Trading Price Action (Support, Resistance and Trend Lines)

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Video Transcript:

Hello, traders. Welcome to the eighth module of the Advanced Technical Analysis Course: Putting Everything Together. And in this lesson, we are going to show you how to trade pure price action, how to trade off naked charts. And here’s where we learn how to trade naked charts. And when we talk about naked charts, we’re talking about charts with zero indicators in them. We are only going to use price action to trade.

I know it sounds a little bit difficult but let me tell you something; sometimes it is the easiest way to trade because it’s the simplest way. We are going to only focus on price action, candlestick formations, chart patterns, and levels – either support resistance or trend lines. And because we are going to only going to be focusing on levels, we are only going to be trading breakouts or bounces. And in order to be profitable trading naked charts, you have to practice and understand the information behind every single candle. You need to analyze the weak links and conflicted zones, the shapes of the bodies, and the confirmation of the next candles.

You need to know the information every candle gives you because it’s your only indicator. Patience is key when trading naked, because you need to trade off your levels because you have no other indicator than price itself. And if trading naked is not your thing, you should at least use it at practice because it’s a great way to improve your reading skills. And if you start trading naked charts, for example, and you trade naked charts for a couple of weeks, then you can go and add an indicator or two — maybe an oscillator, maybe a moving average, something.

And because you already have experience trading naked and you already have trades from the past two weeks, you can go back on your trades and see what signals the indicator would have given you, have you had been using them before. So in my opinion, you should at least try to trade naked a couple of times. Trading Price Action Hello, traders. We are back. And as you can see here, we have the G.B.P. / U.S.D. for our chart, and the first thing we are going to do is we are going to draw a few levels. We are not going to be focusing on this part of the chart because the last couple of months have been super choppy and barely untradeable with cable. But, we have a few good examples of trading naked before this horrible choppiness happened.

For instance, here, as you can see here, we moved all the way up and here, we have an area of resistance. We tested it once… let me just thicken this out for you guys. We tested it once, then we had this huge candle that signaled a rejection of the level, but the next candle did not confirm that we could go short on cable right here. So, this is what we’re talking about. I mean, of course, that you can be aggressive and just short after this candle because this week is huge.

This is the 30-week of rejecting this area of resistance and you can be aggressive and just short after this candle. But if you are trading just with price action, you need confirmation from price [inaudible 00:03:42] itself to be able to short it. And, you need the next candle to confirm a play to the downside. And in this case, we don’t have the confirmation so we don’t have a trade. And here, actually, we have another rejection of this area but we don’t have a confirmation that we are moving lower. So, what happens here is that what could be in play is a flag, just like this one. And, a flag is a continuation pattern, right? And, you need to wait for price to break to the upside and close above the flag for you to be able to trade or to go long.

But in this case, since we have such a strong area of resistance just above the flag, we need a break above the area of resistance too and of course, a close above the area of resistance. We have this huge candle. If you measure it, this is a 86 pip candle that breaks with the flag and breaks with the area of resistance. Then, price comes back and tests the area of resistance and support, and here, you can go long and you would have profit around 63 pips, OK? And, remember that when you are trading naked, you should always, always be trailing your stops. And in this case, after this candle closes, you should have trailed your stops below this low and then again, below this area of support. And, you would have been taken out right here at a profit.

Now, price comes back again and now, it’s trying to break this new area of support which was resistance before to the downside. And here, we have a candle that breaks to the downside but the next candle does not confirm that we have momentum to the down side. And, what happens right here? We have an immediate area of support, OK? If you look closely, this candle closes at this area, this candle closes at this area and then, the fourth candle closes at this area. And then, we have a candle with a huge week to the downside, which is approximately a 20 pip week, signaling that price has in fact rejected this immediate area of support. And, this candle right here gives us the confirmation to go long. Our stops should be below this low and our entry should be right here. So, we have a 45 pip stop and in this case, if you trail your stops here, then here, then here, then here, then here, then here, you would have been taken out right here on a 140 pip win.

So, this is basically a 123 risk to reward ratio scenario just by trading off price action itself. Now, if we go back a little more, you can see here that we have a kind of important trend line right here. We made this high, right here, and then, we continued to move lower. Then, we retest this trend line with this week, right here, and we continue to trade lower. And then, we break to the upside. This candle breaks to the upside, OK? And, this candle signals that we have retested the descending support as resistance and now, we can go long.

I would have gone long right here at the retest of this trend line off of this descending support as, or this descending resistance as support with at least a 20 pip stop right here. Now, I would have put my stops right here below this low, which would have made a 35 pip stop and of course, by trailing your stops, you would have been stopped out right here on a 130 pip win. So, this is basically how you read candles and how you read levels. Remember that when you have a breakout, price needs to retest the level back and when you have a breakout you also need confirmation of where you have a bounce of a rejection of a level. You need confirmation from price that actually, it’s going to bounce of it and it’s going to continue in the opposite direction.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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