Follow Price Action Trends By Laurentiu Damir Copyright © 2012 Laurentiu Damir All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage and retrieval system, without prior written permission of the Author. Your support of author’s rights is appreciated. Table of contents Introduction Trend Corrections Confirmation The Degree Trend change Trade setup Trading system step by step Trade examples Introduction This is a forex system based solely on reading the price action.
It is a trend following system that focuses on points in the market where the trend is about to change its direction, enters the market trying to ride the newly formed trend all the way to its finish line. By doing this in the correct way, this system has the potential to deliver thousands of pips in the long run because shortly after a trend ends, usually another one emerges preceded by a small period of consolidation. It sounds simple, but the key component of this price action system is to correctly identify the current trend, know when a change in direction of the trend is about to take place and then manage the new developing trend in a way that allows you to ride it until it ends. All of this is done by carefully reading the price action without the use of any technical indicators, magical formulas and other nonsense like that.
This is not a very easy thing to do as you must pay great attention to every single detail of the price action, but once you get the hang of it trading this way will make you very profitable in the long run. This book explains with very great detail all of the above and gives you the complete trading system with clear entry, stop loss and exit rules, rules that if respected to the letter, can bring you hundreds of pips for every trade you make. Let us move on now to the core part of this forex system which is the trend. Trend You’ve probably heard a million times by now the saying “the trend is your friend”.
Well, you’ve heard it because it is true, if you want to be profitable in trading you must always know what the trend is because the trend signifies strong conviction from the vast majority of market participants that the fair price, fair value of a specific currency pair should be above or below the current level at that time so they all join forces and push the price up or down creating a trend this way. But let us see what a trend actually is from a technical point of view. A trend is a series of impulsive strong moves in one direction, each of them followed by small corrections or retracements. Let’s visualize a textbook trend: We have in the above pictures an ideal uptrend and a downtrend.
As you can see they consist of strong directional moves followed by smaller moves in the opposite direction which are in fact formed by traders taking some profit from their positions. This alternation of impulsive moves with correctional ones gives birth to what are known as the highs and lows of a trend. For an uptrend the high is formed when the correctional move starts and the low is where the same move ends and price resumes the trend. For a downtrend things work the other way around meaning that a low is formed at the beginning of a correction and a high takes form at the end of the same correction and price resumes the downtrend.
In the examples above you can see that these highs and lows can easily be connected with a trend line. So, to conclude this, we have an uptrend when the price starts to make higher highs (HH) and higher lows (HL) and we have a downtrend when price is making lower highs (LH) and lower lows (LL) just like in the pictures above. Unfortunately, trends so simple and clear like those above are very rare in real market conditions. Let’s see some real trends: We have above one uptrend and one downtrend.
This is just about the closest that real market trends can get to resemble those ideal textbook trends. It doesn’t get any easier than this in real market conditions. However, trends like these two above are rare especially in the forex market which is known to be a very volatile market. Even in these clear trends you can see that there are some variations, there are some smaller trends contained in the bigger trend.
Let’s see now how a more common trend for the forex market can look like: This is a downtrend but you can tell it is more complicated than the previous ones just by looking at it. There are some important rules I designed to help you correctly identify and mark the components of a trend. Here is the first one. Corrections Corrections or retracements can also exist in the form of a trading range that has an upper and a lower boundary where price stalls for a period of time and takes a breath before resuming the trend.
As you learned before, a correction move happens when traders start to take some profit out from the market and, as a consequence of that, price goes for a short period of time in the opposite direction only to resume the trend later on. In this particular example we have a downtrend and the people that are short are starting to take profits. When these sellers start to do this, the people that are convinced that this pair will go upwards from here decide that this is a good level for them to buy this pair. So, in general, a correction move begins because some traders decide to mark some profits and at the same time other traders enter the market in the opposite direction.
In the case above, there weren’t many people buying this pair at the level where the correction started to unfold and so price did not make a classic correction. When a correction looks like a consolidation range it means that the current trend in very strong and it is very likely that it will continue further. In the above example you can see that in the same trend further down we have a different form of correction that basically has its own highs and lows. It has a first impulsive move opposite to the trend direction and at that point you could very well say that this is a classic correction but, as you can see it makes a small correction and then another impulsive move upwards.
Because this correction has its own highs and lows you could make the mistake to consider it as a trend change. However, it stays very well confined into the territory of the last impulsive move down of our trend. It stays well below the last lower high of our trend so it is still a correction even if it develops a higher high. But you will learn more about this we get to the change of trend section.
Corrections can take a lot of forms, these are just the most common ones, the important thing to remember is that for a correction move to be valid it must not be bigger than its impulsive move, it must not surpass the beginning of the impulsive move. Let’s see some examples: You can see on this chart that the correction move has to always be smaller than the last impulsive move. At the bottom of the chart you see an impulsive move but it is followed by a larger move in the opposite direction so that cannot be considered a correction. This is how a trend usually changes direction but we will learn more about this later on.
Okay, I think it is pretty clear what a correction is by now it is not hard at all to see it. Now let us go to the second important rule of a trend and that has to do with correctly identifying highs and lows. Confirmation The rule is that any high or low must be confirmed by the subsequent price action. We know from the above pages that highs and lows are formed at the beginning and finish of a correction move but, for those highs and lows to be valid price has to make another strong impulsive move in the direction of the trend.
By strong impulsive move I mean price has to go well beyond the beginning of the correctional move that made these potential highs and lows. Only after this strong impulsive move happens we can label those potential highs and lows as new valid, confirmed highs and lows in our trend. If this impulsive move does not happen or it is not strong then our potential highs and lows are not confirmed, they are not valid. Valid highs and lows remain the previous ones that have been confirmed by subsequent price action.
Let’s see a chart so you can better understand this: You can see in this chart above that what we have to do to correctly identify the highs and lows of our trend. As the trend unfolds in real time we mark every level where there has been a change in direction as a potential highs or low and then we wait for the next impulsive move down, in this case, to tell us if our potential high/low has been confirmed and it is valid. If the next move down doesn’t go well past the start of the correction then we disregard these levels that we marked as potential high/low and we wait for price action to make its next move and show us where the new and confirmed high and low will be. Let us see another example: Here we have an uptrend , price makes two HH and two HL and then when it looks like it is preparing to make the third pair of HH-HL the pair starts a series of quick up and down moves almost equal in length.
None of these can be considered as a new HH-HL because price doesn’t go up at all, it just stays there and consolidates and so we do not have a new pair of HH-HL here. After this you can see that price does go up with a pretty strong move past the point where correction began but doesn’t go far and retraces back down. We still don’t have a confirmed pair of new HH-HL. In the end, finally price goes very strongly upwards with a massive impulsive move, thus confirming our trend’s new HL and HH.
Things like this are pretty tricky to manage in real time but with the help of this book and with practice it will become easy in time. Let’s see some other examples: In the chart above we have the same situation as in the previous chart. Okay, now let’s see a more complicated one: In the downtrend above you can see that we have a strange trend that has the first and the last two pairs of LH-LL very close to each other. You saw in the earlier examples that we disregard our potential highs and lows if the next impulsive move does not go past the starting point of the correction move or it goes past just slightly.
In situations like in the chart above where things are somewhere in a gray area, meaning that the impulsive move goes past a little bit more than slightly but still not enough to confirm the pair of LH-LL, we do not disregard this pair of LH-LL, we take note of it and after the price makes another pair of potential LH-LL and it is finally confirmed by a strong impulsive move, we label the first pair as well as LH-LL.