Price Action Trading Framework

Price action is the movement of a security's price plotted over time. Price action forms the basis for all technical analysis of a stock, commodity, futures, forex or other asset chart. Short-term traders use Price action formations and certain trends they are good at identifying to give them added confidence as they trade in stocks and options.

Combining price action analysis with trend line to take entries is also a good strategy. The combination of all these studies, and different market conditions give us specific setups. These are called “Trading Setups”.

The Trading setup determines the entry price for us. However, the real work is to understand the psychology behind such setups. If you master the psychology, you will master the quality of that setup. And as you evaluate a quality setup, you will know what to expect, where to enter and exit, where to take the stop-loss. I know that this is not the Holy Grail of trading, but it just makes sense to me personally.

I have traded these patterns, and setups enough to start trusting them with real money. The discretionary part is evaluating the quality of a Trading setup. With a little practice even my 10-year-old son can recognize a price pattern. This part of the exercise is objective. The real learning is assessing the quality of each setup. And that part can be very subjective depending on the skill level of a trader, his/her experience, and may be luck.

Two things we can work on and improve are skill and experience. And the best way to learn is by going through different examples. As you go through these examples, please note that I try to build a story as I get ready to execute an entry. We need to evaluate it in the context of recent market activity, the direction of its overall trend – story building.

If you are going to be taking an entry in time A, you need to start building your storyline from time A minus 10 at least. It means, whatever time frame you are basing your entry in, go back at least 10 candles and evaluate: -

· What was going on?

· Where is the resistance, how far down is the support?

· What did the price do when it was trading their last time?

· Did the price go above a level, but could not close above it?

· Can you figure out something by the way recent candles have taken their shape (Hammer, Long bottom wicks, Trend Candles etc.)

These might seem a lot of factors to evaluate but trust me – it will become your second nature as you read a chart. Of course, it will not happen overnight, but everyone starts from somewhere. So, go ahead and Start now. And Remember, this is not a market secret that will get you Rich. These concepts have existed since long, and everyone words them differently. It is about understanding them, executing them in the right manner, and filtering out the noise. Here is an example :-

Failure of a Congestion Breakout (Short or Put Scenario)

1. Crowded or Congestion area

2. Bullish break out bar

3. Next bar is a Bearish bar (meaning the breakout is busted)

4. Go Short (or buy Puts) few ticks below the Setup or Trigger bar

5. You can cancel the order if it is not triggered within the next two bars

Selling Pressure (Short or Put Scenario)

The area highlighted in yellow shows price where sellers step in. It is represented by long top wicks as the price increases all the way up, but by the close of that time (15 minute shown here) – it reverses back down.

1. Top Wicks in 2 or more candles

2. Third or Last candle is a Bearish candle with top wick (Trigger candle)

Short or Buy puts few ticks below the Bearish candle

All our trading on MommyTrades platform is based on Price Action. Price reflects the psychology and behavior of the traders at that very moment in time. No lagging indicators such as RSI, MACD or Stochs. Success comes when you follow the price, not when your try to predict it.

Last week recap: $AMZN Trade did not trigger. $NFLX and $COUP went very nice above the Long triggers.

This week, here are the 3 possible trades to consider if they get executed.


All the best,

Ainee & UC

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