HowtoTradewithPriceAction

(Strategies)

TradingSetups,Rules&Examples

GalenWoods

©2014GalenWoods

Contents

Notices&Disclaimers.....................

i

Introduction..........................

iv

1.ASimpleInsideBarDayTradingStrategyUsingYM

Futures...........................

1

1.1

Time-frameForDayTradingYMfutures......

1

1.2

TradingRules-SimpleInsideBarDayTrading...

2

1.3

SimpleInsideBarDayTradingExamples......

3

1.4

Review-SimpleInsideBarDayTradingStrategy.

5

2.TradingConsecutiveUp/DownDaysWithLowerRisk

7

2.1

TradingRules-ConsecutiveUp/DownDaysLow

RiskEntry......................

8

2.2

ConsecutiveUp/DownDaysTradingExamples..

9

2.3

Review-ConsecutiveUp/DownDaysLowRiskEntry11

3.Three-BarReversalPatternForDayTrading......

12

3.1

TradingRules.....................

13

3.2

TradingExamples..................

13

3.3

Review-Three-BarReversalPatternForDayTrading15

4.NR7TradingStrategy...................

17

4.1

TradingRules-NR7TradingStrategy........

17

4.2

NR7TradingExamples................

18

4.3

Review-NR7TradingStrategy...........

19

CONTENTS

5.ASimpleandEffectivePriceActionTradingSetup..

21

5.1

BasicDefinitionsForPriceActionTrading.....

21

5.2

TradingPremise...................

23

5.3

TheTrendBarFailureTradingSetup........

23

5.4

Conclusion......................

28

6.Two-leggedPullbacktoMovingAverage(M2B,M2S).

30

6.1

TradingRules-Two-leggedPullbacktoMA....

31

6.2

Two-leggedPullbacktoMATradeExamples....

31

6.3

Review-Two-leggedPullbacktoMA........

33

7.CandlestickandPivotPointDayTradingStrategy..

34

7.1

TradingTools.....................

34

7.2

TradingRules-CandlestickandPivotPoint....

35

7.3

CandlestickandPivotPointTradingExamples...

36

7.4

Review-CandlestickandPivotPoint........

37

8.TradingTheEngulfingCandlestickPatternWithMar-

ketStructure........................

39

8.1

TradingRules-EngulfingCandlestick.......

39

8.2

EngulfingCandlestickTradingExamples......

40

8.3

Review-EngulfingCandlestickwithMarketStructure41

9.HikkakeTradeSetup...................

43

9.1

TradingRules.....................

43

9.2

HikkakeTradeExamples...............

44

9.3

Review-HikkakeTradeSetup............

46

10.CaptureHighProfitswithLowVolumePullbackTrad-

ingStrategy........................

47

10.1TradingRules-LowVolumePullback.......

47

10.2LowVolumePullbackTradingExamples......

48

10.3Review-LowVolumePullbackTradingStrategy.

50

11.What’sNext?........................

52

11.1HowtoTradewithPriceAction(eBooks)......

52

CONTENTS

11.2HowtoTradewithPriceAction(Online)......

52

11.3DayTradingwithPriceActionSelf-StudyCourse.

53

Notices&Disclaimers

Copyright©2014byGalenWoods(SingaporeBusinessRegistration

No.53269377M).Allrightsreserved.

FirstEdition,October2014.

PublishedbyGalenWoods(SingaporeBusinessRegistrationNo.

53269377M).

AllchartswerecreatedwithNinjaTrader™.NinjaTrader™isa

RegisteredTrademarkofNinjaTrader™,LLC.Allrightsreserved.

Nopartofthispublicationmaybereproducedortransmittedinany

formorbyanymeans,electronicormechanical,withoutwritten

permissionfromthepublisher,exceptaspermittedbySingapore

CopyrightLaws.

ContactInformation

GalenWoodscanbereachedat:

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•Email:galenwoods@tradingsetupsreview.com

FinancialDisclaimer

Tradingisrisky.Pleaseconsultwithyourfinancialadviser

beforemakinganytradingorinvestmentdecision.

Theinformationcontainedwithinthisbookincludinge-mailtrans-

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content(hereinaftercollectivelyreferredtoas“Information”)is

Notices&Disclaimers

ii

providedforinformationalandeducationalpurposesonly.The

Informationshouldnotbeconstruedasinvestment/tradingadvice

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Notices&Disclaimers

iii

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Introduction

ThiseBookcontainsaselectionofarticlesIhavewrittenonTrading

SetupsReview.Youcanfindoutmoreaboutmebyclickinghere.

(AllarticlesinthiseBookareavailableforviewingonlineat

http://www.tradingsetupsreview.comforfree.)InthisStrategiesEdition,Ihaveselectedthe10mostpopularprice

actiontradingsetupsreviewedonTradingSetupsReview.These

strategiesusepriceactionpatternsandminimalindicators.Thelast

setupfocusesonusingvolumetocomplementpriceaction.

IhopeyoufindthiseBookafriendlycompanionforyouroffline

learning,andIwishyouallthebestinyourtradingcareer.

1.ASimpleInsideBarDay

TradingStrategyUsing

YMFutures

Todaytradesuccessfully,weneedamarketthatisvolatileand

liquid.S&P500E-mini(ES)andNASDAQ-100E-mini(NQ)futures

arepopulardaytradingmarkets.Beyondthem,theE-miniDOW

(YM)futurescontractisalsoagreatchoice.Amongequityindex

futures,thetradingvolumeofYMfuturesranksrightafterESand

NQfutures.

LikeESandNQ,YMfuturesisalsoanelectronicallytradedcontract.

ItsunderlyingistheDowJonesIndustrialIndex.Foraone-point

movementintheindex,itsvaluechangesby$5.

Ifyouarecompletelynewtofutures,youshouldspendsometime

browsingCME’swebsite.

ReadonforasimpleinsidebardaytradingstrategywithexamplesfromtheYMfuturesmarket.

1.1Time-frameForDayTradingYM

futures

The5-minutetime-frameisacommonchoiceamongdaytraders.

Butthatisjustaconvention.

Instead,IusethePriceActionTime-frameIndex(PATI)*tofind

time-framesthataretradeable.Itfindsthesmallesttime-framethat

istradeableforapriceactiontrader.Aslongasyouaretrading

abovetheminimumtradeabletime-frame(MTT)*,priceaction

ASimpleInsideBarDayTradingStrategyUsingYMFutures

2

analysisispossible.ButnotethattheMTTchangesovertimeas

marketpriceactionchanges.

FortheYMfuturesmarket,itscurrentMTTisthe4-minutetime-

frame.TradingusingtheMTToffersthehighestnumberoftrading

setups.Hence,wewillbeusingthe4-minutetime-frame.

Ifyoupreferfewersetupsorlongerintervalsforongoinganalysis,

increaseyourtime-frame.

*TheconceptsofPATIandMTTareexplainedinmycourse-“Day

TradingwithPriceAction”.

1.2TradingRules-SimpleInsideBarDay

Trading

Theserulesattempttocapturethefirstlow-riskpullbackinanew

trendusinganinsidebar.Wedefinethetrendwiththehelpofa

21-periodsimplemovingaverage(SMA).

BullishInsideBarTradingSetup

1.FrombelowtheSMA,themarketrisescompletelyaboveit.

ApricebarmustclearabovetheSMA.

2.Waitforthefirstbullishinsidebar.

3.Placeabuystoporderatickaboveit.

(Whyuseastopordertoenterthemarket?)

BearishInsideBarTradingSetup

1.FromabovetheSMA,themarketfallscompletelybelowit.A

pricebarmustclearbelowtheSMA.

2.Waitforthefirstbearishinsidebar.

3.Placeasellstoporderatickbelowit.

ASimpleInsideBarDayTradingStrategyUsingYMFutures

3

1.3SimpleInsideBarDayTrading

Examples

ThechartsbelowshowtheYMfuturesmarketusing4-minute

candlesticks.Theorangelineisa21-periodSMA.

WinningTrade-YMFuturesBearishInsideBar

YMFuturesInsideBarExampleWinning

1.ThemarketwasabovetheSMA.

2.ThisbarwentbelowtheSMAandsignaledachangeintrend.

Westartedlookingoutforbearishinsidebars.

3.AfterYMpushedbelowtheSMA,itdidnotpromptany

significantbullishresponse.Noneofthecandlesticksmanage

totesttheSMAaboveit.

4.AttheendofitsthirdattempttorisetowardstheSMA,a

bearishinsidebarformed.Wesoldatickbelowit.

Therearemanyoptionsforexiting.Asweexpectedthetrendto

continue,themostconservativetargetisatthelastextremelow.

(horizontaldottedline)

ASimpleInsideBarDayTradingStrategyUsingYMFutures

4

Evenwiththisconservativetarget,thistradingsetupgaveusa

2:1reward-to-riskratio.Hence,itwasasetupofhighpositive

expectancy.

LosingTrade-YMFuturesBullishInsideBar

YMFuturesInsideBarLosingExample

Thefirstbaronthischartisalsothefirstbarofthesession.

1.ThissessionstartedbelowtheSMA.

2.Withinhalfanhour,YMmanagedtoclearabovetheSMA.

3.TheSMArejectedthefirsttestbythemarketfromabove,

givinghopetobullishsentiments.

4.However,asthemarketmadeanewsessionhigh,itstarted

congesting.Thecandlebodiescontractedandpricesmoved

sideways.

5.Withinthiscongestion,abullishinsidebarformed.We

boughtabovethisbarandgotstoppedoutimmediately.

ASimpleInsideBarDayTradingStrategyUsingYMFutures

5

1.4Review-SimpleInsideBarDay

TradingStrategy

Inanactivemarket,usingtherighttime-frame,insidebarsoffer

greattradingwindows.Itisatooltocontrolourriskandtimeour

entriesinatrendingmarket.

WhileweusedYMfuturesinthisexample,youcanusethisstrategy

inotherliquidandvolatilemarkets.

ThistradingstrategyissimpleasyouonlyneedaSMAand

knowledgeofinsidebars.Buttherearetwopointstotakenoteof

whenemployingthistradingstrategy.

First,lookfornewtrends.Thisisbecauseretracementtradesearlyinatrendhashigherchanceofsuccessandmoreroomforprofit.

Second,avoidcongestionareas.Thisiscrucialforinsidebar

trading.Thisisbecauseinsidebarsareoftenfoundincongestion

patterns.Thetrickhereistodistinguishbetweenaninsidebarin

congestionandonethatisnot.Youwillsufferwhipsawsifyou

assumethatthetrendwillcontinuewhenthemarketisactually

incongestion.

Lookatthetwoexamplesagain.Inthewinningexample,YMwas

clearlydriftingupwardsandthetopshadowsweremoreprominent.

Itwasnotcongesting.Butinthelosingexample,thepricebars

weremeanderingsidewayswithbothtopandbottomshadows.It

wasdefinitelyformingacongestionpattern.Hence,weshouldhave

avoidedtradingthebullishinsidebar.

Withregardstotargetplacement,youshouldatleastaimforthe

lastextremeofthetrend.Whenthemomentumisclear,youcan

aimfurther.Youcanusesupport/resistanceareasprojectedusingpastswingpivotsandpricethrusts.Anothergoodoptionisthehigh

orlowofthelasttradingsession.

Read:10WaystoTakeProfit

ASimpleInsideBarDayTradingStrategyUsingYMFutures

6

Inall,thisYMfuturesstrategyisasolidstartingpointforbuilding

yourownsimpletradingmethod.

2.TradingConsecutive

Up/DownDaysWith

LowerRisk

Whenamarketclosesupforconsecutivedays,tradersgetexcited.

Theystartspeculatingthatthemarketcannotcontinueitsupwards

streak.Somehow,wearewiredtothinkthatwhatgoesupmust

comedown,andviceversa.(See:Gambler’sFallacy)

Thisiswhyconsecutiveup/downdaysformthebasisofmanystock

scansandmarketstrategyresearch.Traderswanttofindoutifthere

isanedgeinbuyingafterconsecutivedowndaysorsellingafter

consecutiveupdays.

•Buyingafterconsecutiveup/downdaysandsellingaftera

week.

•Testingfourdaysdownandup.

•BuildingaheatmapofQQQreturnsafterconsecutiveup/-

downdays.

Inthesestudies,theyapproachedthetradingideaasquantitative

systemtraders.Theresultsseemencouraging,buttheyarenot

conclusiveofanactualtradingedge.Thisisespeciallytruefor

discretionarypriceactiontraders.

Inthisarticle,wewillexploreapriceactiontradingstrategybased

onthesameideaofconsecutiveup/downdays.Butwewillfocus

onthemarketcontextofsuchconsecutiveup/downdays.

TradingConsecutiveUp/DownDaysWithLowerRisk

8

2.1TradingRules-Consecutive

Up/DownDaysLowRiskEntry

Fadingconsecutiveup/downdaysoftenmeansgoingagainstthe

markettrendandmomentum.Itisadangerousstrategy,butitdoes

nothavetobe.

Inourlow-riskvariant,wefocusonfadingconsecutiveup/down

daysthatgoagainstthemarketstructureofswings.

LongEntryAfterConsecutiveDownDays

1.Fourormoreconsecutivedaysdown(closebelowopen).

2.Ifthemarkethasnotbreachedthelastswinglow,buyatick

abovethenextbullishbar.

ShortEntryAfterConsecutiveUpDays

1.Fourormoreconsecutivedaysup(closeaboveopen).

2.Ifthemarkethasnotbreachedthelastswinghigh,buyatick

abovethenextbullishbar.

TradingConsecutiveUp/DownDaysWithLowerRisk

9

2.2ConsecutiveUp/DownDaysTrading

Examples

WinningTrade-LongEntryROSTDaily

ConsecutiveDownDaysTradingWinningExample

ThisisadailychartofRossStoresInc.Itshowsanunderachieving

four-bardownthrust.

1.Thesefourconsecutivedowndayscaughtourattention.Isit

alast-ditchattemptbythebears?Orisitthebeginningofa

powerfuldowntrend?

2.Thefour-barthrustdidnotevenreachthepreviousswing

low,hintingthatthemarketwasinthefirstscenario.

3.Thisbullishbarwasoursetupbar.Weboughtatickaboveit.

Themarketcontinuedtorise,openingwithupgapsforthenext

fourdays.

TradingConsecutiveUp/DownDaysWithLowerRisk

10

LosingTrade-ShortEntrySPYDaily

ConsecutiveUpDaysTradingLosingExample

ThechartaboveshowsthedailybarsofSPY,theS&PETF.Theprice

actioninthischartislessstraightforward.

1.Therewasastrongbearishplungethatwashardtoignore.It

breachedthelastswinglowsoitwasnotacandidatesetup

underthistradingstrategy.

2.Butafterthebearishplunge,themarketrosewithseven

consecutivebullishbarsthatdidnothitthelastswinghigh.

Thatwasinlinewithourtradingrules.

3.Wesoldatickbelowthisbearishbarandwasstoppedoutas

themarketcontinuedtorise.

Afterthestrongbearishplunge,themarketrosesharply,forminga

V-shapedreversal.InterpretingsuchV-shapedpatternsistricky.Itshowsstrengthinbothdirectionsanditisdifficulttojudgewhich

sidewillemergevictorious.

TradingConsecutiveUp/DownDaysWithLowerRisk

11

2.3Review-ConsecutiveUp/DownDays

LowRiskEntry

Inmostmarkets,therearemanyinstancesofconsecutiveup/down

days.Mostback-testingresearchtradesthemindiscriminately.

Thus,theyaregoingagainstthetrendmostofthetime.

Usingthemarketstructuretofilterconsecutiveup/downdaysisa

simplemethodtomakesurethatwetakeonlythelowrisksetups.

Thisisakintotheimprovedthreebarpullbacktradingstrategy.

Therewillbefewertradingsetups.However,itisaworthwhile

sacrificeforbettertradingquality.

Otherthanthemarketcontext,youcanalsopayattentiontothe

pricethrustformedbytheconsecutivebars.

Aretheconsecutivebarsmakinghigherbarhighs?Orlowerbar

lows?Dotheyexceedthepreviousbarbyanincreasingdistanceor

adecreasingdistance?

Inmypriceactiontradingcourse,Idiscusstwopricepatternsderivedfromansweringthesequestions.TheyaretheDeceleration

andAnti-climaxpatterns.Theyareusefulpatternstolookoutfor

whenyouseeconsecutiveup/downbars.

•TheDecelerationpatternconsistsofconsecutiveup/down

barsthatweakensastheyprogress.Thewinningexample

aboveisalsoabullishDecelerationsetup.

•TheAnti-climaxpatternconsistsofconsecutiveup/down

barsthatareexhaustive.Thelosingexamplewasinfactan

Anti-climaxpatternthatwasinvalidatedbeforethesetupbar

appeared.

Tolearnmoreaboutthesepricepatterns,takealookat“Day

TradingwithPriceAction”.

3.Three-BarReversal

PatternForDayTrading

AltonHillfromTradingSim,adaytradingsimulator,wroteaboutanenhancedthreebarreversalpatternfordaytrading.

AccordingtoAltonHill,three-barreversalsaretoocommonin

intradaytime-frames.Toselectthebestthree-barreversalpatterns

fordaytrading,hewantsthethirdbarinthepatterntocloseabove

thehighsofthefirsttwobars.

Thediagrambelowdemonstratesthedifferencebetweentheusual

three-barreversalpatternandAltonHill’sdaytradingversion.

ThreeBarReversalPatternForDayTrading

Three-BarReversalPatternForDayTrading

13

3.1TradingRules

RulesforLong

1.Bar1closesdown

2.LowofBar2isbelowlowofBar1(andBar3)

3.Bar3closesabovethehighofbothBar1andBar2

4.BuyatcloseofBar3

RulesforShort

1.Bar1closesup

2.HighofBar2isabovehighofBar1(andBar3)

3.Bar3closesbelowthelowofbothBar1andBar2

4.SellatcloseofBar3

3.2TradingExamples

WinningTrade

ThreeBarReversalPatternWinningTrade

Three-BarReversalPatternForDayTrading

14

Thisa5-minutechartofESfutures.Itshowstheregularsession.

Iincludedpartoftheprevioussectiontoshowtheuptrendthat

endedyesterday.Afterourentry,thepricesdriftedupfortherest

ofthesession.

1.Theprevioussessionendedwithastrongbulltrend.

2.Thethree-barreversalpatternwasalsotherightshoulderof

abullishheadandshouldersformation.(Youmighthave

noticedthattheheadoftheformationwasaregularthree-

barreversalpattern.Inthiscase,itgaveabetterentrythan

ourenhancedpattern.)

3.Thelastbarofthepatternclosedabovethehighsofthetwo

previousbars.Thatwasoursignaltobuy.

LosingTrade

ThreeBarReversalPatternLosingTrade

Thisisa5-minutechartofE-miniDowcontract.Despiteastrong

signalbar,thepatternfailedimmediatelyafterentry.

1.Althoughpricesweredroppingconsecutivelyforsevenbars,

theincreasingbuyingpressureisobviousasthebarsshow

longbottomtails(shadows).

Three-BarReversalPatternForDayTrading

15

2.Tailsdevelopedatthetopofthebarsduringthepullback

upwards.Tailsonbothtopandbottomofthebarsaregiving

usmixedsignals,implyingthatpricesmightbecongesting

soon.

3.Ifweignoredtheabovewarningsignsandshortedthethree-

barreversalpattern,itisdifficulttofindaworseentrypoint.

3.3Review-Three-BarReversalPattern

ForDayTrading

Thismodifiedthree-barreversalpatternisimpressive.Asimplerule

hasturnedthiscommonplacepatternintoapowerfulsetup.

Infact,thisaddedruleisaskingforconfirmationofthepatternin

advance.(Applyingthetechniqueofcandleblending,ifBar3inanormalthreebarreversalpatternhasgoodfollow-throughinBar

4,blendingBar3andBar4wouldhaveresultedinthisenhanced

three-barreversalpattern.)

Youcaneasilycombinethispatternwithotherindicatorsorprice

patternstofindhighprobabilitytradesetups.Thewinningexample

isagreatcombinationofaheadandshouldersformationanda

threebarreversalpattern.

However,duetotheextrarule,thesignalbar(Bar3)tendstohave

alargerange.Asourstopsareusuallyplacedontheoppositeendof

thesignalbar,thetraderiskmightbehigher.Weshouldeithercut

downourtradesizeortightenthestopifpossible.Ifyouareunable

tomanagetherisk,thenskipthetradesetup.

Onelastpointtonoteisthatifthemiddlebarofthepatternisan

outsidebar,beverycareful.Outsidebarsoftenprecedewildand

unpredictablepriceaction.

Ifyouwanttoreadmoreaboutthree-barpatterns,youmusttake

alookatourreviewofJohnanPrathap’sThreeBarInsideBar

PatternandThomasBulkowski’s“AreThreeBarPatternsReliable

Three-BarReversalPatternForDayTrading

16

forStocks?”articleinTechnicalAnalysisofStocks&Commoditiesmagazine.

4.NR7TradingStrategy

Thequietperiodbeforethenextexplosivemarketmoveislikethe

calmbeforethestorm.NR7helpsustofindthecalmsothatwecan

prepareandprofitfromtheimpendingstorm.

NR7meansnarrowbar7.Itisabarthathasasmallerrangethan

thesixbarsbeforeit.Itisarangecontractionthatprecedesrange

expansion.

Inourtradingstrategy,weaddasimpletrendruletofindlowrisk

trendtrades.

4.1TradingRules-NR7TradingStrategy

LongTradingStrategy

1.Past7barsarecompletelyabovethe20-periodEMA

2.BuyonbreakofhighofNR7bar

ShortTradingStrategy

1.Past7barsarecompletelybelowthe20-periodEMA

2.SellonbreakoflowofNR7bar

NR7TradingStrategy

18

4.2NR7TradingExamples

WinningTrade-BearishNR7

NR7TradingStrategyWinningTrade

Thisisa3-minutechartofCLfuturesonNYMEX.Theorangeline

isthe20-periodEMA.TheNR7barshaveayellowbackground.

1.PriceswungdownfromabovetheEMAwitheightconsecu-

tivebearishbars.

2.ThesevenbarsthatdefinedtheNR7barwereallbelow

theEMA,showingthatthebearishmomentumheldup.

AlthoughtheNR7barclosedhigherthanitsopen,itformed

amicrotripletopwiththetwobarsbeforeit.Afterthelow

oftheNR7barbroke,wewentshort.

3.Pricecamebackuptotestthebreak-evenlevelofthetrade.

However,followingafailedbullbreak-outofthedojiNR7,

pricesplummeted.

ThedojiNR7isalsoagreatexampletowarnusagainstusingNR7

totradereversalswithoutconfirmationfromotheranalysis.

NR7TradingStrategy

19

LosingTrade-BearishNR7

NR7TradingStrategyLosingTrade

Thisisanother3-minutechartofCLfutures.Inthisexample,the

NR7tradeexperiencedwhipsaws.

1.ThesevenbarsleadinguptotheNR7barwereallbelowthe

EMA.Despitethefourbullishbarsintheretracement,price

couldnotreachtheEMA.

2.AspricebrokethelowofthesecondNR7bar,wewentshort.

However,theconsecutiveNR7barswasahintofthetight

congestionthatfollowed.

3.Pricehitourstop-lossatthehighoftheNR7bar.Itwasa

falsebreak-outthatreversedandcontinuedthebeartrend.

Re-entrywasavalidoptionaspricestayedbelowtheEMA

throughouttheretracementandourbearishoutlookwasnot

compromised.

4.3Review-NR7TradingStrategy

TobyCrabelstudiedtheNR7patterntogetherwiththeNR4/ID

tradingsetup.Bothpatternsarepopulartradingtoolsfoundinmanytradingstrategies.

NR7TradingStrategy

20

(Read:DayTradingwithShortTermPricePatternsandOpening

RangeBreakout)

InthisNR7tradingstrategy,welookedformarketswithastrong

trendandusedNR7asalowriskentrypointtojointhetrend.

Donotfollowthetradingrulesmechanically.SomeNR7bars

appearatthehighofabulltrendorthelowofabeartrend.These

setupsarenotthetargetofourtradingstrategy.Waitforareal

pullbacktoenter.

BeverycarefulwhenyouseemultipleNR7bars.Narrowrangebars

inproximityareasignofpricecongestioninwhichNR7patterns

arelessreliable.

Remembertofollowthepathofleastresistance.ThebestNR7bars

occurwhenpriceismovingagainstthepathofleastresistance.

5.ASimpleandEffective

PriceActionTrading

Setup

Observingpriceactionisthesimplestwaytotrade.

Yet,manypriceactiontradingsetupsarenotsimpleatall,requiring

interpretationofcomplexandsubjectivechartformations.

Theworstpartisthattradersoftenmemorizepriceactiontrading

setupswithoutunderstandingtheconceptbehindthem.

Inthisexclusivearticle,wewillintroduceasimpleandeffective

priceactiontradingsetup-TrendBarFailure.

5.1BasicDefinitionsForPriceAction

Trading

Trend

Inpriceactiontrading,higherhighsandhighlowsshowanupward

trend.Lowerhighsandlowerlowsshowadownwardtrend.

Inourexamples,forsimplicity,wewillbeusingtheslopeofthe

20-periodEMAasourtrendfilter.

Youarefreetouseyourownmethodsanddiscretiontofindthe

trend.Someofthemorepopulartrendtoolsaremovingaverages

andtheADXindicator.

Onetipforidentifyingtrends:trendsareobvious.Whenitis

doubtfulwhetherthemarketistrending,itisnottrending.

ASimpleandEffectivePriceActionTradingSetup

22

TrendBar

Atrendbarisonethatrepresentsatrendonasmallertime-frame.

Itopensandclosesonoppositeendsofthebar.

Abulltrendbaropensnearitslowandclosesnearitshigh.Abear

trendbaropensnearitshighandclosesnearitslow.

Whatdoesatrendbarmean?

Itmeansthattradershavecommittedtoonedirection.Remember

thatineverybar,thenumberofcontractssoldandboughtarethe

same.Theonlyreasonforabartoendupwithahigherpriceis

thatthebuyersweremoreaggressivethanthesellers.Thereverse

istrueforabeartrendbar.

Howdoesatrendbarlooklike?

Whilewecanidentifytrendbarssubjectivelydependingonthe

marketcontext,Ipreferamoreobjectivemeasure.Atrendbarhas

abodythatisgreaterthan50%oftheentirebarrange.

TrendBarforPriceActionTrading

ASimpleandEffectivePriceActionTradingSetup

23

5.2TradingPremise

Thesepremisessetthestageforthispriceactiontradingsetupand

explainitsconcept.Theexplanationbelowisforabulltrend.The

reverseistrueforabeartrend.

Trendstendtocontinue.

Thisisoneoftheprinciplesoftechnicalanalysis.Astrendstendtocontinue,ouredgeliesinfollowingthetrend.

Trendbarsagainsttrendhintattheentryof

counter-trendtraders.

Inabulltrend,beartrendbarsrepresentcounter-trendtraders

tryingtoreversethetrend.Thecommittedbearishtradersare

counter-trendtraders.

Thetrendcontinuesascounter-trendtraders

failintheirattempttoreversethetrend.

Accordingtoourfirstpremise,thetrendismorelikelytocontinue

thantoreverse.Hence,itislikelythatthecounter-trendtradersare

wrong.Thebearishtrendbarislikelytofailwithoutsignificant

follow-through.

Asthecounter-trendtradersrealizethatthebulltrendisnot

reversingastheyanticipated,theywillcovertheirshortpositions

andmightevenreversetobuying.

5.3TheTrendBarFailureTradingSetup

Followingthepremisesabove,theentryforatrendcontinuation

tradetakesplacewhenatrendbaragainstthetrendfails.

ASimpleandEffectivePriceActionTradingSetup

24

Ifatrendbarisnotfollowedbyanothertrendbar,weshould

prepareourselvesforaTrendBarFailure.

RulesforLong

1.20-periodEMAisslopingup(orifyourtrendassessmentis

bullish)

2.Beartrendbar

3.Lowofbeartrendbarbroken(withoutformingasecondbear

trendbar)

4.Placeabuystoporderabovethehighofthebar

5.Cancelorderifnottriggeredwithinonebar

RulesforShort

1.20-periodEMAisslopingdown(orifyourtrendassessment

isbearish)

2.Bulltrendbar

3.Highofbulltrendbarbroken(withoutformingasecondbull

trendbar)

4.Placeasellstoporderbelowthelowofthebar

5.Cancelorderifnottriggeredwithinonebar

ASimpleandEffectivePriceActionTradingSetup

25

TradeExamples-ESFutures(5-Minute)

TrendBarFailureESExample

Wehavemarkedthetrendbarsinthecharts.Bulltrendbarswith

greenarrowsandbeartrendbarswithredarrows.

1.Astrongbearishbarfollowedbyabullishreversalbar.Ithad

goodpotential,butthebuyorderplacedatthehighofthe

bullishreversalbarwasnottriggered.

2.AbearishtrendbartestedtheEMAwithoutmuchfollow-

through.Thebulltrendbartriggeredthebuystoporder,and

ledtoaprofitabletrade.

3.Thisbeartrendbarwasalsoaninsidebar.Thetwofailure

trades(failureofinsidebarandtrendbar)ledtothe6

consecutivebullbars.

4.Althoughthebarafterthemarubozuwasnotabeartrendbar,

itshighwasnotbrokenandourbuyorderwasnottriggered.

Wecancelordersiftheyarenottriggeredwithinonebar.Thisis

becausethebesttradeshappenquicklylikeakneejerkreaction.By

cancellingordersthatarenottriggeredswiftly,weareavoidingthe

secondbesttradeandtakingonlytheverybesttrades.

ASimpleandEffectivePriceActionTradingSetup

26

TradeExamples-AmerenCorp(Daily)

TrendBarFailureAEEExample

Youcanusethispriceactiontradingsetupforswingtradingaswell.

1.Adojibrokethelowofthebeartrendbar.However,thebuy

orderwasnottriggered.

2.Anirresistibletrade,withtheanoutsidebarhittingourbuy

stoporderaftertestingtheEMA.

3.Thestrongbeartrendbarhadlittlefollow-through,butthe

buyorderwasnottriggered.

ASimpleandEffectivePriceActionTradingSetup

27

TradeExample-EUR/USD(Weekly)

TrendBarFailureEURUSDExample

Priceactiontradingsetupsworkwellintheforexmarket.

1.Thebeartrendbarfailedwithabulltrendbar.Thispattern

isalsoknownasthepipepattern.

2.Thistrendbarfailurewasalsoaninsidebarfailure.How-

ever,thesignalbarwasadojiandnotideal.

3.Thebeartrendbarhadlimitedfollow-through.Althoughthis

tradewasprofitable,priceswentsidewaysbeforeresuming

thetrend.Amoreconservativetraderwouldhaveexited

duringthesidewayscongestion.

ASimpleandEffectivePriceActionTradingSetup

28

TradeExample-SPDRS&P500ETF(Monthly)

TrendBarFailureSPYExample

Thissimplepriceactiontradingsetupisrobustenoughforlong-

termanalysisaswell.

1.Thebeartrendwasalsoanoutsidebar.Thismeantthatthe

bearsoverwhelmedthebullsinthatbar.However,thenext

barwasbullishreversalbar.Thiswasgoodtradewithanice

follow-through.However,itmightendupasalossifour

targetswerefurther.

2.AnothernicepipepatternthattestedtheEMA.

5.4Conclusion

TheTrendBarFailuretradingsetupisextremelysimpleandversa-

tile.Itistheidealstartingpointforpriceactiontrading.

Thebasicpremiseisthetrappingofcounter-trendtraders.How-

ever,itmanifestsindifferentformslikeinsidebarfailureandthe

pipepattern.

Asshowninthemanyexamplesabove,youcanusethisprice

actiontradingsetupintime-framesrangingfromintradaytrading

tolongertermmonthlyanalysis.

ASimpleandEffectivePriceActionTradingSetup

29

TheTrendBarFailureisapricepatternfrommytradingcourse-

“DayTradingwithPriceAction”.

6.Two-leggedPullbackto

MovingAverage(M2B,

M2S)

Manypriceactiontradersclaimthattwo-leggedpullbacksarethe

mostreliabletradesetups.Thevariantwearereviewingtodayis

fromAlBrooks,whowrotethreetomesonpriceactiontrading.

Thesethreebooksarenotaneasyread,butareextremelyinforma-

tiveforpriceactiontraders.

Inhisbooks,heidentifiedatwo-leggedpullbacktothemoving

averageasoneofthebesttradesetupswhenthereisastrong

trend.

Beforewestart,let’shaveabasicexplanationofcountinglegs.Any

barthatgoeshigherthanthepreviousbarstartsanewlegup.Any

barthatgoeslowerthanthepreviousbarstartsanewlegdown.

CountingLegsExample

Two-leggedPullbacktoMovingAverage(M2B,M2S)

31

6.1TradingRules-Two-leggedPullback

toMA

LongTradingSetup-M2B

1.Stronguptrend

2.Two-leggedpullbackdownto20-periodEMA

3.Enteratickabovethebarthattestedthe20-periodEMA

ShortTradingSetup-M2S

1.Strongdowntrend

2.Two-leggedpullbackupto20-periodEMA

3.Enteratickbelowthebarthattestedthe20-periodEMA

6.2Two-leggedPullbacktoMATrade

Examples

WinningTrade-M2S

Two-LeggedPullbackMovingAverageWinningTrade

Two-leggedPullbacktoMovingAverage(M2B,M2S)

32

Thisis5-minutechartofESfuturescontract,whichisthemain

instrumentAlBrookstrades.Thistradeisabeautifulexampleofa

two-leggedpullbacktrade.

1.AfterpricescrossedbelowtheEMA,ittriedtocrossedback

butwasclearlyrejected.

2.Thestrongdownwardsthrustconfirmedthedowntrend,

whichwaswhatweneededbeforelookingforcontinuation

trades.

3.Thetwoshortdottedlineshighlightthebeginningofeach

legup.Thistwo-leggedpullbacklookedgoodwiththelong

toptailsthatshowedaspricesapproachedtheEMA.Thelong

toptailsimpliedsellingpressure.

LosingTrade-M2B

Two-LeggedPullbackMovingAverageLosingTrade

AnothersessionofS&PE-minifuturesshowing5-minutebars,

whichisAlBrook’srecommendationasthesweetspotforday

traders.

1.Thedaystartedwithswingsupanddownwithoutaclear

direction.However,aspricesmadenewlows,bottomtails

emerged,showingbuyingpressure.

Two-leggedPullbacktoMovingAverage(M2B,M2S)

33

2.TheupswingabovetheEMAseemedstrongastherewere

eightconsecutivebarswithhigherlows.However,therewere

threebeartrendbarswithintheswing,whichhintedat

persistentbears.

3.Followingatwo-leggedpullbacktotheEMA,wehada

bullishreversalbarasoursignalbar.Weenteredatickabove

itbutgotstoppedoutaftersomesidewaysmovement.

Akeydifferencebetweenthelosingtradeandthewinning

tradeishowcertainwewerethatthemarketwastrending.In

thewinningtradeexample,wesawclearrejectionfromtheEMA,

whichwedidnotseeinthelosingexample.

6.3Review-Two-leggedPullbacktoMA

Continuationtradesworkbecausethetrendtrapscounter-trend

traders.Two-leggedpullbacksaremoreenticingtocounter-trend

tradersandworksbetterasamousetrapforthem.

Hence,inatrendingmarket,thetwo-leggedpullbacktothemoving

averageisasimpleandhighprobabilitytradingsetup.

Thekeyliesinfindingtrendingmarkets.Payattentiontosignsofa

trendingmarketandtradeopportunitieswillpresentthemselves.

Veryoften,youcanpayattentiontothespacebetweenprices

andthemovingaverageforasenseofmomentum.Two-legged

pullbacksthatfollowstrongmomentumarebetterqualitysetups.

However,verystrongtrendstendtohavesinglelegpullbacks.If

youinsistonwaitingfortwo-leggedpullbacks,thenyoumustbe

readytomisssometradesinstrongtrends.

Also,withregardstocountinglegsofpricemovement,thereare

manynuancesthatwedidnotcover.RefertoAlBrooks’Trading

PriceActionTrends:TechnicalAnalysisofPriceChartsBarbyBar

fortheSeriousTrader(WileyTrading)tolearnmore.

7.CandlestickandPivot

PointDayTrading

Strategy

Whatistheonetradingrulethatallcandlestickexpertsagree

on?Usingcandlesticksinisolationisnotprofitable.Hence,many

candlesticktradingstrategiesincludeothertradingtoolsforconfir-

mation.

JohnPerson’scandlesticktradingapproachusespivotpointsfor

confirmation.Inthisreview,weareusingasimplerversionofhis

tradingstrategy.

(Explore:CandlestickTradingStrategies)7.1TradingTools

PivotPoints

Pivotpointsarepricelevelscalculatedusingthehigh,low,andclose

ofthelasttradingsession.Thesepricelevelsarepotentialareasof

priceexhaustion.

Thesearetheformulaforthecommonpivotpoints:

•PivotPoint(PP)=(High+Low+Close)/3

•1stSupportLevel(S1)=(PPx2)-High

•2ndSupportLevel(S2)=PP-(High-Low)

•1stResistanceLevel(R1)=(PPx2)-Low

•2ndResistanceLevel(R2)=PP+(High-Low)

CandlestickandPivotPointDayTradingStrategy

35

Mostchartingsoftwarecanplotthepivotlevelsautomatically.If

youneedtodrawthemmanually,youcanusetheonlinePivotPoint

Calculator.Itcalculatesuptothe4thsupportandresistancelevel.

HighCloseDoji

JohnPersondevisedhisowncandlesticktradetriggersforhis

tradingstrategy.Thebullishtriggeristhehighclosedoji.

Basically,waitforadoji.Then,lookoutforacandlesticktoclose

abovethehighofthatdoji.Thatisoursignaltobuy.

LowCloseDoji

Thelowclosedojiisthebearishversion.Similarly,waitforadoji.

Butinthiscase,wearelookingoutforacandlestickthatcloses

belowthelowofthedojitogiveusthesellsignal.

7.2TradingRules-CandlestickandPivot

Point

LongTradingStrategy

1.Dojiatasupportlevel

2.Buyoncloseofhighclosedoji

ShortTradingStrategy

1.Dojiataresistancelevel

2.Selloncloseoflowclosedoji

CandlestickandPivotPointDayTradingStrategy

36

7.3CandlestickandPivotPointTrading

Examples

WinningTrade-HighCloseDoji

CandlestickandPivotPointWinningTrade

ThischartshowsacompletetradingsessionofESfutureswith5-

minutebars.Pricestartedfallingrightafterthemarketopened.

1.PricesfoundsupportatS2.Thefourdojisandthreebullish

barstanglingaroundS2confirmedthesupport.

2.Thebullishcloseabovethelastdojifiredoffahighclosedoji

signal.

3.S1wasthenaturalfirsttarget.

CandlestickandPivotPointDayTradingStrategy

37

LosingTrade-LowCloseDoji

CandlestickandPivotPointLosingTrade

Thisisanother5-minutechartofESfutures.Itshowspartofthe

previoustradingsession.Thesolidverticallineseparatesthetrading

sessions.

1.PricegappedupandrosestronglythroughR1.

2.TheascentpausedatR2withabearishreversalbar.However,

ithadlittlefollow-throughasshownbythetwodojis.

3.Thisbarclosedbelowthelowsofthetwodojis,settingup

alowclosedoji.Wesoldintoalosingtradeastheupwards

trendcontinued.

7.4Review-CandlestickandPivotPoint

Tradingcandlestickpatternsfoundaroundsupportandresistance

levelsisaneffectivetradingstrategy.Inthisparticularvariant,we

usedJohnPerson’shighclosedojiandlowclosedojiwithpivot

pointlevels.

Dojisrepresentuncertainty.Highclosedojisandlowclosedojisare

break-outsfromuncertainty.Mostbreak-outsfail.

CandlestickandPivotPointDayTradingStrategy

38

Tofindhighclosedojisthatperformbetter,lookoutforthe

following:

•Multipledojisaroundpivotlevelstoconfirmpriceexhaustion

•Nostrongbearishbars

•Failedlowclosedoji

Applythesamelogicforlowclosedojis.

Whenindoubt,itisalwaysbettertowaitformorepriceaction

tounfold.Thisisbecausethebesttradesusuallycomeaftersome

congestionaroundthepivotlevels.

Pivotpointsarepopulardaytradingtools.However,theyarenot

superiortootherformsofsupportandresistance.Donottradereversalswiththemindiscriminately.

ThecompletetradingapproachofJohnPersonincludesmoving

averagesandtheuseofdivergenceforconfluence.Healsouses

anothertradetriggercalledjackhammer.Tolearnmore,referto

hisbooks:

•CandlestickandPivotPointTradingTriggers:Setupsfor

Stock,Forex,andFuturesMarkets(WileyTrading)

•ACompleteGuidetoTechnicalTradingTactics:Howto

ProfitUsingPivotPoints,Candlesticks&OtherIndicators

(WileyTrading)

8.TradingTheEngulfing

CandlestickPatternWith

MarketStructure

Ifyouhavelearnthowtotradecandlesticks,youmustknowthe

engulfingcandlestickpattern.Itsstrikingnameandvisualmakesit

oneofthemostpopularcandlestickpattern.

Reference:JapaneseCandlestickChartingTechniques

Theengulfingcandlestickpatternhastwocandlesticks.Thebody

ofthesecondbarcompletelyengulfsthebodyofthefirstbar.

Itrepresentsatotalchangeofmarketsentiment.

Anengulfingcandlestickintherightcontextoffersahighproba-

bilitytradingsetup.Findingthebestcontextwithmovingaverages

andoscillatorsarereliabletradingmethods.

Learn:CandlestickwithRSITradingStrategy

However,inthisreview,wewilllookatasimplermethodthat

usestheconceptofmarketstructuretofindpointusintheright

direction.Marketstructurereferstotherelationshipofswinghighs

andlowsthatlendstructuretomarkettrends.

8.1TradingRules-EngulfingCandlestick

BullishEngulfing

1.Higherswinghighandhigherswinglow

2.Buywithbullishengulfingcandlestickpattern

3.Highofpatternmuststaybelowpreviousswinghigh

TradingTheEngulfingCandlestickPatternWithMarketStructure

40

BearishEngulfing

1.Lowerswinghighandlowerswinglow

2.Sellwithbearishengulfingcandlestickpattern

3.Lowofpatternmuststayabovepreviousswinglow

8.2EngulfingCandlestickTrading

Examples

WinningTrade-BearishEngulfing

EngulfingCandlestickTradingWinningTrade

ThisisadailychartofAllergan(AGNonNYSE).Itshowsamarket

plungethaterasedmonthsofgains.

1.Thelowerswinghighandlowconfirmedthebeginningofa

downwardstrendwiththeclimaticbearbar.

2.Pricesretracedupimmediatelyafterthedrasticfall.Thebull

movestoppedasabearishengulfingcandlestickemerged.

3.Thebearishengulfingcandlestickpatternformedonthemid-

point(50%retracement)ofthestrongbeartrendbarwhich

providedresistance.

TradingTheEngulfingCandlestickPatternWithMarketStructure

41

LosingTrade-BearishEngulfing

EngulfingCandlestickTradingLosingTrade

ThisdailychartofCardinalHealth(CAHonNYSE)showsabearish

engulfingpatternthatdidn’tfollow-through.

1.Technically,therewasasetoflowerswinghighandlow.

2.However,inthiscase,theswingsdidnotpushoutofthe

sidewaysmovementofCAH.Hence,thelowerhighandlow

structurewasnotareliableindicatorofadownwardstrend.

3.Thebearishengulfingcandlestickpatternledtoalosingshort

trade,aspricesbrokeoutabovethetradingrange.

8.3Review-EngulfingCandlestickwith

MarketStructure

Manytradingstrategiesuseengulfingcandlestickpatternsasa

signalformajortrendreversals.Thatisalowprobabilitystrategy.

However,asweuseengulfingpatternsforcontinuationtradeshere,

wehavebetterodds.

Manycandlesticktraderswaitforonemorecandlestickafterthe

engulfingpatternasconfirmation.Forthistradingstrategy,you

TradingTheEngulfingCandlestickPatternWithMarketStructure

42

shouldnotwaitforconfirmationformosttradingsetups.Waiting

forconfirmationworsensourrewardtoriskratio.

Ifyouwaitforconfirmation,thetradingsetupislikelyinvaliddue

totradingrule3.Basically,thatrulekeepsusawayfromtaking

tradesthathavepoorrewardtoriskratio.

Observingswinghighsandlowsisthesimplestwaytofollow

markettrends.Itbuildsonthemarketstructureanddoesnotneed

anytradingindicator.Whilethisapproachgivessomeconfusing

signalsduringdeeperpullbacks,itssimplicityisstillattractive.

Regardlessofyourtradingstrategy,payingattentiontothemarket

structurewillhelpyoufilterbadtrades.

Read:TakeOnlyTheBestTrades

Congestedmarketsmighthavemanyengulfingcandlestickpatterns

withnofollow-through.Becarefulandavoidsignalsinsideways

market.Lookforclearswingstoavoidcongestion.

Honeyourskillsinreadingthemarketstructure.Itisinvaluablein

anytradingmethod.

9.HikkakeTradeSetup

DanCheslerdiscussedthiscandlesticktradingsetupintheActive

TraderMagazineinApril2004(“TradingFalseMoveswiththeHikkakepattern”).Hikkakemeanstrap,trickorensnare.Thistradesetupseekstoprofitfromfalsebreakouts.

9.1TradingRules

RulesforLongHikkake

1.Aninsidebar

2.Thenextbarhasalowerhighandlowerlow

3.Placebuyorderatthehighoftheoriginalinsidebarforthe

nextthreebars

4.Cancelorderifnottriggeredafterthreebars

RulesforShortHikkake

1.Aninsidebar

2.Thenextbarhasahigherhighandhigherlow

3.Placesellorderatthelowoftheoriginalinsidebarforthe

nextthreebars

4.Cancelorderifnottriggeredafterthreebars

HikkakeTradeSetup

44

9.2HikkakeTradeExamples

WinningTrade-HikkakeTradeSetup

HikkakeWinningTrade

ThisisadailychartofCairnEnergylistedontheLondonStock

Exchange.Wehadaninsidebar,followedbyabarwithahigher

highandhigherlow,providinguswithaHikakkesetup.Weplaceda

sellorderatthelowoftheinsidebar.Twodayslater,pricetriggered

thesellorderandthestockwentplummetingintoprofits.

Thiswasanexcellenttradeastherewasadownwardstrend

followedbyaseriesoffivebullishbars,whichgavereasonablehope

tothebulls.Hence,bullishtraderssawtheinsidebarasalow-

riskentryforatrendreversalupwards.Notethattheinsidebar

hadagoodfollowthrough,butnotgoodenoughtoeventestthe

beartrendbarthreebarsbefore.

WhentheHikkakesetupcamealong,pricewentsouthandstopped

outthebulls.However,thehopeforareversalwasstrongandprices

wentbacktotestourentrypricetwobarslater.Whenthattestfailed

too,thedownwardstrendcontinued.

HikkakeTradeSetup

45

LosingTrade-HikkakeTradeSetup

HikkakeLosingTrade

ThisisadailychartofInternationalPowerPLC.Wesawabearish

insidebarfollowedbyabarwithahigherhighandhigherlow.We

placedasellorderatthebottomoftheinsidebar.Anoutsidebar

triggeredthesellorder.Pricesbegantodriftupwardsafterthatand

welostthetrade.

Thereweretwomainreasonsnottotakethistrade.First,price

brokeabeartrendline(notdrawn)beforeformingahigherlow

(sixbarsbeforetheinsidebar),hintingatabullishcontextwhich

wasbadforshorts.

Next,forashortHikkaketosucceed,wehaveenoughtraders

bettingonabullishbreakoutoftheinsidebar.However,asboth

theinsidebarandthebarbeforeitwerebearish,traderswere

unlikelytobetonabullishbreakout.Moreover,itlookedlikea

doubletop,whichagaindeterredbullishtraders.Withoutbullish

traderstrapped,thisshortHikkakedidnotlookgood.

HikkakeTradeSetup

46

9.3Review-HikkakeTradeSetup

Thistradesetupillustratestheconceptoftrappedtraders.From

whomdoyouthinkyourprofitscomefrom?Youalwaysprofitat

othertraders’loss.Thisisafactofthemarket.

Theinsidebarhasasmallerrangeandhenceasmallerrisk.This

low-riskinsidebaropportunitytemptsmanytraders.TheHikkake

patternthensetsuptoenterwhenthesetradershavetoexitwith

aloss.Understandingthisconceptoftrappedtraderwillhelpyou

findthebestHikkaketradingsetups,whichoccurswhenpricehas

trappedmanybreakouthopefuls.

(Read:4WaystoProfitfromTrappedTraders)However,aninsidebarisacontractioninrangeandmaylead

toatighttradingrangewherepriceactionbecomesratherunpre-

dictable.Thisexplainswhythissetupoftenfailswithanoutsidebar,

whichshowsstrengthinbothdirections.Remember,thecontext

givestheedge.

(Learn:UsingCandlestickPatternswithaMovingAverage)

10.CaptureHighProfits

withLowVolume

PullbackTrading

Strategy

DowTheoryreliesonvolumeasasecondaryindicatortoconfirm

priceaction.Nonetheless,interpretingmarketvolumehasdevel-

opedintoawholebranchoftechnicalanalysis(volumespread

analysis)andspurredmanytraderstocreatevolumeindicators.

Inthisreview,wewillfocusontradinglowvolumepullbacksin

trends.

Likeeverythingelseintrading,absolutevaluesareuseless.Rather

than“low”,weactuallymean“lower”.Welookatchangesin

volume.

Whenvolumeincreases,tradersareinterested.Whenvolumede-

creases,tradersarenotkeen.Themarketdoesnotmovewhen

tradersarenotinterested.So,theideaistofadelowvolume

moves.

10.1TradingRules-LowVolume

Pullback

LongTradingSetup

1.Priceisabovethe20-periodsimplemovingaverage(SMA)

2.Pricebreaksabovethelastswinghighwithhighervolume

3.Pricefallswithlowervolume

4.Buyatickabovethenextbullishbar

CaptureHighProfitswithLowVolumePullbackTradingStrategy

48

ShortTradingSetup

1.Priceisbelowthe20-periodSMA

2.Pricebreaksbelowthelastswinglowwithhighervolume

3.Priceriseswithlowervolume

4.Sellatickbelowthenextbearishbar

10.2LowVolumePullbackTrading

Examples

WinningTrade-ShortSetup

LowVolumePullbackTradingStrategy-WinningTrade

ThisisaweeklychartofSPDRStraitsTimesIndexETF(ES3.SIon

SGX).ItseekstoreplicatetheperformanceoftheSTIwhichisthe

maingaugeofSingapore’sequitymarkets.

Volumeoverlaysaregreattradingtools.Theyallowyoutokeep

tabsonvolumewhileyoulookatpriceaction.Theymitigatethe

riskofignoringpriceactionandfocusingonlyonvolume.Inthis

case,greenmeanshighervolumethanthepreviousbar,andred

meanslowervolume.

Gettheoverlayhere.

CaptureHighProfitswithLowVolumePullbackTradingStrategy

49

1.AftermovinguptotesttheSMA,priceplungeddownbelow

theearlierswinglowwithhighervolume(asshownbythe

greenbackground).Itconfirmedthatbearishmomentumwas

stillinplace.

2.Aspricespulledbackup,itseemedasthoughwewouldnot

havealowvolumetradingsetup.Thepullbackbarsroseup

sharplywithhighervolume.However,thebearishoutsidebar

haltedtheupthrustandsignaledthereturnofthebears.

3.Twobarslater,wegotanupbarwithlowervolume.Itverified

thelackofmarketinterestinpushingpriceshigher.Thenext

barwasasolidbearishreversalbar.Wesoldatickbelowits

low.

Ittook15weeks,butthistradeprovedprofitableastheETFfellto

itsearlierextremelow.

LosingTrade-LongSetup

LowVolumePullbackTradingStrategy-LosingTrade

ThisisadailychartofWalmart.

1.ShortlyafterpricemovedabovetheSMA,itmadeanewhigh

withhighervolume.

CaptureHighProfitswithLowVolumePullbackTradingStrategy

50

2.However,ifweextendedourperspective,wewouldhave

noticedthatpricefailedtoriseaboveakeyresistancethat

sentpricesdownbelowtheSMAearlier.Thisfailuremade

thepicturelessrosy.

3.Wehadalowvolumepullbackfollowedbyabullishreversal

bar.Weenteredatickabovethereversalbar.

Thetrade’smaximumprofitpotentialislargerthantheamountwe

risked.However,thetrenddidnotresumeuntilitmovedbelowour

signalbartotestourstop-losslevel.

10.3Review-LowVolumePullback

TradingStrategy

Weusedbasicvolumetradingprinciplesdirectlytocreatethis

simplelowvolumepullbacktradingstrategy.

Welookedforincreasingvolumeduringbreak-outstoconfirm

themarketmomentum.Then,wetookadvantageoflowvolume

pullbackstotimewhenweenterthemomentum.

(Liketheideaofusingvolumetoconfirmtrendbreak-outs?Check

outtheYumYumcontinuationpattern.)

Thistradingstrategyisextremelyusefulforclarifyingpriceaction.

Whenyoucan’ttellwhatpriceistryingtodo,volumemightshed

somelight.

Payingattentiontolowvolumepullbacksalsoimprovesother

retracementtradingstrategies.Combinethislowvolumeapproach

withthefollowingsetups.

•TheHolyGrail

•Two-LeggedPullbacks

•9/30TradingSetup

CaptureHighProfitswithLowVolumePullbackTradingStrategy

51

Ifyouwanttopickupmoreideasaboutusingvolumeintrading,

havefunwiththese.

•On-BalanceVolume(OBV)TradingStrategy

•ACompleteGuideToVolumePriceAnalysis

•InvestingwithVolumeAnalysis:Identify,Follow,andProfit

fromTrends

11.What’sNext?

Strategiesaloneareuseless.Profitabletradersdonottradestrate-

gies.Theytradethemarket.Understandingthepriceactioncon-

ceptsunderlyingthemarketismoreimportantthanlearningall

thetradingstrategiesintheworld.

Tocomplementthesetradingstrategies,herearesomerecom-

mendedoptions.

11.1HowtoTradewithPriceAction

(eBooks)

YouhavejustcompletedtheStrategiesEditionofthis3-bookseries.

TheKickstarterEditiongivesasolidfoundationwithbasicprice

actionconceptsandtermsthatwillbringyoualongway.

TheMasterEditionexplainsthemoreadvancedconceptsinprice

actiontradingwithafocusonintradaytrading.

Clickheretodownloadthe3-book“HowtoTradewithPrice

Action”seriesforfree(orpaywhatyouwant).

11.2HowtoTradewithPriceAction

(Online)

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11.3DayTradingwithPriceAction

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DocumentOutlineTableofContentsNotices&DisclaimersIntroductionASimpleInsideBarDayTradingStrategyUsingYMFutures

Time-frameForDayTradingYMfuturesTradingRules-SimpleInsideBarDayTradingSimpleInsideBarDayTradingExamplesReview-SimpleInsideBarDayTradingStrategy

TradingConsecutiveUp/DownDaysWithLowerRiskTradingRules-ConsecutiveUp/DownDaysLowRiskEntryConsecutiveUp/DownDaysTradingExamplesReview-ConsecutiveUp/DownDaysLowRiskEntry

Three-BarReversalPatternForDayTradingTradingRulesTradingExamplesReview-Three-BarReversalPatternForDayTrading

NR7TradingStrategyTradingRules-NR7TradingStrategyNR7TradingExamplesReview-NR7TradingStrategy

ASimpleandEffectivePriceActionTradingSetupBasicDefinitionsForPriceActionTradingTradingPremiseTheTrendBarFailureTradingSetupConclusion

Two-leggedPullbacktoMovingAverage(M2B,M2S)TradingRules-Two-leggedPullbacktoMATwo-leggedPullbacktoMATradeExamplesReview-Two-leggedPullbacktoMA

CandlestickandPivotPointDayTradingStrategyTradingToolsTradingRules-CandlestickandPivotPointCandlestickandPivotPointTradingExamplesReview-CandlestickandPivotPoint

TradingTheEngulfingCandlestickPatternWithMarketStructureTradingRules-EngulfingCandlestickEngulfingCandlestickTradingExamplesReview-EngulfingCandlestickwithMarketStructure

HikkakeTradeSetupTradingRulesHikkakeTradeExamplesReview-HikkakeTradeSetup

CaptureHighProfitswithLowVolumePullbackTradingStrategyTradingRules-LowVolumePullbackLowVolumePullbackTradingExamplesReview-LowVolumePullbackTradingStrategy

What'sNext?HowtoTradewithPriceAction(eBooks)HowtoTradewithPriceAction(Online)DayTradingwithPriceActionSelf-StudyCourse

TableofContents

TableofContentsNotices&DisclaimersIntroductionASimpleInsideBarDayTradingStrategyUsingYMFutures

Time-frameForDayTradingYMfuturesTradingRules-SimpleInsideBarDayTradingSimpleInsideBarDayTradingExamplesReview-SimpleInsideBarDayTradingStrategy

TradingConsecutiveUp/DownDaysWithLowerRiskTradingRules-ConsecutiveUp/DownDaysLowRiskEntryConsecutiveUp/DownDaysTradingExamplesReview-ConsecutiveUp/DownDaysLowRiskEntry

Three-BarReversalPatternForDayTradingTradingRulesTradingExamplesReview-Three-BarReversalPatternForDayTrading

NR7TradingStrategyTradingRules-NR7TradingStrategyNR7TradingExamplesReview-NR7TradingStrategy

ASimpleandEffectivePriceActionTradingSetupBasicDefinitionsForPriceActionTradingTradingPremiseTheTrendBarFailureTradingSetupConclusion

Two-leggedPullbacktoMovingAverage(M2B,M2S)TradingRules-Two-leggedPullbacktoMATwo-leggedPullbacktoMATradeExamplesReview-Two-leggedPullbacktoMA

CandlestickandPivotPointDayTradingStrategyTradingToolsTradingRules-CandlestickandPivotPointCandlestickandPivotPointTradingExamplesReview-CandlestickandPivotPoint

TradingTheEngulfingCandlestickPatternWithMarketStructure

TradingRules-EngulfingCandlestickEngulfingCandlestickTradingExamplesReview-EngulfingCandlestickwithMarketStructure

HikkakeTradeSetupTradingRulesHikkakeTradeExamplesReview-HikkakeTradeSetup

CaptureHighProfitswithLowVolumePullbackTradingStrategyTradingRules-LowVolumePullbackLowVolumePullbackTradingExamplesReview-LowVolumePullbackTradingStrategy

What'sNext?HowtoTradewithPriceAction(eBooks)HowtoTradewithPriceAction(Online)DayTradingwithPriceActionSelf-StudyCourse