10 price action secrets

1. Multi-candle patterns are more reliable

The more candles a specific pattern contains, the more reliable it usually is. 3 candle patterns are better
than single candle patterns. 30 candle patterns are usually better than 3 candle patterns.

Here’s an example: 

 Patterns like head and shoulders, double and triple tops are among my favourites, exactly because of this
reason. They consistently result in higher probability trades, which is what we’re all after. It doesn’t mean
that a good pin bar setup won’t work, it just means there’s a higher probability of having these multi-
candle setups resulting in a winning trade.

2. Wait for confirmation

Confirmation means that instead of entering when the pattern completes, it’s often helpful to see if the
price will follow through. To make sure that I get confirmation, I enter just a little bit above or below the
pattern, depending on which direction I suspect the price will go. This way, you can avoid fake-outs where
price reverses on you, leaving the inexperienced traders in the cold.

Seasoned traders know to wait for confirmation.

Also don’t get into the habit of entering trades before the pattern completes. It’s tempting to want to
enter when the last leg of a head and shoulders pattern is almost complete as you would get a better
price, but it’s just as likely that the price reverses before the price action pattern completes, leaving you
with a loss instead of the result you hoped for. Waiting for pattern completion shows patience, which is a
personality trait every trader should have.

Here’s an example:

 Here, we can see an uptrend where suddenly, price seems to stall a little bit. It consolidates sideways until
quite a large pinbar shows up. Now you could do two things: jump in immediately or wait and put a sell
stop a few pips below the low of that pinbar.

These are the candles that follow:

 As you can see, price didn’t hesitate and made a move higher. The impatient trader would have opened
the order and very likely have its stop loss hit for a loss. The pro price action trader however would find
that his sell stop would have never been hit and didn’t have lost any money.
Now which scenario do you prefer?
3. Know where to place your stop loss
Knowing where to place an order is just the beginning. Where do you place your stop loss? Fixed pips
stop loss levels are hardly a good approach since the market volatility can change and every trade should
be looked at within the context of the recent market history. There are a few strategies to place stop
losses like a boss, and I’m going to share them with you.

This is the easiest (and in many situations the best) option. When you see a price action pattern, you take
the high of that pattern, add a few pips (± 5) and place your stop loss there. This is a good strategy
because many times, the price will not go further than the high or low that the price action pattern
created.

The drawback of this approach is that depending on the pattern, your stop loss might be quite large. A
large stop loss means a smaller R:R, so you’re taking more risk to get the same reward. Nevertheless, in
many cases, this is a valid approach. Have a look at this bearish engulfing bar, where you would place the
stop loss a little bit above the pattern.

Stop loss half-way the pattern

 When the pattern is so large that it’s realistically not possible to put your stop loss above the pattern, this
could be another option.
It often happens with pin bars with a very long wick. It is riskier than our previous option though, since
there is more of a possibility that the price will actually retest certain levels, as long as it stays within
bounds of the pattern. But taking into account R:R, this can still be a good approach.

4. Always look for confluence

This is absolutely one of the most important secrets you have to know about. Confluence is everything.
So you’ve found a sweet price action setup. Great! Now make sure it has confluence, meaning that it
coincides with other valid signals that support your trading idea. Here’s a triple top and previous high
confluence:

 These signals can come from a multitude of sources, but here are a few that I sometimes use in my
trading:
Price action pattern happens at a meaningful support or resistance zone
Divergence on RSI
The pattern happens at a fibonacci retracement level
The pattern happens at a pivot point
It’s a break and retest setup
…
The very simple rule is: the more confluence you can have, the better the setup is.

5. Tell a story of what happened

Every chart tells a story. It might be a story of clear direction or a story of messy back-and-forth battling
between buyers and sellers. In a similar way, we can talk about clean price action vs messy price action. It
is up to the trader to find the story and better understand what the market might do.

Unclear story 
 From this chart snapshot, we can create our story:
The buyers were initially in control and pushed the price quite high. Eventually, they hit a resistance zone
and had trouble keeping the price at this level. Sellers regained control and violently pushed price back
down. But the buyers won’t just give up! In the second wave, they move the price back up until – you
guessed it – sellers blocked their path and regained control.
This goes on for a couple of times and is characterised by lots of strong up and down moves, lots of
candles with long wicks combined with candles with large bodies and – most importantly – a general lack
of clear direction. You can define some resistance and support zones, but the price action is rather messy
and it is not something I would trade.

Good story

 Let’s go about creating our story again:

Clearly, in the left part of the chart snapshot, the buyers are in control. We see large green candles
pushing upwards with very little counterweight from the sellers. There is a slight pause on the way up, this
is what we would call a consolidation. The buyers catch a break, so to speak. After this consolidation
period, we again see a strong push upwards. Candles are mostly defined by large bodies and relatively
small wicks.
Now I want you to focus on the sequence of 4 candles at the top of the structure. At some point, we can
see a large bullish candle, followed by a small bearish pin bar followed by a rather large indecision candle
(the one with the long upper and lower wicks) and finally a strong bearish candle. This should already ring
the alarm bell.
Let’s go through it step by step: the large bullish candle is a so-called exhaustion candle. The reason this
candle is the largest of them all is that at this point, the most buyers finally are aware of this uptrend and
so the most buyers are in the game. The imbalance between buyers and sellers is the largest here.
Next we see that at some price level, sellers start to push the price down, but don’t yet succeed (the
bearish pin bar). There are still too much buyers that believe this will go higher, so it takes some more
time. The next candle is what you could call an indecision candle candle, but I would call it the squeeze
candle. Buyers are “squeezed” to keep their position and a lot will sell at a loss. At the same time, sellers
see the price going down and are more convinced they are on the right side of the move. There is no
victor yet and the battle continues until the last candle, where we see a strong move down and the sellers
take control. The tide has turned and they will push the price further down.
What would you prefer to trade? The first or the second scenario?
I know what story gives me the most confidence on the direction of the price.
Clean price action and being able to tell a convincing story about what price is doing will help you in
making better trading decisions. While it may take some time to be able to read charts like this, it is done
purely by interpreting price action.

6. Find the major inflection points

Inflection points are areas that mark the beginning of a fundamentally different behaviour of the price.
They are the big spikes indicating rejection of a certain price level, the turning points in the direction of
the market. It’s characterised by a big concentration of buyers and/or sellers. It’s where the big moves
happen. Inflection points often form a part of your support and resistance as well, and you will see that a
lot of those inflection points regularly line up to be at the same price level.
These points (or areas) are important because there will be a lot of buyers and sellers looking at them.
Lots of buyers and sellers will have orders close by that will trigger. Stop losses and take profits will be
around these levels. It is therefore important that you keep an eye on these levels. But how do you find
them?

Let’s look at an example:

Basically, all areas where one of the following happens:

A major spike
A lot of increased activity
A major turning point in price direction
It takes some experience to know what the important inflection points on a chart are, but usually, the
larger the spike or the stronger the move, the more important the inflection point will be. These points
can line up with other inflection points to form support and resistance zones, which brings us to the next
item.

7. Identify key support & resistance zones

Support and resistance (or S&R for short) are terms used to denote areas where price reverses at its
lowest point (support) and highest point (resistance) on a chart. Often, these zones are “tested” multiple
times as traders look for increased buyer and seller activity around these levels. It’s important to note that
support and resistance are usually not thin lines, but rather zones. This example should make things
clearer:

 The stretched out green rectangles represent support and resistance zones. Support indicates a lower
level and resistance indicates an upper level. The green arrows show where price approached a resistance
zone and (sometimes sharply) reversed. The red arrows show where price approached a support zone and
reversed. Also note that sometimes the same zone can be resistance but then become support after price
has broken through it (and the other way around).

Trending support & resistance

Support and resistance levels do not have to be horizontal either. Here is an example of support and
resistance in an uptrend:

 As you can see, the lower and upper boundaries are here defined by a rising channel. At some moments,
price protrudes the cannel but always comes back. Again, these boundaries are more like zones than
specific lines (but it’s not easy in TradingView to draw rising zones ).
Dynamic support & resistance
Finally, support and resistance can also be defined by dynamic lines, for example using moving averages
or Bollinger bands boundaries (see, it’s not forbidden to use indicators – just know when they’re useful).
Here’s an example of dynamic resistance (note that price can still pierce through it sometimes, it’s not an
exact science):

Support and resistance are of importance since they are often areas of increased buyer and seller activity.
Price is more likely to react to such levels, giving us opportunities to enter the market.
Market reaction to support and resistance levels
I’ve found that horizontal support and resistance lines are usually more reliable than trend lines and
dynamic S&R, but this depends on the situation and the amount of times a specific support or resistance
level has been tested.
On the one hand, the more times a level of support & resistance has been tested, the more people will
have eyes on that level so it will hold more easily. On the other hand, you have to consider the amount of
buyers and sellers for a certain level. Every time a specific level has been tested, less buyers and sellers will
be left to keep the level intact for the next time. This means that after a few tests, price might eventually
break through it after all.
All of these things should be considered when defining your support and resistance. The more you do it,
the better you will get at it.

8. The best price action is clean to the left

When you look at a price action setup on a chart, you will find that the best setups are usually clean to the
left. What I mean by that is that ideally, the candles that precede the price action setup haven’t been
around the same price levels that your price action setup is in.

This chart shows a head and shoulders setup with a lot of “white” space to the left. For the past 30 or so
candles, the market hasn’t touched the price levels the head and shoulders pattern is in. The reason
professional traders prefer these kinds of charts is because when the price hasn’t been trading at the
current levels for a while, it’s likely that there are less traders having pending orders on these levels, which
in turn will make the price action pattern more meaningful.

9. Avoid price action in narrow ranges

Price action in narrow ranges is often less meaningful than when price makes a new high or low, or at
least goes to a level that hasn’t been touched in a while. In narrow ranges, there is often too much buyer
and seller activity going on to make some price action setup valid. This is similar to the previous point
about having charts that are clean to the left of the price action, but expands on that.
A better approach could be to wait for a range breakout and look for price action setups there. A good
way to measure if the price is in a narrow range is by using Bollinger bands. If the bands contract a lot,
there is less and less volatility and price might be ranging. On the other hand, if the bands expand again,
you will often see price trending or making bigger moves:

Also know that the longer price is in a narrow range, the more likely it is that price will be trending
afterwards.

10. Context is everything

Depending on where a price action setup occurs, you should interpret it differently. The same pin bar
could be bullish or bearish, depending if they show up at the bottom of a downtrend or top of an
uptrend, respectively. Not all patterns are also worth taking if they are not preceded by the right price
action and happen at the levels that are in one way or the other of significance. This significance usually
comes from confluent signals, which is the topic of secret 10.

This next chart shows exactly what I mean. There are multiple pin bars on the way up, but they’re not
really meaningful as they don’t occur at levels that are significant. It’s clear that every single one of the pin
bars lacks follow through and instead of a reversal, price keeps grinding higher. Keep in mind that the
context of price action is everything.

Conclusion
Employing price action strategies is one of the most fundamental and powerful ways for a trader to
become profitable. At the same time, it’s often not well understood and there are a quite a few
misconceptions about it. In this guide, I’ve exposed some of the secrets to make price action work for you,
providing you with examples to get the most out of your journey into the price action trading world.
It might take some time to get used to, but I believe price action trading is one of the best ways to
understand markets. This doesn’t even only apply to forex, but a trader who understands price action can
apply this to all kinds of financial markets such as futures, stocks, commodities and more. It’s about
describing and understanding what’s at the core of every market.
Although I’ve tried to be as complete as possible in a single article, I might have not covered all topics you
wanted. If you have questions about a specific part of this price action secrets guide, don’t hesitate to let
me know in the comments.
Good luck becoming a successful price action trader!