Learn Price Action The Easy Way by Mohan Gilley...
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Disclaimer The information contained contained in this book is for informa informational tional purposes only. I am not a financial financial advisor. Any legal or financial financial advice I give is my opinion based on my own experienc experience. e. You should always always seek the advice advice of a professional professional before acting on something I have published or recommended. Please understand that there are some links contained in this guide that I may benefit from financially. No part of this publication shall be reproduced, transmitted or sold in whole or in part, or any form, without the prior written consent of the author. Users of this guide are advised to do their own due diligence when it comes to making business decisions and all informati information, on, products, and and services that have been provided should be independently verified by your own qualified professionals. By reading this guide, you agree that myself and my company is not responsible for the success or failure of your business decisions relating to any information.
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About the Author Mohan Ghilley is a full time day-trader and investor with a current preference for cash , Nifty futures and commodity futures markets. His style style of trading is is discretionary, discretionary, operating in the direction of short-term sentiment within a framewo framework rk of support and resistanc resistance. e. He is a graduate from IIT Roorkee and MBA from IIM Calcutta. Soon after his MBA in marketing and finance, he fell in love with stock market and since have been trading full time. With average to good success in the stock market he has launched this book to help traders succeed in their trading business He is the founder and chief contributor to http://www.YourNiftyCoach.com , which aims to provide quality trading education and resources with an emphasis on the ‘less sexy’ but more important aspects of trading – business management, risk management, money management and trading psychology. MG can be contacted via
[email protected]
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Table of contents Contents
Disclaimer ............................................................................................................................................... 0 About the Author ............................................................................................................................... 2 Table of contents ............................................................................................................................... 3 Acknowledgments ............................................................................................................................ 5 Introduction........................................................................................................................................... 6 Price Action Trading — Support & Resistance are the best levels to trade on your chart......................................................................................................................................... 8 Support & Resistance.................................................................................................................. 8 Dynamic Support & Resistance .......................................................................................... 10 Impulse & Corrective move ................................................................................................... 11 The 4 stages of the markets every serious trader must know ............................ 13 Stage 1: Accumulation phase ............................................................................................... 13 Stage 2: Advancing phase ...................................................................................................... 14 Stage 3: Distribution phase ................................................................................................... 15 Stage 4: Declining phase ........................................................................................................ 15 How to tell when the market is trending .......................................................................... 17 Structure of the markets ........................................................................................................ 18 Moving average ............................................................................................................................ 19 How to tell when the market is ranging ............................................................................ 21 Range expansion ......................................................................................................................... 21 Range contraction ...................................................................................................................... 22 How to read the price action of any markets (and determine the strength and weakness of it) ......................................................................................................................... 23 Slope of impulse moves getting flatter ......................................................................... 23 Candlestick bodies getting smaller on impulse move ......................................... 23 Slope of corrective move getting steeper .................................................................. 24 Candlestick bodies getting larger on corrective move ....................................... 25 Stop memorising candlestick candlestick patterns, you only need to know these 4 things ....................................................................................................................................................... 29 Wick ..................................................................................................................................................... 29 Length of the wick ...................................................................................................................... 30 PRICE ACTION TRADING THE EASY WAY
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Size of the candle ........................................................................................................................ 31 Close of the body ........................................................................................................................ 32 Advanced candlestick knowledge (that nobody talks about) ............................. 34 Pinbar .................................................................................................................................................. 34 Inside bar .......................................................................................................................................... 40 Price action patterns — Rising three method ............................................................ 43 Price action patterns — Wide range candles .............................................................. 46 Price action patterns — Narrow range candles ......................................................... 47 A price action trading strategy that works ...................................................................... 49 1. Mark your area of Support of Support & Resistance ............................................................. 49 2. Wait for a directional move into Support or Resistance area ............... 49 3. Wait for price rejection at Support or Resistance area ............................. 50 4. Enter on next candle with stop loss below the swing low ...................... 50 5. Take profits at the swing high ................................................................................... 51 A price action strategy to capture momentum and ride trends ....................... 54 Final words from MG ..................................................................................................................... 56 How Much You Succeed is All Up to You ..................................................................... 56 Rome Wasn’t Built In a Day ................................................................................................... 56
Thank You So Much! ....................................................................................................................... 58
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Acknowledgments Unfortunately I never found one person to act as a mentor. I consider myself to be self-taught,having developed my trading approach through trial and error. That being said, I expect there is nothing new in my approach to trading that hasn’t been discovered before by others. This is just
my unique interpretation of a blend of information,which has been gained from exposure to many others throughout my trading journey. Numerous traders and educators have had significant influence in my own trader development. There are too many to mention in full, however I would like to offer a special thanks to the following people: Lance Beggs, Nial Fuller, Mark Douglas, Dr Brett Steenbarger. Study everything you can find that was written by these people.
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Introduction Dear Traders Thank you for downloading my price action strategy guide. I have one primary aim for this book. To share with you the way that I view the financial markets and some of the way that I use price action to identify and manage trade opportunity. The strategy shared within this book is a discretionary method of trading. It is not a simple “buy on trigger A and sell on trigger B”
system. Such simple systems do not work, no matter how much we wish they did. Spend a day surfing any of the numerous systems forums and you’ll see this for yourself. Many systems are
presented which appear to offer great potential, generating excitement amongst the forum participants and a flurry of posting activity. Ultimately they fade away to nothing as the participants discover the system fails to deliver consistent results, or they become frustrated as it morphs into a completely different system as filter after filter is applied to try to overcome its limitations. In the initial chapters I have started with most basic tenants of Price Action and have moved on to the more advanced stuff on the later section of the book. Remember I haven’t covered money management and trading psychology. That will be on my blog but as far as this book is concerned you will have plenty to learn and apply. Most of us think that indicators are the holy grail of the market and hence they run after every indicators out there and in the end they return in vain thinking that trading in the stock market is not for me. Actually they are chasing shadows and the reality behind those shadow is price.
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What causes price to move? It is the supply and demand imbalance and here in this book, we are trying to define this imbalance in terms of price action. We will trade when there is imbalance, so that we can capture the movement quick and in the most efficient way.
So keeping that in mind, I have divided this guide into following sections
The best levels to trade on your charts The 4 stages of the markets every serious trader must know How to identify a trending market without second guessing yourself How to identify a range market easily How to read naked charts like a pro and identify “hidden” strength & weakness Quit memorising candlestick patterns, focus on these instead…
Advanced candlestick knowledge that nobody talks about A price action trading strategy that works
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Price Action Trading — Support & Resistance are the best levels to trade on your chart Here are 4 things you must know: 1. 2. 3. 4.
Support & Resistance Previous Support turns Resistance Dynamic Support & Resistance Trending & Retracement move
Let’s begin.
Support & Resistance Support – An area on the chart, with potential buying pressure, to
push the price higher. Resistance – An area on the chart, with potential selling pressure,
to push price lower. Here’re a few examples:
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…Support & Resistance is not a single line, but an area on the chart Next…
If price breaks below support, previous support becomes resistance. If price breaks above resistance, previous resistance becomes support. Here’s what I mean…
Now:
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You’ve just learnt what are Support & Resistance, and their role
reversal with one another. These are “static” Support & Resistance, where their areas are fixed on the chart. But wait… that’s not all.
Dynamic Support & Resistance Because Support & Resistance can move along with price, which is called Dynamic Support & Resistance. Dynamic support occurs in an uptrend and dynamic resistance in a downtrend. They can be identified using moving averages. (I use 20 & 50 EMA). This is what I mean…
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You’re wondering: MG, is there anything special about 20 & 50 EMA?
The answer is no. I use it because it fits my trading style. Ultimately you need to find something that suits you. Indicators are simply trading tools. It’s how you use them that make a difference.
Impulse & Corrective move Here’s what I mean: Impulse move – “Longer leg” on the chart, which
points the direction of the trend. Candlestick size is usually larger, signalling momentum behind the move. Corrective move – “Shorter” leg on the chart, which is against the
current trend. Candlestick size is usually smaller because of traders taking profits, without strong selling pressure. If you want to learn more, go read Impulse & Corrective move written by Chris Capre. Here’re a few examples: PRICE ACTION TRADING THE EASY WAY
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Here’s a tip for you…
You can trade pullback on a corrective move, and breakout on the impulse move. Depending on your trading style, both approaches let you get on board the trend. Now, let’s move onto to the next section…
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The 4 stages of the markets every serious trader must know The markets are always changing. It moves from a period of a trend to a range, and range to trend. You can break it down further into 4 stages:
Accumulation Advancing Distribution Declining
Stage 1: Accumulation phase Accumulation usually occurs after a fall in prices and looks like a consolidation period. Characteristics of accumulation phase:
It usually occurs when prices have fallen over the last 6 months or more It looks like long period of consolidation during a downtrend The 200-day moving average tends to flatten out after a price decline Price tends to whip back and forth around the 200-day moving average
It looks something like this:
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Stage 2: Advancing phase After price breaks out of the accumulation phase, it goes into an advancing phase (an uptrend). Characteristics of advancing phase:
It usually occurs after price breaks out of accumulation phase Price forms a series of higher highs and higher lows Short term moving averages are above long-term moving averages (e.g. 50 above 200-day ma) The 200-day moving average is pointing higher Price is above the 200-day moving average
It looks something like this…
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Stage 3: Distribution phase Distribution usually occurs after a rise in prices and looks like a consolidation period. Characteristics of distribution phase:
It usually occurs when prices have risen over the last 6 months or more It looks like long period of consolidation during an uptrend The 200-day moving average tends to flatten out after a price decline Price tends to whip back and forth around the 200-day moving average
It looks something like this:
Stage 4: Declining phase After price breaks down of the distribution phase, it goes into a declining phase (a downtrend) and consists of lower highs and lows. This is the stage where traders who do not cut their loss become long-term investors.
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Characteristics of declining phase:
It usually occurs after price breaks out of distribution phase Price forms a series of lower highs and lower lows Short term moving averages are below long term moving averages (e.g. 50 below 200-day ma) The 200-day moving average is pointing lower Price is below the 200-day moving average
It looks something like this…
So, you’ve learnt what are the 4 stages of the market, and the key
characteristics to look out for. Now, let’s move onto the next section…
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How to tell when the market is trending There’s a famous Wall Street saying that goes like this…
Question: What is the trend of the market? Answer: What is your time frame? You’re wondering: What does it mean?
This means there are trends on different time frames. You can have a downtrend on 5 minutes chart and an uptrend on a daily chart. Here’s an example…
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So, you’ve understood that trends can exist in different time
frames. Now… let’s learn how to define a trend objectively.
There are two ways you can go about it:
Structure of the markets Moving average
Structure of the markets The market is in an uptrend when there’s series of higher highs and higher lows.
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Likewise, in a downtrend, there’s a series of lower highs and lower
lows.
Moving average Alternatively, you can use a moving average to define the trend. Here’s how you can do it:
20 ema – Short term trend 50 ema – Medium-term trend 200 ema – Long term trend
If 20 ema is pointing higher, and the price is above it, then the short term trend is up. If 50 ema is pointing higher, and the price is above it, then the medium-term trend is up. If 200 ema is pointing higher, and the price is above it, then the long-term trend is up. Let’s look at a few examples:
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Now, let’s learn how to identify a range market… PRICE ACTION TRADING THE EASY WAY
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How to tell when the market is ranging A range market is contained between Support & Resistance. A textbook example looks something like this:
Now, before the light bulb in your head goes off with “buy low and sell high”, I want you to see the reality of trade range markets.
Because in the real world, you get variations like:
Range expansion Range contraction
Range expansion This occurs when the market does a false breakout and trades back into the range. Thus expanding the “space” between
Support & Resistance. Selling at resistance would get you stopped out, as price breaks above the resistance, only to trade back into the range. An example:
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Range contraction This occurs when the market enters a period of low volatility, usually due to an impending major news release. Looking to “buy low sell high” would put you on the sidelines as
the markets went into a tighter consolidation. Here’s what I mean:
Personally, I find range expansion and contraction one of the hardest markets to trade, and I usually stay out of it. Now, let’s move onto something interesting… PRICE ACTION TRADING THE EASY WAY
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How to read the price action of any markets (and determine the strength and weakness of it) Here are the things I look out for:
Slope of impulse moves getting flatter Candlestick bodies getting smaller on impulse move Slope of corrective move getting steeper Candlestick bodies getting larger on corrective move
Slope of impulse moves getting flatter
Candlestick bodies getting smaller on impulse move
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Slope of corrective move getting steeper
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Candlestick bodies getting larger on corrective move
Here’re a few examples to walk you through… Example 1:
A-Start of the move downward, look at the slope and length of the move PRICE ACTION TRADING THE EASY WAY
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B-Corrective move called as retracement C-A move downward, but candle size getting smaller compared
to the previous impulsive more D-A very small correction, signalling a move to support is imminent E-Price moved to the support with this impulsive move and formed a dozi(I will explain it later) F-Correction is almost 100%, signalling that move is almost done but we might retest the support, which often is the case G-Tried to moved down, but failed, as bulls are getting stronger H-Tasted the high of F I-Very slow move to the support, you can see there are small corrective move and impulsive move within this down move, which is the indication of bears losing momentum. J-Again a doji and start of the upmove begins, slope of the corrective move is more than 45 degree. K-Very small correction, bears have died and bulls are coming strongly. L-Very close to the previous high of corrective move F, M-Same as K. N-Broke the previous high of corrective move F, Bulls are in full control Overall: The downtrend is getting weak. Support comes in around 230 which is a strong line of defence for the bulls. I will look to long or stay on the sidelines. No shorting at this point. With the retest of support and formation of doji confirms that Bulls are gaining control and an upmove is imminent. Example 2:
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A-Corrective move after an strong impulsive move. B-Price couldn’t travel much higher compared to previous impulsive move. C-50% correction of the move B D-Look at the slope, it seems like flattening out, but we can’t say bulls are done yet, as high is still higher the previous swing high. E-Almost 60% correction, signalling bearish pressure is getting weaker. F-Very flat move and into the resistance and topped by a doji, showing strong downward pressure.Bears are getting ready and can pounce anytime. G-Look at the candle size, bears have come and want to take price down. H-Last attempt by bulls to take price higher but they failed and now bears are in full control. Overall: PRICE ACTION TRADING THE EASY WAY
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Bulls were in full control upto the resistance area, as the price reached resistance area bears pounced, I will go short at swing high after corrective move H. For further readings, I would recommend the works of Lance Beggs. Now, let’s move onto the topic of candlesticks…
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Stop memorising candlestick patterns, you only need to know these 4 things They are: 1. 2. 3. 4.
Wick Length of the wick Size of the body Close of the candle
Wick The wick of the candle represents price rejection. If you see a longer wick, it represents greater price rejection. Here’s what I mean:
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Length of the wick In general… When you see wicks “flying” all over your charts, you’re probably in a “choppy” condition (usually in a range market). And when you get little to no wicks, you’re probably in a “cleaner”
condition (usually in a strong trending market).
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Size of the candle The easiest way to identify momentum in the markets is, to look at the size of the body. A large body shows greater momentum, and a small body shows a lack of momentum. An example:
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Close of the body To identify who’s currently in control, you’d want to see where
the candle closes. If it closes near the highs, the bulls are in control.
If it closes near the middle, the market is undecided.
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If it closes near the lows, the bears are in control.
So, are you pumped right now? Because you’re going to learn something really cool…
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Advanced candlestick knowledge (that nobody talks about) I used to get excited when I spot a candlestick pattern that I memorised. “Look, a shooting star! The market is heading lower for sure!”
And it rallied 30 points. Now… Instead of “copy-pasting” what individual candlestick means, I’ll
go deeper into it. I’ll explain to you how not to trade them, how to trade them, and
other variations of it. Here’s what you”ll learn:
Pinbar Inside bar Rising three method Wide range candles Narrow range candles
Pinbar A Pinbar is a reversal pattern, which was first introduced by Victor Sperandeo, in his book, Trader Vic: Methods of a Wall Street Master . The key takeaway about this pattern is price rejection. Bullish Pinbar – A small bodied candle with a long lower wick,
showing rejection of lower prices.
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Bearish Pinbar – A small bodied candle with a long upper wick,
showing rejection of higher prices.
Now: Just because you see a bearish Pinbar, doesn’t mean price is going to trade lower. In fact, it’s usually just a retracement within a trend. Here’s what I mean:
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Do not “blindly” go short when you see a bearish Pinbar or go
long when you see a bullish Pinbar. Chances are, it’s a retracement within a trend. Here’s what you should do instead:
In an uptrend, only trade bullish Pinbar at an area of support In a downtrend, only trade bearish Pinbar at an area of resistance
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Following these simple rules, you’ll greatly increase the odds of
your trade working out. Look at this:
Recall: The Pinbar shows price rejection on the charts. But, there are more than one ways to show price rejection, and it may not come in the form of Pinbar. So… …if you’re only focusing on Pinbar trading setups, then you’ll miss trading opportunities like these…
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. Another variation of Pinbar is the Engulfing pattern. If you think about it, Pinbar is actually an Engulfing pattern on a lower time frame.
Image from Tradciety PRICE ACTION TRADING THE EASY WAY
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Remember…
Price rejection can come in many forms. You should focus on price, not the pattern.
Inside bar It can be both a continuation and reversal pattern (I’ll focus on continuation pattern). The key takeaway about this pattern is low volatility. Thus, you can get an entry with tight stops on this pattern (and improve your risk to reward). Inside bar – Small candle contained within the previous bar highs and lows
How not to trade it?
Most traders would trade the break of the Inside bar, hoping to capture a quick profit. But…
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In a choppy market, the lack of momentum usually results in many losses (so it’s best to avoid choppy markets). Here’s an example:
The best Inside bar setups occur when:
Price breaks out of a range with strong momentum It’s a strong trending market
Trading in the direction of the trend
Here’s what I mean…
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Another variation of the Inside bar is coined the “Fakey”, by Nial
Fuller. It’s when the Inside bar breaks out in one direction, only to
reverse and close in the opposite direction (otherwise known as a false breakout). Here’re a couple of examples:
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Look how Fakey setsup perfectly in the downtrend, it broke on the wrong side and into support turned resistance, perfect way to go short on the break of the inside bar on the downside. Moving on…
Price action patterns — Rising three method This pattern was first introduced by Steve Nison, in his book, Japanese Candlestick Charting Techniques . PRICE ACTION TRADING THE EASY WAY
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The main idea of this pattern is trend continuation. Rising three method – This is a bullish trend continuation move,
with three bearish candles as a retracement in an existing trend. Then a bearish candle closes lower, signalling the bears are back in control. Falling three method – This is a bearish trend continuation move,
with three bullish candles as a retracement in an existing trend. Then a bullish candle closes higher, signalling the bulls are back in control.
Here’s the thing: PRICE ACTION TRADING THE EASY WAY
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By waiting for this precise pattern to occur, you’ll not get many trading setups (following an exact 3 candles pullback). So… what other patterns can you trade?
If you think about it, another variation of this pattern is the flag or pennant formation. Here’s what I mean:
Next… PRICE ACTION TRADING THE EASY WAY
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Price action patterns — Wide range candles A wide range candle is formed due to an imbalance of buying/selling pressure. This represents “hidden” Support & Resistance in the markets
(known as Supply & Demand by Sam Seiden) Here’s what I mean:
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There are traders who swear by Supply & Demand, and some who do just fine, with Support & Resistance. Here’s the thing… You don’t want to trade them in isolation, but use them with
other technical tools, that add confluence to your trades.
Price action patterns — Narrow range candles If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion. – Paul Tudor Jones You’re wondering: What does it mean?
Simply put, when you get series of narrow range candles (volatility contraction), get ready for an explosive move. (These findings can be validated by the works of Adam Grimes, Tony Crabel, and Mark Minervini.) Here’re a few examples:
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So, what’s the best way to enter such trades?
You can look to trade the initial breakout or the pullback after the breakout. The last thing you’d want to do is trade against the breakout. Let’s move on…
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A price action trading strategy that works Here’s what you need to do:
1. 2. 3. 4.
Mark your areas of Support & Resistance (SR) Wait for a directional move into SR Wait for price rejection at SR Enter on the next candle with stop loss beyond the swing high/low 5. Take profits at the swing high/low Here’s an example…
1. Mark your area of Support & Resistance
2. Wait for a directional move into Support or Resistance area
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3. Wait for price rejection at Support or Resistance area
4. Enter on next candle with stop loss below the swing low
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5. Take profits at the swing high You can consider taking half your position off at the nearest swing high, and the remaining at the further swing high. This depends on your trade management.
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This is important… You must understand the trading strategy isn’t the holy grail. In fact, you’re going to have both winners and losers. And the only
thing that will keep you in this game is proper risk management. My advice is to risk no more than 1% of your account on each trade. Here are more examples of the price action trading strategy:
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A price action strategy to capture momentum and ride trends Recall: The inside bar is a small candle contained within the previous bar highs and lows (which represents indecision in the markets). Due to its small bodied candle, it’s a powerful way to limit risk
while capturing explosive moves in the markets. Inside bar trading strategy If the market is strongly trending lower, then check if it respects the 21 EMA. If the market respects 21 EMA, then wait for an inside bar to form. If an inside bar is formed, place a sell stop order below the previous bar with a stop loss above the high. If the order is triggered, then exit your trade when price closes above 21 EMA. Vice versa for uptrends. Here are a few examples:
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Guidelines:
The best setup occurs when the market is trending strongly, or shortly after it breaks out of a long term range Risk no more than 1% of your equity on each trade You can use 10 EMA to trail your stop loss
Further considerations to ask yourself:
Do you place your stop loss using the previous bar or the inside bar? Do you set your entry using the previous bar or the inside bar? Do you want to capture a swing or a trend?
**Disclaimer: I will not be responsible for any profits or losses resulting from using these trading strategies. Past performance is not an indication of future performance. Please do your own due diligence before risking your hard earned money.
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Final words from MG Congratulations! If you have made it to this point, you definitely have the price action trading spirit in you. I know I’ve provided
you with a lot to think about in this guide, but you now have the knowledge to take the information and apply it into your trading. Here are a few final thoughts I’d like to share with you before I
finish up.
How Much You Succeed is All Up to You The thing about trading is that it doesn’t care about your
educational background. You can be a first class honors graduate or a school dropout, but if you fail to follow the rules of the market, it will take your money, regardless of your status and background. But if you follow the rules of the market, then how much you can make is entirely up to you. You can trade 1 lot, or 10 lots, and your profits and losses are just a matter of a few more zeros behind.
Rome Wasn’t Built In a Day Trading is like learning a new skill. You need to be willing to put in time and effort to be proficient in it. There are countless lessons to learn from the markets and every mistake you learn is a step closer to profitable trading. Most degree graduates spent 3 years in school studying. What about a trader acquiring a skill that could feed him or her for life? Don’t think about the money just yet. Just focus on doing the right things one step at a time. Some take 10 years before being profitable whereas some never figure it out and eventually give up. If you really want it bad PRICE ACTION TRADING THE EASY WAY
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enough, then persevere on and always look at the big picture: the chance to one day be a consistently profitable trader.
Don’t Be Afraid to Ask for Help There is absolutely no reason why you shouldn’t ask for help when
you need it. Many people, including myself, are happy to help people out. You’d be surprised.
If you never ask, you will never know, right?
PRICE ACTION TRADING THE EASY WAY
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