{"id":67663,"date":"2015-02-05T03:01:35","date_gmt":"2015-02-05T08:01:35","guid":{"rendered":"http:\/\/countingpips.com\/?p=67663"},"modified":"2015-02-05T16:20:31","modified_gmt":"2015-02-05T21:20:31","slug":"the-4-problems-with-price-action-trading-and-how-to-fix-it","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/02\/the-4-problems-with-price-action-trading-and-how-to-fix-it\/","title":{"rendered":"The 4 Problems With Price Action Trading And How To Fix It"},"content":{"rendered":"
February 5, 2015<\/div>
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Article by Rayner Teo<\/strong><\/p>\n

Price action trading is one of the most popular trading strategies around due to it\u2019s simplicity and fabulous internet marketing.<\/p>\n

From my early days of trading I have been trading this\u00a0approach\u00a0religiously, and I can say that price action trading built the foundation\u00a0of trading in me.<\/p>\n

However despite trading it for 4\u00a0years,\u00a0I wasn\u2019t consistently profitable with this approach.<\/p>\n

After much reflection, I realized there are 4\u00a0problems with price action trading that was holding me back. If you are a struggling price action trader, then\u00a0I would like to share with you what these 4\u00a0problems are and how you can fix\u00a0it.<\/p>\n

1)\u00a0Low\u00a0number of trades<\/strong><\/h2>\n

Price action trading requires patience due to it\u2019s low trading frequency. This is because it requires the trader to wait for confirmation at support &\u00a0resistance.\u00a0The confirmation could be in a form of\u00a0Pinbar or Engulfing pattern.<\/p>

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However by waiting for confirmation, traders tend to miss trading opportunities\u00a0when price simply \u2018touch and go\u2019 at\u00a0support & resistance levels.<\/p>\n

I know it is heart wrenching to watch price bounce off your levels without being in the trade.\u00a0So what\u00a0can you do?<\/em><\/p>\n

\"price<\/a>Missed opportunities because of confirmation<\/em><\/p>\n

One way you can go about overcome this problem is to not wait for confirmation. That\u2019s right,don\u2019t wait for confirmation.<\/strong><\/p>\n

What you can do\u00a0is identify your levels\u00a0as per normal and trade without price confirming at your levels. You can<\/em> try\u00a0this on a demo.<\/em><\/p>\n

After which compare it with your own trading account and see if there\u2019s any difference in frequency of trades and profitability.\u00a0You may be\u00a0surprised at the results.<\/em><\/p>\n

2) Waiting\u00a0for your levels<\/strong><\/h2>\n

Price action traders would always wait for price to come to their\u00a0levels\u00a0as\u00a0they don\u2019t chase the market. Some of these levels could be support & resistance, or previous resistance turned support etc.<\/p>\n

But in a trending market, often price\u00a0does not come back to retest these levels due to the strong underlying momentum. This cause price action traders to be on the side line while the market is making a directional move. How?<\/em><\/p>\n

An example below<\/p>\n

\"price<\/a>Usdjpy daily \u2013 The retest that never came<\/em><\/p>\n

One way to overcome this problem is to go down into the lower time frame<\/strong> and look for trading\u00a0setups.<\/p>\n

If price is making a parabolic move\u00a0the daily timeframe, drill down to the 1 hour timeframe to\u00a0find\u00a0trading opportunities.<\/p>\n

On the lower time frame you will notice that it has it\u2019s own set of support & resistance, you can then look to trade these levels with the bias from the\u00a0higher time frame.<\/p>\n

Below you can see 3 possible trading\u00a0opportunities\u00a0that are not\u00a0apparent on the daily timeframe.<\/p>\n

\"1<\/a>Usdjpy 1 hour \u2013 Trading opportunities on the lower time frame<\/em><\/p>\n

3) Poor\u00a0placement of stops<\/h2>\n

If you read most trading books or attend trading courses, you will be taught to place your stops just beyond the highs\/lows of the candle.<\/p>\n

Thus it is no surprise that\u00a0traders tend to place their stops\u00a0at obvious levels.\u00a0E.g.\u00a0a few pips beyond the wicks of the candle, just above resistance,\u00a0just\u00a0below support or at round numbers.<\/p>\n

Do know that the dealers are not stupid\u00a0and they can have an educated guess where your stops are without looking at the order book. Yes those juicy support & resistance levels.<\/em><\/p>\n

Because of this you will find yourself being stopped out of trades unnecessarily only to watch price go back in your favor. Rings a bell?<\/em><\/p>\n

An example below<\/p>\n

\"stop<\/a>Cutting your trade\u00a0at support<\/em><\/p>\n

A solution to this problem would be to place your stops\u00a0away from support & resistance,\u00a0<\/strong>to prevent\u00a0dealers trying to trigger your stops.<\/p>\n

An approach you can consider is to use\u00a0the ATR<\/a> indicator to gauge how far\u00a0away your stops\u00a0should be.<\/p>\n

This way if you do get stopped out, it\u2019s a good indication that your support & resistance has failed to hold up.<\/p>\n

4)\u00a0Size of candlestick<\/strong><\/h2>\n

From a price action trader\u2019s point of view, candlestick patterns\u00a0serve as confirmation to whether a level is holding up.<\/p>\n

Candlesticks like the Pinbar and Engulfing pattern comes in all shape and sizes. But\u00a0are they created equal?\u00a0<\/em>No. Because the larger the Pinbar or Engulfing pattern,\u00a0the stronger the price rejection.<\/p>\n

But what if I\u00a0get a small looking Pinbar that lacks conviction, would I\u00a0still trade\u00a0it? How do I\u00a0quantify the size of the Pinbar to trade?<\/em><\/p>\n

One way to overcome\u00a0this issue is\u00a0to use the ATR indicator to gauge\u00a0the volatility of the market I\u2019m trading and compare it with\u00a0the range of the Pinbar.<\/p>\n

Technically speaking I will look for the Pinbar to have a range of at least 1.5 times the ATR.<\/strong>The larger the range compared to the ATR, the more conviction of the underlying move.<\/p>\n

Looking at the chart below, the given ATR for that period is 45 pips.\u00a0Then notice the range of Pinbar 1 is 45 pips, I would skip this pinbar as it is not 1.5 times the ATR.<\/p>\n

Next, Pinbar 2 has a range of 85 pips! It is more than 2 times the ATR and tells me that there is conviction behind the move. I would choose this Pinbar to trade instead.<\/p>\n

This method would allow you to identify\u00a0Pinbar or Engulfing patterns\u00a0which signifies stronger rejection at price levels.<\/p>\n

\"atr\"<\/a>Only the range of Pinbar 2 is more than 1.5 times ATR<\/em><\/p>\n

Conclusion<\/h2>\n

There are many mentors out there teaching price action trading, but seldom do they discuss\u00a0the issues\u00a0that come with it.<\/p>\n

I hope this post will give you heads up to\u00a0the problems you may face and how you can overcome them.<\/p>\n

To sum it up<\/p>\n

If you have low number of trades and want to increase it, consider trading without confirmation.<\/p>\n

If price doesn\u2019t come to your level in a trending market, consider trading on a lower time frame.<\/p>\n

If you find yourself being stopped out repeatedly, consider placing your stops away from support & resistance.<\/p>\n

If you do not know if the candlestick\u00a0pattern is large\u00a0enough, consider using the ATR indicator to quantify it.<\/p>\n

So, did you face any problems with price action trading?<\/em><\/p>\n

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Article by Rayner Teo, tradingwithrayner.com<\/a><\/strong><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Article by Rayner Teo Price action trading is one of the most popular trading strategies around due to it\u2019s simplicity and fabulous internet marketing. From my early days of trading I have been trading this\u00a0approach\u00a0religiously, and I can say that price action trading built the foundation\u00a0of trading in me. However despite trading it for 4\u00a0years,\u00a0I […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-67663","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/67663","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=67663"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/67663\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=67663"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=67663"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=67663"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}