Using Price Action To Time Entries and Exits

[torero 10]

Continuing with the price action primer (“Price Action: Modern Day Tape Readingâ€Â), this article will focus on where and when the best spots are located for entries and exits. As explained in the previous article, trend direction or lack of direction is determined by HIGHER HIGH and HIGHER LOW for uptrend and LOWER HIGH and LOWER LOW for downtrend. Understanding the above principle is fundamental in the concept of following the trend (i.e. “trend is your friendâ€Â). With this in mind, each trade more often than not have a higher ratio of reward to risk and that the probability is much higher in getting a trade to be winner than a loser (Inertia: The reluctance of any object to change its state of motion).

 

The idea is to move with the trend and buy the pullbacks in uptrends and short the rallies in downtrends until the market shows otherwise.

 

 

The chart above is the example of an uptrend in a series of HIGHER HIGHS and HIGHER LOWS. The best entries are the pullbacks, where the safest trade where the reward is high and the stop loss is small. How do we know when the pullback is finished and where to place the entry? In an uptrend, the pullback ends when a new bar is formed where its high is higher than the previous bar's high and/or the new bar’s low is higher than the previous bar’s low (although the determining the low is not a requirement).

 

 

In close up of the pullback from the previous chart, the ideal entry is taken where the bar hit past the high of the previous bar. Why there? Momentum. This bar indicates that the bulls have made fresh new buys reversing the pullback. With these buys, more bulls will gain confidence and commit their buys or adding their positions to push it up further, this these bars usually see surge in volume. In addition, many scalpers at this point are covering their shorts, pushing it even higher. One caveat: make sure the volume during the pullback is low compared to the volume during the upmove. This indicates whether or not there are many sellers participating in the sell-off or not during the pullback. Low volume means a large majority of bulls are holding their position.

 

 

Where is the ideal stop loss? It can be the previous higher low or the last pullback low, depending on how large a risk the trader is willing to take. The last pullback is a scalp risk while the last higher low is longer intraday trade.

 

When we do take profit? Here are two options:

 

1. Look for the next resistance, it could be yesterday's high, this week's high or last high of the last few weeks. This strategy is best when the trade was initiated in the middle or latter part of the trend.

2. But the best indication to take profit is when the price action is no longer making a HIGHER HIGH and HIGHER LOW. Either it has gone into a range or it is now making a LOWER HIGH AND LOWER LOW. Following this strategy will ensure the trade will ride out the entire trend.

Either option will provide a minimum profit at least 2 or 3x the amount of risk taken (stop loss amount * 2 or stop loss amount * 3). Below is the example of the second exit strategy where the profit exit line hits below the last higher low.

 

 

 

Below is the chart with a strategy for shorting the rallies in a downtrend. It’s the exact opposite rules to long entries. When the small rally is ensuing, when a new bar that makes a low past the previous bar's low, that is the ideal entry. Target is the previous LOWER HIGH or the last rally high. And the exit occurs when the market is no longer moving down by not making a LOWER LOW and is now reversing to make HIGHER LOW or at next support. The best risk/reward entry is the first or second HIGHER LOW.

 

 

This is very straight-forward way to making high probability trades if a trader is willing to take the time to learn the price action. Most professionals use this tactic time and time because it's one of the safest win-win trades (high probability of success with extremely small stop but a large profit target). With enough practice and observation, price action will be the primary confirmation and indicators will only be a second confirmation signal to make trading decisions. Despite the extensive use of technology for trading today, the market still speaks to traders in simple ways-- price action. So if a trader wants to listen and understand what the market is saying, this is the best way to learn to speak its language.

 

 

 

This article was first submitted and posted at MrSwing.com.

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[danforbe 10]

I noticed that in the second chart, the 12th bar from the left would have taken you long, but later retraced lower before finally resuming the trend. How do you handle that?

 

Dan

[brownsfan019 17]

This looks very similar to what is being discussed here.