Why is Price Action Trading more Profitable?
Hello, traders. Welcome to the Price Action course, and the first module, Introduction to Price Action Trading. In this lesson we are going to ask ourselves one very important question. Why is price action trading more profitable than a semi-automated style of trading? To answer these questions we are going to first look at how to profit from the [inaudible 00:00:24] national market, and how we actually profit from it. Profiting from the financial markets is not easy, and starting off on the wrong foot makes it even more difficult. When I talk about starting on the wrong foot, I’m talking about jumping indirectly on maybe a single service, without understanding what goes behind it, how the signals are being given out, what the system recognizes as a bull or bearish signal, and, of course, what market you are trading.
When you start off on the wrong foot, it makes it more difficult to come back and really understand what is going on behind all these bars. Price Action Trading aims to simplify your chart setups, executions, and mind. When you have a clearer chart in front of you, you have clearer setups, you have better executions, and you have a clearer mind. A clearer mind gives you the opportunity to monitor a much wider array of financial assets.
The first thing we need to learn is patience. We are not going to follow a system and jump in blindly every time we get a signal. On the contrary, we are going to learn how to read the markets and where to find high probability trades with very little risk. And we are going to move from automation to discretion, meaning that we are no longer going to trade off of buy and sell signals, but we’re going to use our discretion to really decide whether to take the trade or not. Rather than blindly following signals, we are going to understand the structure of the market. We are trading, we are going to locate highly conflicted zones and wait for price to hit them. And when price hits these zones, we are going to analyze what’s behind the candles. Of course, we are going to decide whether we take a trade or not based, on the confirmation that we get from them. The confirmation for the trade can come in forms of rejection, and/or traps. We are going to go really into depth on these kinds of setups further on the course.
Another question that is asked a lot is, where does the money come from? The interesting part of this lesson is that you are going to realize that the money has always been there, you just didn’t know how to collect it. To let you understand what I’m talking about, I’m going to run some numbers and an example here. Let’s assume that you trade with a semi-mechanical system that has a 70% winning rate and aims at a 40 pip profit while risking 40 pips. This means that you have a one-to-one risk-to-reward ratio every single time you take a trade, which is not that bad on a 70% winning rate system.
Let’s assume that we are only trading the Euro or U.S. dollar and that you had 25 signals in the last week, both long and short. This means that if the market was trending, you took some trades against the trend, which I don’t totally feel comfortable about when sculping the markets. I’m also going to into depth on why I don’t like to trade against the trends when you’re sculping the markets further on these scores. For the time being, let’s assume that the system gives you 25 signals and that you traded them all. Of course, this is impossible because you are not trading 24/7 and you are not 24/7 in front of your charts, so there’s just no way you could have taken 25 signals.
For the sake of this example, let’s say you did. And if you did, that means that you would have made a total of 400 pips in the week with 25 trades. Why? Because you had a 70% winning ratio on the 25 trades and on those winning trades you made 40 pips, meaning that you had a total of 700 pips on the plus side. But on the negative side – meaning all the trades that you did lose, you lost 300 pips, giving a total net profit of 400 pips, of course, minus commissions.
The thing about Price Action is that you could have yielded the same result in just one single trade. Why is that? Because we don’t look at trading inside of a trend. We look for the corrections and we look for, even more, the projections. With Price Action we filter out the no’s. We decrease our exposure and we make consistent profit with a much lower risk factor. This basically means that we are making the same amount of pips with just one trade, and a much less riskier environment than making 25 trades inside of a week.
Now, this is where the real money comes from. Lowering your risk to the minimum and riding long trends until the market tells us not to. Let’s go through an example. This is by no means a system that gave out these signals. These are just arrows that I inserted on my charts on the highs and the lows on this chart. As you can see, there are a lot of highs and lows on these 600 people. By trading with Price Action, you could have taken maybe 500 pips out of this 600 pip move and you would have risked around 100 pips, maybe 80 pips if you were trading from the top of it. We are going to teach you how to do this. It’s really less exhausting for the mind just to let it ride all the way down than to be taking every single dip and rally.
Of course, the mentality of selling the rally and buying the dip comes in play when trading with Price Action, but we are not looking to do it in every single dip and rip. We are going to understand what is market noise, what are just profit taking corrections, and what is really at change in the market structure.