PRICE ACTION TRADING

(Extraido del blog de cadaver)

Stage 1: Bars
The first stage in mastering price action is to know what any kind of bar is. This just not just mean
differentiating between a reversal bar and an inside bar but also what the bar means in a given
context. For example, you should master various aspects that strengthen and weaken a setup such
as:
an up/down trend bar pair is a reversal signal only if its not in mid-range.
A doji before a reversal bar greatly weakens the signal.
An inside bar needs to have a strong close to be a reversal signal, but a tail may be
acceptable if its a failed breakout of a Trading Range.
doji signal bars often work for with-trend trades but fail for counter-trend trades.
huge bars are trading ranges
Stage 2: Bar Sequences
Master bar sequences. Most setups are bar sequences so you should be able to recognize them. For
example:
2 legged pullbacks
three pushes with TCL OS
trend channel overshoots of MTL
In addition, you should be able to expect common bar patterns based on current bar. For example:

large bar could become possible Spike and Channel

large bar could be a failed breakout
a pullback bar followed by doji could become barb wire.
bars suddenly turn tiny and doji-like in a strong trend could be TTR

Stage 3: Market Structure

Market structure takes a bit more experience, but this is the most important. You should be able to
keep track of whether the market is trending, is about to break out into a trend from a trading range,
etc. You should also be able to determine the kind of move and the type of trading thats successful
in this market. Is it a soft trend where you should buy every fL2? Is it a hard trend and you should
short every L1? Is the range very tight and every trade is a scalp since every stop will be taken out?
Is it a strongly trending market that is likely to run for a long time? Is it a wild and crazy market
that's stopping everyone in all directions? The quicker you can recognize these, the faster you can
act.
Market structure is your filter and overall guide ensuring you dont take trades in the wrong
direction. If you like to swing for multiple points, you want to trade with-trend in a strongly
trending market. If the market is weak or tight, you can trade both with and counter-trend (with
some experience).
Market structure mastery also allows you to sit though pullbacks and exit at the right time,
maximizing your gains. Until you have mastered this, you will feel helpless in anything but the
normal average trends and trading ranges. You will sit helplessly in a hard trend and short your way
to the top in a soft trend.

However, even with market structure mastery, you wont be able to enter a setup correctly without
mastering Stages 1 and 2. If your entries are stopped out and the market then moves in the direction
of your original entry, you have a poor mastery of stage 2.
Stage 1 is so fundamental that you need to be a really poor trader to not master this. If you are
buying above bear bars and selling below bull bars and many of your entries turn into 1tf and 5tfs
you probably need to work on mastering your bars properly.
During trading hours, mark the chart with your read of the Stages above and compare your
performance at the end of the day. This will help identify areas that need work and you should pick
one or two specific deficiencies and correct them one after another. Most people are unable to fix all
problems at once, so don't bother trying it.
Using the 10 week rule, if you have correctly identified items you seek to correct on the chart, you
can move on to the next one.
BAR SELECTION.
The very first thing to learn about price action trading is signal bar selection. If you do nothing else
but trade every well formed bar, you will make money on most days. If you trade well-formed bars
only with-trend, you will make money consistently. Enter above a bull signal bar with a stop below
it and vice-versa for bear bar. If the bar is too large or too small or has lots of overlap, use a money
stop of 8 ticks.
The indicator above plots a red dot above any reasonable bear bar and a blue dot below any
reasonable bull bar. Naturally, this means it misses some of my important setups such as OR/1Rev
at b3 and possibly some 1PB setups.
If you did nothing but trade these bars, most of your trades would be wins. Your losses would only
be from b45-47 chop and possibly b74 L1. If you swung any contracts for any of your previous
trades, you probably earned money overall.
Lets add some common sense to the mix and eliminate counter-trend trades and H1/L1 against
strong moves. This gives only b45 as a losing trade of the day. Add a second common sense rule
and do not take shallow H1/L1 with-trend unless its close to ema or trendline and you already have
an all-winner day.
REVERSALS AND PULLBACKS IN TRENDS.
When the market is in a trend move, it will continue to be in the trend until there is a very strong
overshoot or a very clear trendline break. When in a trend, every counter-trend signal is probably a
trap and you should ignore it and wait for its failure. Even with the very clear and obvious W at b53
after an obvious buy climax, the risk of failure is high.
An obnoxious overshoot such as b11 or an obvious trendline break such as b74-79 and a successful
test of the extreme is necessary before any counter-trend trades are attempted. A failed L2 (b13,15)
after a bullish reversal (b11) is a strong confirmation of the reversal and the next buy signal is
usually good for a swing.
The W entry is the only counter-trend trade you ever need to take since it usually gives a
confirmation and a with trend W1P right after. Every reversal signal in a trend is probably a
pullback and nothing more until counter strength is demonstrated. You should look for with-trend
signals near the ema or trend line. Ignore signals far away from them (b30,46,52) since they imply
possibly another leg in the pullback.

FIRST REVERSAL OR OPENING REVERSAL.

When the day opens, one option is to treat the first bar as a trading range and watch for fBO and BP
of b1. If the BO or fBO looks compelling, it may lead to a trend and you should take a strong
signal bar such as b8 or b19. The larger the distance to the other extreme of the day, the higher the
chances of a trend developing. Therefore, its perfectly fine to ignore something like b3 and wait for
a break above the HOD (b1 at this point) and wait for a failure or BP.
When the move is possibly a trend move (b8-b19), no matter how small, its reversal is a 1Rev and
is likely to lead to the primary move of the day.
Since 1Revs can fail, conservative traders can take a 1PB if the fBO or BO succeeds. In other words
buy only the HL after a bullish reversal and a LH after a bearish reversal. Today's 1PB would be
b24, which is not well formed, so its acceptable to skip it and wait for the next setup. You should
only take with-primary trend setups until the other extreme of the day is taken out.
This strategy works for almost any day except tight trading ranges with tiny bars. On those days,
very few things work and price action entries have a high failure rate, so its best to skip trading if
the range of the first hour or two is very small, especially if there was no gap on open.
PRICE ACTION INDICATOR.
As many of you have guessed from the dots on the chart, I've been working on a Price Action
Indicator for NinjaTrader. Currently, it only highlights reasonable signal bars as described in Al
Brooks book and nothing else.
To mechanically trade the indicator, a scalp and a swing portion can be entered with a 6t stop. At +2
points the scalp portion exits with a profit and the stop moves to breakeven. Ideally, the scalp
portion is twice the swing portion to get the best results. The swing portion should be exited at a
fixed profit such as +4 or on a second attempt to reverse a trend if the entry is with trend, i.e, long at
HL (b25) or short from LH (b10). If its a counter-trend entry, the first sell signal should cause any
swing portion to be exited (entry above b18 or below b41)
On a day with reasonable range such as today this should profit from most trades. For example,
today the only losing trade was the short below b57. The short below b34 and the longs above b45
and b69 were first attempts (L1/H1) and would not be traded. One option is to mark the L1/H1 in a
different color since eliminating them is not an option since that would eliminate any signals in a
hard trend.
A 2 contract scalp + 1 contract swing would have made +40 on the wins and -3 on the losses. But
today was possibly an excellent day for the indicator and not all days are so generous. To collect
more data, I would need to automatically trade it and run it over a couple of years worth of data. I
expect poor performance on tight trading range days since two point scalps are probably hard on a 5
point day. Large range days would probably be indeterminate, causing stop outs before the profit
target is reached but a single swing may compensate for many losses.
TRADING RANGES, TRENDS, FBOs AND Bps.
A breakout from a trading range is an attempt to create a trend and its failure is a move back into the
trading range. A successful breakout leads to a trend. Similarly, a successful failure to resume the
trend leads to a trading range. Today, b15 and b28 were failures to resume the trend and b67 was a
successful resumption of the trend.
After every breakout, the trader needs to decide if he will fade the breakout or enter with the

breakout on a pullback. In general, when in a trading range, a trade on the failure of the breakout is
more likely to succeed and certain important signs are needed to trade with the breakout.
The signs are:
1.
2.
3.
4.

Breakout is strong (i.e., half or more of the breakout bar is beyond the break point)
Strong close
Second attempt to breakout
Poor attempt to fail the breakout

Lets look at these one by one:

1. Strong breakout: b27 and b67 were both very strong breakout bars, but b67 was more than
halfway above the break point. Even though b27 was less than halfway out, there was a good
chance that a 2 or 3 legged pullback could give a second attempt up. On the other hand b10
was a weak breakout with weak close.
2. Strong close: A strong close beyond the breakout point indicates that there were insufficient
fade orders at the break point. A weak close followed by a deep pullback (such as b29-46)
indicates possible failure of the breakout. A weak close such as b10 indicates fade orders
were waiting and a failed second attempt (b15) is likely to seek the other end of the range.
3. Second attempt: Second attempts are stronger than first attempts and second attempts of
strong closes usually are very successful. An fBO (b28) that fails to take out the other end of
the range (b15 low) should be treated like a deep pullback and is a possible trend break (HL
after HH). This is especially true after a fL2 such as the one at b50.
4. Poor attempt to fail the breakout: b11 and b15 are strong attempts to fail the breakout.
Usually, when the first failure is pronounced (b11,12), the second will usually go much
further (b15-b27). If the bar after the breakout bar is a reversal or inside bar with a strong
close such as b28, there is a high probability of at least 2 legs down, possibly deep. If the
attempt to fail the breakout is poor such as b67, and it does not trigger, the chances are very
high that the price will seek a measured move of the prior range (b28-45 met at b79).
THE OPEN GAPS.
The open is a very complex set of topics and gap opens are an important source of information
about the day's price action. Occasionally, the market opens very near to the close of the prior day
(less than one average bar). This usually can be traded as if there was no gap and the open is simply
continuation of the prior day's price action. Usually, the open almost always is a few bar lengths
away from the close of the prior day. This is a small gap and usually this acts like a breakout or a
trendline break. Usually, the market attempts to close small gaps giving either a pullback from the
gap breakout or re-test after the gap trendline break. Sometimes small gaps will extend before
closing and this will lead to a protracted trend after reversal. When a small gap extends, you usually
have no idea how far it will go but you always know that the reversal will test the close of the prior
day.
Gaps that give an open within the body of the prior day, especially mid-body are suspect. No matter
which way they trend, they are likely to reverse sometime within the day.
In other words, most days are likely to trend trying to close the gap. Naturally, if it tries to close the
gap in two or three attempts and fails, the market will usually give a large trend in the opposite
direction. Keeping the above in mind is very important to determine 1Rev correctly.

The last case is the large gap (about a day's range). A large gap can lead to a large trend if it tries to
close the gap. If it tries to extend the gap, it often behaves like a spike and channel with the gap as a
spike. This often means its a soft-trend day. A large gap down can give a hard trend if it tries to
widen the gap.
However, a large gap simply gives a trading range, which can lead to a gap closure late in the day
(as in today's chart). A good metric for the trendiness of a large gap is the first bar, which if its a
average sized trend bar is likely to lead to a large trend day. A doji or other poor bar such as today's
b1 usually indicates a poor AM trend.
Determining the likely primary direction of the day improves your chances of a successful 1Rev
and 1PB entry, which in turn allows you to swing for larger number of points and increases your
profitability.
THE FIRST BAR.
According to Al Brooks, the first bar represents the day in a nutshell on most days. As you can see,
today that was not true. My modification is that the first one or two bars represents the AM
movement. If the first couple of bars are strong trend bars in the same direction, there is a good
chance of a trend move (either with or against the first two bars). If the first bar is a trading range
type of bar or the first two bars are opposite colored and overlap (even though they are trend bars),
then the market is forming an opening range rather than an opening trend.
The first bar is special, because it is the only bar thats guaranteed to give both a new HOD and
LOD. From this point on, you can trade fBOs and BP of b1 and continue with every new HOD and
LOD. A bar with tails such as b1 today should be considered a small trading range. Such an opening
often leads to an expanding triangle open, which essentially is a series of fBO of every new high
and low until one of them gives a two or three legged LH (such as b30) or HL and begins a trend
move.
Trend bars on open show energy and will often lead to an AM trend. Those trends will often reverse
and lead to a prolonged trend that could last all day.
A reversal bar on open will often give a sharp move that will turn around and take out the other end
of b1. This is especially true if the reversal bar is in the wrong place, i.e., mid-range or a bull
reversal bar above a small gap, etc.
Doji b1 can give a small fBO on one end of the bar followed by a prolonged move when the other
side of the bar breaks out. But it can also lead to BW open.
Regardless, the size and form of b1 is only a guide and should not be relied upon religiously. There
are various edge cases that are too numerous to list and can only be mastered with experience. The
right way to approach b1 is as if its a trading range and trade it as if its a small trading range. That is
to say, if there is a strong breakout, enter on a pullback and if there is a weak breakout, fade the
breakout. Remember that fBO of small ranges is usually not worth the trouble and that applies to b1
as well.
THE INITIAL TREND: FIRST REVERSAL AND FIRST PB.
After zero or many fBOs off the first bar of the day, the market may attempt to trend. This is called
the initial trend and if its strong, it may eventually persist till the end of the day. However, on most
days, there will be an attempt to reverse the trend.
If b4 was the initial trend attempt, then b5 is its reversal. On the other hand b4,5 could simply be

another fBO and b5 to b8 could be the initial trend. b9 would then be the first attempt to reverse the
trend. If this attempt is feeble, then it will fail and turn into the first pullback of the trend or 1PB.
Often the protective stop above 1PB is not violated for the rest of the day (including today). This
makes 1PB often the best swing entry of the day.
For practical reasons, the first deep pullback is usually a better swing candidate. The W at b29 or
the W1P at b36 make excellent 1PB entries and are often the best practical swing entries of the day.
This is because a protective stop of a deep pullback is less likely to be taken out before yielding a
swing profit and a deep pullback is easier to enter than a one bar pullback such as b9.
Today, there was an excellent PM move, but on many days, the AM trend is the only large move
and the lunch and post-lunch hours do not yield any large moves unencumbered by choppy
movement and stop runs. This is why mastering the 1PB entry is crucial to profitability.
THE OPENING RANGE AND ITS MEASURED MOVE.
On some days, there is no clear initial trend and the first few bars of the day are simply a trading
range. Two up and two down moves that don't go too far from the open make an opening range. On
many days there will be no successful breakout of the range and the market will oscillate between
the bounds of the range and every breakout attempt will fail.
When the market fails to break out twice (b11 and b27), it normally tests the other end (b61).
However, when the market does breakout successfully, it will often reach the measured move of the
opening range.
A three push failure (b3,11,27) on one end of the TR often results in the successful break on the
other side. A simple but fairly successful way to trade these moves is to take the first HL long and
the first LH short of the day as long as they are close to the prior swing and hold till the other end is
taken out. For example, you would buy above b19 and sell below b37 or b53.
A 2 legged pullback after a breakout(b69) is possibly the first A2 in a new trend and is a high
probability trade.