5/23/2017 How to Use Price Action to Trade New Trends

How to Use Price Action to Trade New Trends

May 3, 2017 12:30 am +07:00
by James Stanley (/authors/bio/James_Stanley),Currency Strategist ()

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Talking Points:

- The trending market condition is one of the more attractive given the potential for strong risk-reward outlays.

- While the trend is your friend, timing entries into that trend is what often differentiates success from failure. In this article, we look at how traders can use a
combination of multiple time frame analysis and price action in the effort of timing trend-side entries.

- If youre looking for trading ideas, check out our Trading Guides (https://www.dailyfx.com/free_guide-tg.html?ref-author=Stanley). And if youre looking for
ideas that are more short-term in nature, please check out our IG Client Sentiment Indicator (https://www.dailyfx.com/sentiment?ref-author=Stanley).

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The trend is your friend. Weve all heard it, and it makes perfectly logical sense; but in practice, this advice is so opaque that its practically worthless.
Because even if youre on the right side of whatever trend is showing at the moment, the timing and entry into that setup is likely whats going to
determine ones success or failure on that individual trade. So, its not enough to just nd the direction of the trend and then hope that were right; we
also have to nd support (or resistance for down-trends), we need to be patient and exercise discipline while waiting for the setup to build, and then we
have to identify risk levels so that if/when were wrong, we have a line in the sand with which to bail in order to save the rest of our equity. In this article,
were going to share a ve-step process for traders looking to trade into new or fresh trends using price action
(http://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2013/10/04/Four_Simple_Ways_to_Price_Action.html?ref-author=Stanley).

Know Your Time Frames

New traders often wonder which time frame is best? This is very similar to asking what is the best temperature. Well, its relative. Some like it colder,
others like it warmer; but by and large most people are in the same ballpark range of comfort. Chart time frames work like this, as well. If youre a scalper
looking to hold positions no longer than 20 or 30 minutes, the setup on the monthly or weekly chart is probably going to be so divorced from the
dynamics that youre following that you might as well be looking at another market altogether. And if youre trading a monthly setup, whats taking place
on the one or three minute chart is probably going to be pretty inconsequential to your big picture setup.

There is no best time frame. Time frames are merely different looks at the same picture; with the shorter or tighter time frames offering a more granular,
detailed look at near-term price action. The downside to this greater detail is noise; as those shorter time frames are, in general, considerably noisier
than longer-term charts. But the longer-term charts are signi cantly slower and not nearly as actionable; so the prerogative here should be one of
balance.

Multiple time frame analysis is the process of using a variety of chart time frames to plot strategy for a market
(https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/06/18/The_Time_Frames_of_Trading.html?ref-author=Stanley). This
has the bene t of getting the consistency of the longer-term charts along with the granularity and detail of the shorter-term charts. The downside is
that an element of subjectivity is introduced as were now analyzing two different charts; but provided that the trader can nd balance between the
utilization of these charts, the bene t should far outweigh the additional subjectivity thats introduced.

Trader 'Style' ~ Holding Period Trend Chart Entry Chart

Long-Term 1 Week + Weekly Daily

Swing-Trader few days - few weeks Daily 4 hour

Short-Term few hours - few days 4 hour 1 hour

Day-Trader/Scalper < few hours 1 hour 15 minute

https://www.dailyfx.com/forex/education/trading_tips/chart_of_the_day/2017/05/02/how-to-use-price-action-to-trade-new-trend-srepstans.html?utm_source=Tw 1/4
5/23/2017 How to Use Price Action to Trade New Trends
Created by James Stanley, originally published in The Time Frames of Trading
(https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/06/18/The_Time_Frames_of_Trading.html?ref-author=Stanley)

Dont Chase the Breakout

The period that is often most dangerous to trade a new move is also when it happens to be the most attractive, and thats when prices are breaking out
of previous support or resistance. Breakouts can be dif cult to trade, even for experienced traders, because by nature its the process of something new
happening and thereby theres no recent data or observations from which we might be able to derive strategy.

Chasing breakouts, or buying after price has already run through resistance or selling after price has dropped through support, can often lead to
challenging trades. Even if youre right on the direction, youll often have to let the position retrace against you before the trend-side move continues.
So, rather than chasing a new breakout wait. Let price action run-higher or lower, and chalk away the potential for a trend-side entry in the not-too-
distant future.

Use the breakout merely as a signal: The fact that buyers were able to power-thru resistance can be a positive indication of further top-side potential.
But rarely is a market one-sided; after that new-high comes-in, well often see traders taking pro t; and even some trying to fade the move. Combine
this with the fact that buyer demand is likely diminished by the fact that prices are now-higher; and we have a recipe for a pullback. This is the exact time
that you do not want to be chasing a move higher.

(https://media.dailyfx.com/illustrations/2017/05/02/how-to-use-price-action-to-trade-new-trend-srepstans_body_Picture_1.png.full.png)
Chart prepared by James Stanley (http://www.dailyfx.com/authors/bio/James_Stanley)

Wait for Support to Show-Up Around Prior Resistance (for up-trends)

Watching a fresh breakout can be trying for a traders patience, and for the new trader that can be a challenging exercise as their only real option whilst
watching a breakout take place is to either chase it, or fade it (go short after a bullish breakout). Given that a breakout is, by de nition, a new
observation of higher or lower prices, this is an inopportune time to open positions.

Instead, that prior level of resistance that had previously capped price action can now be re-assigned as potential support. Traders can let the breakout
develop, and let the market set a new short-term higher-high. After that new high is set, traders can then wait for the next higher-low, and this will
often show-up at or around a prior resistance level.

We discussed this concept in the article, A Simple but Effective Price Action Tell
(https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2014/11/13/A-Price-Action-Tell.html?ref-author=Stanley) , and on the
chart below, we can see multiple iterations of this taking place in the recent move in EUR/USD (//www.dailyfx.com/eur-usd).

(https://media.dailyfx.com/illustrations/2017/05/02/how-to-use-price-action-to-trade-new-trend-srepstans_body_Picture_2.png.full.png)
https://www.dailyfx.com/forex/education/trading_tips/chart_of_the_day/2017/05/02/how-to-use-price-action-to-trade-new-trend-srepstans.html?utm_source=Tw 2/4
5/23/2017 How to Use Price Action to Trade New Trends
Chart prepared by James Stanley (http://www.dailyfx.com/authors/bio/James_Stanley)

Use the Shorter Time Frame to Con rm Support & Early Stage of Directional Move

Once the breakout has been found, and once the pullback has gotten under-way, traders can begin to plot their trend-side entries. This is where the
greater detail and granularity of that shorter-term chart can be helpful from the additional perspective thats provided.

To attempt at timing the entry, the trader can wait for the pullback to begin to slow. So if were looking at a bullish move, wed want to have already seen
the breakout produce the higher-high, followed by a pullback bringing price closer to prior resistance; at which point we can look for support to begin to
show on the shorter time frame.

If buyers are responding to falling prices, wicks will show-up on the under-side of the shorter-term candles as demand begins to out-strip supply. And as
buyers begin to take-over, prices will begin to edge higher on that shorter-term chart as sellers succumb to even greater demand. And its as this is
taking place that traders want to investigate the top-side entry, because the point of support that was just established, as highlighted by those under-
side wicks, is where the trader can look to place their stop. For a more in-depth explanation behind using price action to plot supply and demand, please
check out our article, Using Support and Resistance to Trade Supply and Demand
(https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/08/30/Trading_Support_and_Res_w_supply_demand.html?ref-
author=Stanley).

(https://media.dailyfx.com/illustrations/2017/05/02/how-to-use-price-action-to-trade-new-trend-srepstans_body_Picture_3.png.full.png)
Chart prepared by James Stanley (http://www.dailyfx.com/authors/bio/James_Stanley)

Setting Risk and Bailing When Proper

After the trade has been identi ed, traders are going to want to add a stop as they trigger or shortly after they open the position. That way, if matters
reverse, the trader has some element of down-side protection. But key here is one of expectations: Price action
(https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/05/01/The_Forex_Traders_Guide_to_Price_Action.html?ref-
author=Stanley) is rarely perfect, and perhaps more to the point, price action swings
(https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2011/10/17/Price_Action_Swings.html?ref-author=Stanley) are blatantly
obvious and most market makers can visibly see where prices had previously reversed. Most market makers also know these points are often used for
stop or limit placement, so these price action swings can be like a red beacon for free liquidity for market makers executing on sitting orders.

So, rather than placing the stop at the exact low (for up-trends), look to nest the stop a bit-lower so that your exit isnt at a blatantly obvious point in
the market. If theres any element of support or resistance con uent nearby, incorporate that as well.

So, for instance, if USD/JPY (//www.dailyfx.com/usd-jpy) just put in a swing-low at 112.03, you probably dont want your stop right at 112.03; but rather
below the psychological level (http://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2014/05/13/Hidden-Support-and-
Resistance.html?ref-author=Stanley) of 112.00. So, giving the entry an extra 10 pips of wiggle room can afford you a bit of distance should that prior
swing, or the psychological level at 112.00 face a retest.

If the stop does look like it would be hit, traders should avoid giving it even more room in the hope that they can stay in the trade. This is considered
throwing good money after bad because, at that point, your idea is almost proven incorrect and, given that youre already in the trade and somewhat
invested, it can be dif cult to temper ones own bias whilst in a trade thats already eating your equity.

One bad trade can wipe away the gains from numerous winners
(https://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2011/12/08/What_is_the_Number_One_Mistake_Forex_Traders_Make.html?
ref-author=Stanley), and throwing good money after bad is one of the common ways that traders sink into this pitfall. So, set your risk at the outset of
the trade, and place stops at a level that youll be able to walk away from the trade without any remorse. And if the stop gets hit, simply look for a new
trend elsewhere.

https://www.dailyfx.com/forex/education/trading_tips/chart_of_the_day/2017/05/02/how-to-use-price-action-to-trade-new-trend-srepstans.html?utm_source=Tw 3/4
5/23/2017 How to Use Price Action to Trade New Trends
--- Written by James Stanley, Strategist for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX (https://twitter.com/JStanleyFX)

DailyFX (/) provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES (/conflict-disclosures)

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