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The internet is flooded with talk of pin bars, inside bars and engulfing bars. But what about the story behind the price action on your chart? And not just the key levels you have identified. I’m talking about the angle at which price moves within a market.
Becoming a successful Forex trader through the use of price action trading is about more than just finding pin bars at key levels. It’s about learning how to read the angles of movements within a larger pattern or trend. These angles can be an indication of buying or selling interest, which can help you determine when and where to enter the market, if at all.
In this lesson we’re going to examine the story behind the price action you see on your charts. By the end of this lesson, you will be more aware of the angles you see on your charts and how they can increase your odds of success as a trader.
You will also be able to “read” the strength of a trend by identifying the angles of certain movements. This will allow you to better position yourself for taking only the most favorable trade setups.
You probably know price action as the strategies that are taught on most price action sites, including this one. These strategies include things like pin bars, inside bars and even the Forex breakout strategy.
But there’s a lot more to price action than these strategies and patterns alone.
To become a master of price action, you have to learn to read the angles. After all, the angle at which a market moves up or down is simply an indication of the ratio between supply and demand.
Below is an illustration of two markets. The first shows a market where supply greatly outweighed demand after making an extended move up. In other words, the number of sellers was much greater than the number of buyers. This is represented by the steep decline you see.
The second illustration shows a market where, although there is still more selling than buying, the number of buyers is more proportionate to the number of sellers.
The first illustration shows a market where supply is much greater than demand during the downtrend, thus price declines quickly. This type of decline is usually found at major tops, where sellers flood the market with orders that drive the price down.
The second shows a market where, although supply still outweighs demand, it isn’t nearly as one-sided. This type of market tells us that buyers are still around and are willing to buy even at the new higher prices.
So what does all this mean? It means that you can learn to read these angles to further increase your chances of finding favorable trade setups.
Let’s take a look at an example of a market that made an aggressive rally followed by a steep decline.
I can hear it now, “but this is obvious…of course we only want to look for buy signals in an uptrend and sell signals in a downtrend”. That’s true, it is obvious. But the illustration above is about more than knowing when to buy or sell in a trending market.
It’s about learning to “read” the chart using angles – understanding what the market is telling you based on the angle of a bullish or bearish movement.
The chart above illustrates two market segments. One segment shows a bullish market and the other shows a bearish market. Because the angle of both movements is equally steep, we can determine two things:
Although those two statements aren’t ground-breaking by any means, it’s amazing how many traders I see disregarding the obvious. They are trying to sell a bullish market and buy a bearish market.
To drive home the importance of angles, let’s take a look at a market where buyers are eager to continue buying even at higher prices.
The chart above shows a rally that took place on the USDCAD daily time frame. Notice how, after making an extended move up, buyers were still willing to support the market. This is great information to have as a potential buyer.
The fact that buyers are still interested in these higher prices is an indication of a healthy trend. That isn’t to say that trends can’t experience aggressive pullbacks, because they can and do quite often. However, the sideways price action above is a clear indication that a move in the direction of the preceding trend is extremely likely.
We can use that information in combination with price action buy signals to determine a favorable point of entry.
Profiting consistently from the Forex market takes more than finding the occasional pin bar or inside bar. It’s about learning to read the price action for what it is – an inside look at trader sentiment.
It will show you exactly where the buyers and sellers are positioned if you keep an open mind and begin paying attention to the angles of a market.
Once you’re able to read where these buyers and sellers are positioned within a market, you will greatly increase your odds of finding favorable trade setups. If you can do that and learn to control your ego, you have a real shot at becoming a consistently profitable Forex trader.
Did you find this lesson helpful? Leave your feedback or ask a question below.
Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...
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