Higher Probability Trades with Price Action
There are three important implications about a price action approach.
1 – The Pattern
First of all, it’s all about the pattern itself. There must be a valid pattern in order to be a valid signal. There must be no doubt about the signal, there is or there is no signal. Should there be any doubt whether the pattern is valid or not, then it is probable that the pattern is not valid.
2 – Near an important level
The second aspect is all about where the pattern is formed. Patterns that are formed closer to important support and resistance levels have a great impact in the market.
When a valid pattern is present near an important support or resistance level, and at the same time it is longer than previous market action, then the pattern is more likely to indicate future market direction.
Support and resistance levels are points where the balance between the supply and the demand changes. Traders and investors tend to be more emotional at these levels, making the pattern more significant.
This process takes advantage of the unfulfilled desire of traders to take the market lower or higher. At this point, usually traders tend to act more aggressively and also takes advantage of the unfulfilled desire of traders to take the market to the next level. At these levels, traders tend to act aggressively, but the opposite force is just stronger.
3 – Significance
The last and most important aspect of a price action approach is the significance of the pattern. The more significant the pattern is, the more impact it will have.
How do we measure the significance of any pattern?
The longest the candlestick the more significant it is. We take as a benchmark prior market behavior. When a reversal pattern is longer than usual, it tends to produce more impact in future price movements.
To increase the accuracy of the system we need to see more volume than usual, but is difficult to get a volume reading in an OTC market, that’s the reason we trade only when candlesticks are larger than usual.
Candlesticks could be large because one of the following reasons:
A lot of traders (or banks, etc) are trading in the same direction
A few traders (or banks, etc) are trading big in the same direction
We will go into more specific detail on how to apply this when we go over the systems that we at StraightForex are using to generate consistent profits
Well by now you will be getting an idea of all the variables that can be combined into an effective system – makes the head spin doesn’t it!
The good news is that we at StraightForex believe in simplicity and doing a few things VERY WELL. There is far to much over complication and many of the indicators show the same thing so do not all need to be mastered – it is up to you to chose the one or ones you like the most and work toward becoming very familiar with those., Although true price action approach aficionados do without indicators almost entirely and rely on the price action at certain levels. Again it will be up to you to choose the approach you are most comfortable with.
Anyway, no need for a decision now as plenty more to learn before you need to make your mind up. We advise that on an ongoing basis you take a look at some of those indicators on the charts and see which ones you have confidence in. This will help you shortlist your favorites and perhaps with that experience you may see that anything an indicator shows is already reflected in the price action.