In this article we are going to discuss a very successful and result oriented price action strategy which can be termed as “Holy Grail” in forex trading. The strategy consists of 5 key steps as described below;
The first step is to go through the candlestick chart. If you are a scalper then check out 15 minutes to 1 hour timeframes, if you are a day trader then check four-hour and daily timeframes while weekly timeframe should be considered for long term trading. You need to identify the reversal candles in various assets for a potential trading opportunity. Some key reversal candles include bullish pin bar, bearish pin bar, bullish engulfing candle, bearish engulfing candle, hammer, shooting star, doji etc. These reversal candles must be appeared in a counter trend.
Once you have identified a reversal candle, the next step is to verify the legitimacy of potential trading opportunity. For example, you spot a bullish pin bar, now you need to calculate the support and resistance levels with the help of other price action strategies. For example, insert Fibonacci levels into your chart and find out major support and resistance levels. Key Fibonacci levels include 38.2%, 50%, 61.8%, 76.4%, 100%, 161.8% and 261.8%. If candlestick reversal candle is emerged near any of the major Fibonacci levels then it’s one confirmation for the validity of potential trade. However, if you want some more evidence then move on to the next step.
You need to draw trendlines by joining the lows and highs of candles. If the reversal candle is emerged near the channel support or channel resistance then it’s the second evidence for the validity of potential trade opportunity. Similarly, the emergence of reversal candle near horizontal support and resistance levels also provide good trading opportunity. Once you get a valid trading signal through a number of price action tools then the next step is to find out the risk & reward ratio. Generally a ratio around 1.5 or 2 times return is considered good in day trading so place your take profit and stop loss limits accordingly. Never ever enter a trade with negative risk/reward ratio that is less than even 1:1.
After entering a trade it is suggested to always stick to the original trading plan, avoid emotional decisions during the trade. Also avoid overtrading, successful price action traders open 2-3 positions a week or even less than this. A trader should spend most of his time on analysis and research. It is also recommended to avoid trading ahead of major releases and monetary policy announcements. This was a brief account on one of the best and result oriented price action strategies.