Complete Guide to Price Action Trading
- “Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.”—Jesse Livermore
- The first principle of price action trading is going with the flow and path of least resistance on a chart.
- A signal is when something new happens on a chart that shows a change in the price pattern.
- Your trading system contains your complete process, including your watchlist, position sizing parameters, and entry and exit signals. Your trading plan is how you execute the system in the market step by step.
- An entry should be taken when the odds of success are in your favor based on past price action, the candlestick or chart pattern, and momentum. Each entry should be made inside the context of a long-term trading system; otherwise, it is just random.
- Develop a filter to enable you to see what really matters in price action. For example, a trend trader needs higher highs and higher lows for uptrends or lower lows and lower highs for downtrends. Breakout traders need to see the price move outside of a range.
- The signal is the actionable trading information. The noise is a distraction from what is happening in the big picture.
- “Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.”—Bruce Kovner
- Think of your entry signal like the gas pedal and your stop loss as your brakes. Your position sizing is your seatbelt to keep you safe if you must hit your brakes later.
- Remember that the difference between a stop loss and a trailing stop is that the former minimizes risk, and the latter maximizes profits. The signal is the actionable trading information. The noise is a distraction from what is happening in the big picture.
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