After 9 fundamental articles, we’ve gone through the learning process about Price Action. Today we will go to extremely important content. Those are the steps to set up an effective Price Action trading strategy in Olymp Trade.
A lot of Price Action trading strategies revolve around Pin Bar, Inside Bar, Fakey candlestick patterns… They make us mistakenly think that Price Action patterns are strategies. In fact, those patterns are just a small part (signal entry) of the strategy. If you enter an order based only on candlestick patterns or price patterns blindly without analysis or specific strategies, you will easily lose and give up.
A Price Action strategy must answer the following questions:
- How to evaluate the market?
- What is our trading setup?
- Where to enter the order? And where to exit?
- 1 Evaluate the market situation through Price Action
- 2 Understanding how to set up a Price Action trading strategy
- 3 Why do we need to set up a Price Action trading strategy?
- 4 The ultimate purpose of a trading setup is risk control
- 5 How to set up an exit strategy with Price Action
- 6 Summary
Evaluate the market situation through Price Action
The market has 3 common types when trading according to Price Action that traders will encounter. Each type of market has different meanings and investment methods. These include uptrend, downtrend, and sideways.
Evaluating market trends will give us an advantage. It has a very important influence on the success of our trade. That is a lot more important than Price Action candlestick patterns.
Let’s see how Price Action patterns work in different market circumstances.
Bullish Three-Bar Reversal pattern in a downtrend.
Bullish Pin Bar pattern in a downtrend.
Two-Bar Reversal pattern in a downtrend.
You can see Bullish patterns in downtrends fail a lot. In contrast, Bearish patterns in a downtrend have a higher probability of success. So the trend is what determines whether your candlestick pattern works or not. Before determining the price action pattern to trade, you need to identify the trend correctly.
You can quickly make the market evaluation with these simple tools.
- Multiple Time Frame analysis
- Market structure
- Trend line
- Support and resistance
Just identifying the market trend is not enough, we need a trading setup to increase the winning advantage. Now let’s go through that part.
Understanding how to set up a Price Action trading strategy
A trading setup is a set of many market behaviors that we need to consider before entering any trade.
In most strategies using Price Action, a setup always includes a pattern. Short-term Price Action patterns with a high winning rate are Pin Bar, Fakey, Inside Bar… Or it can also be a long-term price pattern like Double Bottom or Head and Shoulders.
We discussed above that identifying the market will give us an advantage before entering an order. So why don’t we enter an order immediately after confirming, but need a pattern like Pin Bar or Inside Bar – the so-called pre-trade setup.
Why do we need to set up a Price Action trading strategy?
In theory, you can completely enter an order as soon as the price approaches the expected entry point according to analysis without needing a setup at all. Once your opinion changes, exit the order.
However, this type of trade requires an extremely large amount of capital, because the volatility of the price from the time you enter the order until the moment you complete the evaluation can change extremely. We are only allowed to risk a moderate amount per trade (usually 1-2% per trade). So entering an order without a trading setup is like throwing money out the window.
The ultimate purpose of a trading setup is risk control
Entering order when the trading setup appears, we can point out exactly 1 stop loss at which when the price hits, our setup is definitely wrong. Price Action setups all have precise entry and stop loss. Thus, the risk you take every time you enter an order is limited, while the potential profit can be huge.
The chart above shows the extremely tight stop loss of a Pin Bar setup. However, the profit can be from 4R to 6R, which is very cool.
How to set up an exit strategy with Price Action
Stop loss is easy, but exiting the order will give you a headache. Usually, in Price Action strategies, we have 3 ways to exit orders as follows.
Exit based on Support and Resistance levels
Support and resistance levels are logical and natural places to exit. Because those are where the price has a high probability of reversing. We will exit at the nearest resistance if it is UP and the nearest support if it is DOWN.
However, if the distance between the entry point and the take profit is not twice as long as the entry point to the stop loss, then you should not enter the order. Because that setup has a bad Risk/Reward ratio. So you guys should look for other more attractive opportunities to trade
Exit with Measured Objectives
Measured Objectives is also a great way to exit. Each pattern has its own purposes and effects. When the price reaches the target, the effect of the pattern is no longer available. It’s time to exit the order.
The example above is measuring the price target by the length of the previous impulse. We expect that the price will have the same momentum as the nearest impulse wave.
Exit with Price Action reversal patterns
If you enter an order with a Bearish Exhaustion Bar, then exit when the market appears Bullish Pin Bar or Bullish Engulfing. Remember that these must be strong reversal patterns, not indecision patterns like Doji or Inside Bar.
The general formula of a Price Action strategy is as simple as that. You identify the market trend, determine the potential zone to enter an order. Wait for the price to enter the potential area to form a setup. And click on the order as soon as the opportunity has come. Exit the order with 1 of the above methods. After mastering these steps by doing them over and over again, you will make profits with Price Action. Besides, you also have to know how to manage emotions and capital to optimize profits.
Professional Price Action traders don’t sit in front of the chart wondering what to do. They have already set up their perfect trading strategies and just wait for the combination of signals to enter Buy/Sell orders.
As a beginner, you shouldn’t enter an order based on emotions and then hope that it will bring profits. Never enter a trade with real money without having outlined yourself a reasonable trading plan in Olymp Trade.
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