General advice for price action trading
This lesson will cover the following
- General thoughts on price action trading
- What qualities must a trader have and develop to become successful
- What a trader must aim for and what he needs to avoid
This article will not discuss any particular specifics regarding price action trading, rather give you some general advice and food for thought.
One of the most important things you need to remember when it comes to trading is that it is a job, and this means two things – it can earn you money, but it requires dedication and discipline, just like any other profession. If you want to be successful at it, you need to have a predetermined plan that you need to follow and not deviate from. Dont make the mistake of thinking trading can become your hobby – by not dedicating your full attention it will just be a constant money sink.
It doesnt need to be a complicated plan – most traders, no matter what type of trading they are practicing, stick to a certain number of indicators or trading patterns, specialize in them and wait for the right moment to earn money. Keep in mind that the simpler you keep things, the better. If you arent able to profit from a single chart, on a single time frame, and without using indicators, then surely by making things more complicated it wont be better for you.
In order to be a successful price action trader, or any type of trader for that matter, you need not only to do enough of reading and understand how trading works. You need enough practice to be able to pick the best trades, which most often do not match the textbook patterns.
Dont look for perfection
When it comes to textbooks, in general nothing is perfectly clear and you will rarely see a textbook scenario on your chart, no matter how hard you look for it. Moreover, the more people expect one pattern to occur, the more limited the markets reaction will be. A general rule of thumb is that if something resembles a reliable pattern, then it will probably trade like one.
Moreover, in order to be a successful trader, you need to have an open mind, be flexible and be ready for an infinite number of scenarios the market might present you with. It is of utmost importance for each beginner trader to keep risk at minimum, so that he reduces the chance of wiping his account. This way he can “live to trade another day” and continue gaining experience. People who start off with expectations of huge returns in the beginning of their trading careers are left with empty accounts sooner than you can imagine.
What is crucial for each trader is to objectively assess his personality and subject himself to a degree of risk which he can emotionally handle. You need to be able to follow the rules you have set yourself, which in terms will ensure that your trading sessions go calmly and with minimum levels of worry or anger.
Another common mistake newbie traders do is get too excited and overtrade. In contrast, successful traders find trading boring, but profitable. Beginner traders should take it easy at the start and try to soak as much knowledge as possible for the least money (keep risk at low levels).
Ride the trend (not the lightning)
The best way for a novice trader to minimize risk, and we have said this numerous times throughout our guide, is to avoid counter-trend trades at all costs/. The best signal bars are strong with-trend trend bars. Conversely, doji bars, which we already know are single-bar trading ranges, are regarded as the worst signal bars.
Once a trend has set in motion, you must refrain from going against it until a major trend line has been breached and a trend reversal is very likely. But even then, it might be better to first look for a with-trend entry as the price tests the previous trend extreme, and go against it only after market movement has reversed again at the same price level.
A general rule of thumb is that you will not become a persistently profitable trader until you start placing almost exclusively with-trend orders, and especially enter on with-trend pullbacks. Moreover, you will not stop losing most or all of that hard-earned money until you stop trading against the market.
Another suggestion worth considering is to always take advantage of trapped traders. When you see that either bulls or bears are trapped, the chance for a profit from a scalp in the opposite direction greatly improves. As you enter, those traders will be forced to exit their positions and refrain from entering new ones for some time, which is in your favor.
A general principle traders must follow is to buy low and sell high. It can be overall ignored during strong trends, which however require certain time to be spotted. Strong trends are relentless and will keep edging higher until a major reversal attempt occurs, and even that will most likely fail (first breakout attempts usually fail). This allows you to keep buying, or at least swinging a portion of your position for a prolonged period of time (buy high and sell higher). You can buy High 2 setups in a bull trend, even if they are near or at the session high (or sell Low 2 setups in bear trends).
Look for pullbacks
You must not forget that market movement is rarely straightforward, and if it is, that is usually for a short period of time. Even the strongest trends have pullbacks and traders use these counter-trend moves to squeeze an extra profit. However, pullbacks are always seen as a bad place to enter in the direction of the trend and force many traders to wait for the development of a deeper pullback in order to jump in, causing market players to miss on good opportunities. Meanwhile, other traders are afraid to enter on pullbacks, because they fear this might be a trend reversal, since pullbacks often come after a somewhat climactic market movement.
At the same time, many traders get trapped in on alleged trend reversals that initially look good, but ultimately fail. Unless you are a highly skilled trader with many years of experience, counter-trend betting is pure gamble and even trading gurus would prefer in most cases not to go against the market. Then why should you? What you need to do is take advantage of those deceiving counter-trend setups and place with-trend entries, capitalizing on the trapped-in counter-trend traders.
Think in advance
In general, and we have said this many times, before you enter the market you need to know exactly why you are placing that order, what you can probably expect to happen during its duration, and when do you need to lock in your profit. Deviating from your predetermined plan during the course of trading may lead to premature and inaccurate decisions based on emotions, and those can be devastating for you wallet.
Moreover, you need to take your time and pick the best possible entry signals, which means that a 1-minute time frame might not be suitable for a novice trader. The 5-minute and 10-minute time frames on the other hand achieve a favorable level of balance between giving you enough time to asses the current situation and also generating enough trading signals per day.
You should also remember that it is far more important, and advisable, to work on increasing your position size over time, instead of focusing on increasing the number of trades you make per day. This way, as you get better at trading, you will increase your profit without reducing the time to think per trade.
Of course, being able to wait for the best setups requires a ton of patience, and most importantly – solid discipline. Discipline is the single most important quality a trader must develop. Through discipline you can force yourself not to take that seemingly good trade, which however your analysis tells you might end up wrong. Also keep in mind that discipline does not help you much, if it lasts for too little. In order to be a successful trader, you need to keep your overexcitement reined not only today or tomorrow, but during each day of your trading career.