Time to get real! Everything you have learned about price action, trends, candlesticks and support and resistance will now come together in an actual trading strategy.
So far I’ve shown you the three basic components of price action trading:
How do we bring these elements together in a trading strategy and more importantly; what is the logic behind each step in this strategy? Because you really have to understand every step and master them to be able to trade this strategy properly.
Because if you do not understand every moving part, you will make mistakes and the more mistakes you make, the lower your win rate will be. And the lower your win rate, the lower your profit will be and the less self-confidence you will have, which will cause you to make more mistakes, etc. etc.
So pay close attention and think of the bulls and bears story. Always ask yourself the most important question. Do you remember which one?
Who is in control of the price?
If you did not remember that question, stop now and start over with this post . After all, that question is more important than everything else in trading or investing. Every time you look at a chart you have to ask yourself this question.
Let’s start from the beginning. Almost everything in trading starts with a trend.
Why is this trend so important? If you look at a trend and you ask yourself the question; who is in control of price? Then the answer is obvious and irrefutable.
In the trend above buyers are clearly in control, because we see higher highs and higher lows. The bears have nothing on the bulls at the moment.
But now we encounter resistance…
And when the price meets resistance, the trend seems to be stalling.
What is the story of price here?
We were in a market where buyers were in full control and now we reached a resistance zone where price seems to be stalling. A new candle has been created that indicates indecision.
The indecision candle has a long wick at the top and a short one at the bottom. The body is small and even turned red instead of green. Which tells us it closed lower.
Who is in control of the price here?
Nobody! Buyers have obviously lost control for now, but sellers have not yet taken over. There is just indecision.
The story so far is that we had a nice bullish trend and we are now touching resistance. We know this is an area where sellers are waiting. Buyers now come across sellers and what happens next?
The fight for control
A battle begins. Buyers can’t push further up, but sellers are not yet strong enough to push price down. Indecision forms and that’s confirmed by the candle that printed in the resistance zone.
At this point price can still go in all directions. It can break resistance, it can move sideways (range) or it can turn direction and come down.
If sellers take control and push the price down far enough, we’ll see the start of a counter trend reversal.
The counter trend reversal trade is one of the setups I like to take and if you play it right, these trades can be very profitable.
Above you see the setup of this reversal trade. I will talk extensively about stops, entries and targets later. For now I want you to see the steps behind these trades.
- The preceding trend
- Resistance zone
- Indecision candle in the resistance zone
- Trend reversal
All of this this together tells us a story and that story is …
Buyers were in control of price until they encountered resistance. When price hit the resistance zone, they lost control over price. We saw a strong indecision candle, that told us that sellers fought back to gain control over price.
The next candle (after the indecision candle) told us sellers won the battle and they managed to push price down. They broke the lowest point of the indecision candle and made a lower low and lower high. This showed us that the sellers were strong and it turned out to be true, because they pushed price down considerably. Ultimately hitting our target.
And it works the same the other way around for a long reversal! 🙂
Let me know in the comments below if you have any questions, I’m happy to help.