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Introduction to price action trading
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How to Trade the News Using the Straddle Trade Strategy
Instructions for joining the webinar have been sent to your inbox. Add webinar series to calendar. Knowing how to identify a trending market is the basis of successful price action trading. There are basically three types of markets: Different market conditions require different arsenals of trading tools in order to trade them successfully. Trending markets form higher highs and higher lows during uptrends, and lower lows and lower highs during downtrends.
Straddle Trade
The following picture shows what uptrends and downtrends look like. If the price fails to form a new higher high during an uptrend or a new lower low during a downtrend, this means that the underlying trend is losing its strength and you should prepare for the possibility of a trend reversal. The two main ways trends reverse are by forming either a failure swing, or a non-failure swing. This is shown on the next picture.
Notice how in the failure swing, the higher low at B fails to fall below the previous higher low X. Still, C fails to push above A and forms a lower high — a sign that a trend reversal might be ahead.
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A sell signal is shown at point S. In a non-failure swing, D forms a lower low and falls below B. An aggressive sell entry is shown at point S1 , while a conservative sell entry is shown at point S2 with the break of the lower low D.
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A non-failure swing has much more significance than a failure swing. Primary trends last from 6 months to a few years, and can be seen on large timeframes such as the weekly or monthly.
Clean vs. messy chart
Intermediate trends are mainly corrections of the primary trend that go in the opposite direction, and can last from a few days to a few weeks. Minor trends are generated by market noise and tend to last for just a few days or shorter, but can still be used to trade a variety of breakouts or chart patterns. The primary goal of any trader is to catch a trend in its early stage, and to ride the trend until it proves to be invalid.
Price action traders would look to enter the market with a long position at point 1, with the break of the previous resistance. In fact, the pair made a strong non-failure swing, and the price made a series of higher highs HH and higher lows HL in the following weeks. This is also shown on the chart above, with a rectangular chart pattern forming at point 2.
A rectangle is a continuation chart pattern that indicates that the underlying trend is about to continue once the price breaks above the rectangle. But what are chart patterns in the first place? Simply put, chart patterns are specific price formations in a chart that can be used to forecast future price action. These are recurring price formations that have proven to have a forecasting ability in the past, and are a popular tool among price action traders.
Generally, chart patterns can be grouped into two categories: While continuation patterns signal that the underlying trend is about to continue, reversal patterns signal the opposite; that the underlying trend is about to reverse. Covering all available chart patterns would be far beyond the scope of this article.
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The chart above shows a rising wedge during an uptrend, which is a reversal pattern. Unlike triangle patterns, the lines of falling and rising wedges both slope is the same direction downwards or upwards. A sell entry signal is given at point 1. Remember that price action traders love to combine various tools in their analysis. A confluence zone is simply a zone where two or more important levels overlap and intersect.
Those can be support and resistance lines, trend lines, chart patterns, channels, Fibonacci retracements, or any other tool used to analyse the market.