggering. As example, your calculated SL is only 15 pips on M15 time frame, so add at least 10 more pips to have a bit more space. This is just a tip but this is a useful tip. Of course if your calculated SL is already 50 pips let’s say on M15 time frame, so
no need to add more pips because there is already enough space in the distance. And at the same time if your calculated SL is very big like 90 – 100 pips on M15 time frame, so it is better to avoid such trades at all. The idea is simple, tight SL may be a cause of false SL triggering.
Wide SL requires bigger targets and involves more risk. So better use optimal SL value, not wide and not tight. To illustrate what I mean please look at the following screenshot down below.
As you can see the SL distance in the example above is too short. This is a very tight SL which could be a cause of SL triggering. So if you see the SL is too tight, add at least 10 or 15 more pips (in regards to M15 time frame), and then place a trade. If we used at least 15 or 20 pips SL, it would already be ok for us in this particular example and that could work out and bring us much more profit than the pips we risked. So remember too tight SL is not good as well as too wide SL. Well, now I am going to show you one more entry and signals filtering technique. As you already know we are using the Moving Average to filter out weak signals. We also use Bollinger Bands the ways I already described above. But here I want to show you one more way. Here it is. Please look at the screenshot below.
The idea is we change the entry rules a bit. We not only wait for the candle to close at the opposite Bollinger’s l ine border but we also wait for the price to breach the middle line. Here is how it works. You have a signal. Let’s look at the first buy signal on the screenshot. Our
first rule is ok. The signal is above the SMA 200. Then we wait for a candle to close at or touch the lower Bollinger Bands line. Then we wait for a new candle to breach the middle Bollinger Bands line and close above it. Once this last condition is met we place a trade. Now look at the other buy arrow. Notice how this rule would help you avoid entering the market too early. In other words this rule helps to choose less risky trades and serves like an additional filter. And the Bollinger Bands helps you with this task. And in case of sell signals, we do the same things, but the opposite way. I am sure now you understand how to apply this rule with sell signals, so I do not provide an additional example for this purpose. Ok now that’s all as for this method. You no w know the concept of trading this strategy so you
may start practicing and using it in your trading. I truly believe this method will help you become a better trader and enhance your trading experience.
I wish you great trading!
Alex Nikovsky
ForexHolyGrailSystem.com
[email protected]
