Success With Price Action Trading

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Success With Price Action Trading

Hello everyone, I’m back finally after a long Christmas and New Years break. I hope that everyone had a wonderful Christmas and a great start to the New Year! While I was away I was reading up extensively on Price Action, in particularly Al Brooks books on price action (they finally came in!). I am nowhere near done reading them, they are huge books, and not the easiest ones on the shelf to read…..by far. Those books contain so much detail about Price Action I feel like I’m sifting through a forest made of mud. Sometimes I have to re-read a page to grasp what was said, and I may read all three of these books over again just to let it sink in. They are hard to read, but they are the best source of what price action is to me. I will be applying some of the concepts from those books in my trading, and I will do it as I read the books, so bear with me it may take a while.

So lets have a look at what I did today, this is the first day I started trading since I stopped when the markets were getting a bit crazy and scarce. One thing I do not do is trade during December; everything just seems sporadic to me so I stay away. Plus it gives me time to focus on family and friends; otherwise my head is stuck in the books lol. Anyways I made four trades today, and three of them were ITM. I am trying to make my trades as simple as possible, no need to be super technical about it, because I’ve tried many strategies with crazy chart setups, colors, bells and whistles, and I find it just distracts me from what’s really happening. I have made a slight modification to my charting setup, nothing big really, just I changed and added an extra EMA to the chart. Those EMA periods are 180 and 365, and I chose those because it gives me the bigger picture of the trend on a smaller time frame, and also price seems to treat the EMA’s as Support/Resistance.

My first trade was with EUR/GBP, and I watched as price bounced a couple times off the 180 period EMA, so I waited for it to approach the EMA again. Once it reached it again I waited for some other form of confluence. We can see that the overall trend was down, and there was a bearish inside bar that formed after the candle that reached the EMA. To help things out further the Value Chart was at the 106 level which also signaled a possible overbought situation. Keep in mind everyone, it may sound like a lot, but it’s easy for me to see all of these hints and it takes me just a couple of seconds to decide. I placed a Put with a 10Min expiry and it was about a 4 pip win.

My second trade was with AUD/NZD. This is the first time I have traded this pair, so I’m not that familiar with it. But I did find confluence and adequate PA to trade it. Here price was reacting to the 180 and 365 EMA, so I waited until it came down and touched one of them. It did and shortly after there was some rejection of that level, and also a pin bar formed, which I highly value. The trend was also changing direction to the north side and the Value Chart had just dipped down below the 94 level, signaling to me a possible oversold situation. All of these gave me enough confidence to place a Call on the 10Min expiry, and ended up ITM by almost 2 Pips. It wasn’t the best win, but price did respect the EMA.

My Third trade was with AUD/USD, and I didn’t win this one. This trade I should have just threw out the window, because I didn’t have all of my criteria met to take this trade, yet I did anyways. I’m still working on my patience, sometimes I get antsy looking for a trade, and I DON’T need to do that, I need to let the market come to me. The only thing I really had going here was there was a small bullish inside bar, and that’s about it. Remember folks, follow your rules.

My fourth and final trade was back with EUR/GBP. It was ITM by about 4 pips as well. My reasoning for this trade was because price was continuously being rejected around .81057. I waited for price to come down and reach that level again, and see if it was going to push though. After price reached that level, it had more rejection, in the form of another Pin bar. I also had confluence from the Value Chart as well as the fact the EMA’s were flattening out, signaling the downtrend was slowing to range for a while.

Well, that’s about it for today, I hope everyone enjoyed my explanations of my trades. If you have any questions please ask!

The Most Successful Price Action Trader in History: Munehisa Homma

Today’s article is going to focus on the man who invented the candlestick chart, candlestick trading patterns, and whom I consider to be the “father” of price action trading and technical analysis. In the past I’ve written an article on the market wizards, but today’s article is about one incredible man who was known as the “God” of the markets in his day; Japanese rice trader Munehisa Homma. He lived from 1724 to 1803 and even if half of the legends about him are true, he was by far one of the most amazing traders in history and we can learn a lot from the stories that surround him.

Homma is rumored to have made the equivalent of $10 billion in today’s dollars trading.

You should probably listen to a “Samurai trader”

Homma is rumored to have made the equivalent of $10 billion in today’s dollars trading in the Japanese rice markets. In fact, he was such a skilled trader that he served as an important financial advisor to the Japanese government at the time and was later raised to the rank of honorary Samurai. I don’t know about you, but I think it’s pretty safe to say we can learn something from a guy who was such a great trader that he become a Samurai because of it, to me that is totally cool in what is probably a semi-nerdy kind of way. Rumor has it that he once had 100 profitable trades in a row….granted there’s a bit of an advantage when you are basically the “inventor” of technical analysis and no one else really knows about it yet…but clearly Homma was a force to be reckoned with in the markets and his legend lives on today.

Homma began recording price movements in the rice market on paper made out of rice plants. He laboriously drew price patterns on his rice parchment paper every day, recording the open, high, low and close of each day. Homma began seeing patterns and repetitive signals in the price bars he was drawing and soon started to give them names, including some of the popular Japanese candlestick patterns that you are probably already familiar with like Spinning tops, Stars, Doji’s, Hanging Man and others, each pattern clearly conveyed a specific meaning and Homma began using these patterns to predict the future direction of rice prices. The discovery of the price action patterns left behind by the movement of rice prices gave Homma a huge advantage over other traders in his day, and combined with his passion and skill for trading, this advantage is what allowed him to become one of the most successful traders ever, if not thee most successful trader ever.

To any of you reading this who may still be “on the fence” about the relevancy and effectiveness of price action trading, consider the fact that it was used centuries ago by Homma and others and it’s still effective in today’s markets. I cannot think of any other trading method, system, indicator or robot that has been effective for that long and stood the test of time as pure candlestick price action trading has. Whether or not Homma knew the term “price action” in his time is irrelevant, he was clearly trading from the pure price movement of the market and he was the first person who realized the advantages of focusing one’s attention on a market’s price movement to predict its direction.

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Homma realized price action reflects market psychology, and used it to his advantage

In Homma’s book “The Fountain of Gold – The Three Monkey Record of Money”, which he wrote in 1755, he says that the psychological aspect of the market is critical to trading success and that traders’ emotions have a significant influence on rice prices. He notes that this can be used to position oneself against the market when all are bearish, because at that time there is cause for prices to rise (and vice versa).

In other words, Homma was the first trader to realize that by tracking the price action in a market he could actually “see” the psychological behavior of other market participants, and make use of it. As it relates to the price action strategies that I teach, this could mean for example that after a large run up or down in a market a long-tailed pin bar signal can give rise to a large move in the opposite direction. I imagine that Homma was the first person to trade a pin bar signal and I’m sure when he realized the power of the signal he got goose bumps all over his body.

Homma also probably took advantage of false break trading strategies by the sounds of what he wrote in his book. I’m sure that he quickly identified patterns similar to what I teach as the fakey setup and saw that they sometimes form at major market turning points just as the last market participants have finally committed to a direction. The tendency of people to jump into a market when it “feels” safe has probably been around ever since Homma’s trading days back in the 1700’s, and it has not changed over the centuries. Homma probably realized this as it’s very evident by studying the price action of a market and using a big of logic and commonsense. In essence, Homma was the first true “contrarian” trader and this is why he is one of my heroes to this day. Using the price action of the market and logical thinking, we can often find high-probability entries into the market while most other market participants are stuck in a cycle of trading mainly with their emotions and from what makes them feel good.

Homma would definitely agree that what “feels” like the “surest” trade is often the wrong one, and once he could start to see the emotion of market participants via candlestick price patterns, this likely became very obvious to him.

The trend has been your friend or over 250 years, so stop fighting it!

Homma described the rotation of Yang (bull market), and Yin (bear market) and claims that within each type of market is an instance of the other type.

I can only imagine the amazement that Homma must have felt when he started to see price trends emerge over his years of drawing price patterns on his rice parchment paper. It must have instantly set off a euphoric feeling in him because he likely realized very quickly that trading with the trend would be the easiest way to make money in the rice markets.

To this day, trading with the trend is still the easiest way to trade. Traders try to fight it by continuously trying to pick tops and bottoms, but trend-trading has long been the easiest way to make a lot of money in the markets. Simply put, there’s a reason for strong trends, so it’s illogical to fight the trend. Homma was the first trader to be able to identify high-probability entry points in a trending market via simple price action patterns. This method has worked for literally over 250 years, and why so many traders still try to fight it and over-complicate it is beyond me.

If Homma was alive today and he saw all the messy indicators and trading robots people put on their charts, he would probably get a confused look on his face and wonder why anyone would behave so illogically and ignorantly when everything they need to find high-probability entries into the market has been right in front of their face the whole time.

Mirrors don’t lie

Homma wrote several books in his time, which are apparently out of print now, but the candlestick patterns he described in his books became known as the “Sakata Rules”. These Sakata Rules became the basis of modern candlestick charting and thus most of what Homma wrote about is still relevant today. The fact that the first person to trade from a price chart and arguably the most successful trader of all time was a price action trader, is really not surprising to me. What Homma discovered, and what many of us now know, is that the price movement on a “naked” price chart reflects everything about a market.

Everything you need to know to find high-probability entry signals into virtually any market is available on a natural price chart. If you want to see your reflection in the mirror, you just go to a mirror and look at yourself. You do not put a wig on or throw a paper bag over your head. Similarly, if you want to see what a market is doing, you simply need to look at its price chart. You do not need to cover up the most accurate reflection of a market with indicators and other nonsense. Munehisa Homma discovered this simple truth about markets over 250 years ago, and to this day many other traders, including myself, are still using pure price action to trade the markets, because there is simply no better way to trade. If you’d like to learn how I trade with price action candlestick patterns and how to trade in-line with time-tested concepts very similar to those Homma and other traders have been using for centuries, checkout my price action trading course for more information.

Works Cited- “Munehisa Homma.” Wikipedia. 03 Jan. 2020. Web. 18 Apr. 2020.

An Introduction to Price Action Trading Strategies

Price action describes the characteristics of a security’s price movements. This movement is quite often analyzed with respect to price changes in the recent past. In simple terms, price action is a trading technique that allows a trader to read the market and make subjective trading decisions based on the recent and actual price movements, rather than relying solely on technical indicators.

Since it ignores the fundamental analysis factors and focuses more on recent and past price movement, the price action trading strategy is dependent on technical analysis tools.

[ Many day traders focus on price action trading strategies to quickly generate a profit over a short time frame. For example, they may look for a simple breakout from the session’s high, enter into a long position, and use strict money management strategies to generate a profit. If you’re interested in day trading, Investopedia’s Become a Day Trader Course provides a comprehensive review of the subject from an experienced Wall Street trader. You’ll learn proven trading strategies, risk management techniques, and much more in over five hours of on-demand video, exercises, and interactive content. ]

Tools Used for Price Action Trading

Since price action trading relates to recent historical data and past price movements, all technical analysis tools like charts, trend lines, price bands, high and low swings, technical levels (of support, resistance and consolidation), etc. are taken into account as per the trader’s choice and strategy fit.

The tools and patterns observed by the trader can be simple price bars, price bands, break-outs, trend-lines, or complex combinations involving candlesticks, volatility, channels, etc.

Psychological and behavioral interpretations and subsequent actions, as decided by the trader, also make up an important aspect of price action trades. For e.g., no matter what happens, if a stock hovering at 580 crosses the personally-set psychological level of 600, then the trader may assume a further upward move to take a long position. Other traders may have an opposite view – once 600 is hit, he or she assumes a price reversal and hence takes a short position.

No two traders will interpret a certain price action in the same way, as each will have his or her own interpretation, defined rules and different behavioral understanding of it. On the other hand, a technical analysis scenario (like 15 DMA crossing over 50 DMA) will yield similar behavior and action (long position) from multiple traders.

In essence, price action trading is a systematic trading practice, aided by technical analysis tools and recent price history, where traders are free to take their own decisions within a given scenario to take trading positions, as per their subjective, behavioral and psychological state.

Who Uses Price Action Trading?

Since price action trading is an approach to price predictions and speculation, it is used by retail traders, speculators, arbitrageurs and even trading firms who employ traders. It can be used on a wide range of securities including equities, bonds, forex, commodities, derivatives, etc.

Price Action Trading Steps

Most experienced traders following price action trading keep multiple options for recognizing trading patterns, entry and exit levels, stop-losses and related observations. Having just one strategy on one (or multiple) stocks may not offer sufficient trading opportunities. Most scenarios involve a two-step process:

1) Identifying a scenario: Like a stock price getting into a bull/bear phase, channel range, breakout, etc.

2) Within the scenario, identifying trading opportunities: Like once a stock is in bull run, is it likely to (a) overshoot or (b) retreat. This is a completely subjective choice and can vary from one trader to the other, even given the same identical scenario.

Here are a few examples:

1) A stock reaches its high as per the trader’s view and then retreats to a slightly lower level (scenario met). The trader can then decide whether he or she thinks it will form a double top to go higher, or drop further following a mean reversion.

2) The trader sets a floor and ceiling for a particular stock price based on the assumption of low volatility and no breakouts. If the stock price lies in this range (scenario met), the trader can take positions assuming the set floor/ceiling acting as support/resistance levels, or take an alternate view that the stock will breakout in either direction.

3) A defined breakout scenario being met and then trading opportunity existing in terms of breakout continuation (going further in the same direction) or breakout pull-back (returning to the past level)

As can be seen, price action trading is closely assisted by technical analysis tools, but the final trading call is dependent on the individual trader, offering him or her flexibility instead of enforcing a strict set of rules to be followed.

The Popularity of Price Action Trading

Price action trading is better suited for short-to-medium term limited profit trades, instead of long term investments.

Most traders believe that the market follows a random pattern and there is no clear systematic way to define a strategy that will always work. By combining the technical analysis tools with the recent price history to identify trade opportunities based on the trader’s own interpretation, price action trading has a lot of support in the trading community.

Advantages include self-defined strategies offering flexibility to traders, applicability to multiple asset classes, easy use with any trading software, applications and trading portals and the possibility of easy backtesting of any identified strategy on past data. Most importantly, the traders feel in-charge, as the strategy allows them to decide on their actions, instead of blindly following a set of rules.

The Bottom Line

A lot of theories and strategies are available on price action trading claiming high success rates, but traders should be aware of survivorship bias, as only success stories make news. Trading does have the potential for making handsome profits. It is up to the individual trader to clearly understand, test, select, decide and act on what meets his requirements for the best possible profit opportunities.

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