Your ability to properly define support and resistance levels on your charts is directly correlated to the odds of you becoming a successful Forex trader.
For those of you who have followed me for some time, this statement should sound familiar. But even if this is “old news” to you, it doesn’t make it any less important. In fact, just the opposite is true.
Trying to trade the Forex market without properly defined levels is like trying to drive a car with your eyes closed. While it can be done for a short while, it’s only a matter of time before you crash.
The technique you are about to learn will help you confirm the levels on your chart by using the swing highs and lows that occur on the higher time frames. It’s a simple technique but one that is extremely powerful when used properly.
So what exactly is confirming price action? Put simply, it’s any movement in price that signals an increase in buying or selling at a key level of support or resistance.
The primary function of confirming price action is to inform us whether a level is likely to hold. The pin bar should immediately come to mind as the formation that we use for such a signal.
Notice how the bullish pin bar to the right tells us that there is heavy demand surrounding this key level of support. This is a perfect example of confirming price action.
We all know what a pin bar looks like and most of you are familiar with the significance of it. But what about all the other movement we see each and every day? Can that also be used to our advantage?
Absolutely! That’s what this lesson is all about.
What are we actually doing when we trade price action? Are we simply looking for bullish or bearish pin bars at key levels or is there more to it?
In fact, there is much more to it!
A great price action trader doesn’t just sit around and look for pin bars. A great trader uses all price movement to aid in his or her evaluation of the market. This includes using swing highs and lows to your advantage.
As usual, the technique I’m about to show you is extremely simple but can greatly add to your confidence when putting on a position. I especially like to use this technique when pyramiding into a winning position. You will see why in a moment.
The best way to illustrate the technique is by example. Below is a chart of EURGBP. We will begin with the daily time frame and work our way through each level of support that you see below.
Notice the wedge pattern in the chart above followed by three levels of support. It should be noted that these levels were drawn prior to the breakout of the wedge pattern. As I always say, marking key levels of support and resistance should always be the very first thing you do when you open a new chart.
The next chart shows the bearish price action that gave us the signal to go short. This setup was discussed as it unfolded inside the Daily Price Action member’s community.
Notice how the first key support level was found using the swing low that started the wedge formation. This is always a great place to take profit when trading wedge breakouts.
Now for the really fun part of this lesson.
The chart below shows what happened after the wedge broke down. Be sure to really study the following chart for a few minutes and even come back to it on several occasions if you must. It’s key for you to understand what is happening here if you truly wish to become a successful Forex trader.
What you see above is the heart and soul of price action trading. As mentioned previously, being a great Forex trader isn’t just about identifying favorable pin bars or inside bars at key levels. It’s about being able to “read” the price action using the levels the market gives you.
Remember how I said the key levels above were drawn prior to the market testing them? In other words, they were based on previous price action in the market. This is crucial in order to understand how the swing highs and lows in the chart above are being used to confirm that my previously-defined levels were accurate.
Put simply, we are using the swing highs and lows to validate the levels of support and resistance. It isn’t enough to think you have a level accurately defined. The market needs to validate the levels you have marked otherwise you will find yourself trading what you want to see rather than what the market is showing you.
Of course, the market won’t always respect your levels this nicely. And that’s okay. Don’t be afraid to modify your levels as the price action unfolds on your chart. The market is a great teacher and is always around to tell you whether or not your levels are accurate.
If I had to summarize this entire lesson into one sentence it would be this – being a well-rounded price action trader is about learning to interpret the market’s reaction at key support and resistance levels, not just identifying pin bars.
Using price movement in this manner may seem very basic, and it is. But it’s the essence of trading raw price action so a firm understanding of it is critical to your success.
We don’t just look for buy or sell signals and pull the trigger. We use the clues the market gives us to put ourselves in the best position possible to make money and protect our capital. That means watching how the market reacts to previously drawn levels of support and resistance.
It doesn’t matter if you trade pin bars, inside bars, wedge patterns or some combination of these strategies. Learning how to use the market’s movements to validate key levels will give you the edge you need to begin stacking the odds in your favor.
Did you find this lesson helpful? Leave your comment, question or general feedback below.