Hello everyone,
Today I am going to share with you a very simple yet very effective method of trading currencies most of the people know it by the name of Price Action for using this method you need only one quality that is Patience.

The idea is to draw the important horizontal support and resistance lines on the chart. Time frame may be any,i personally prefer 4 Hour chart or above,after drawing the horizontal lines,we will wait for the price to reach these lines and get rejected or to go through these lines and wait for a pullback and then getting rejected.

HOW TO DRAW SUPPORT AND RESISTANCE LINES
To draw support and resistance lines, keep in mind that there should be 3 or more touches to the trend line to be valid. You may refer to this link of www.babypips.com about placing support and resistance lines explaining very neatly how to place the support and resistance lines on the chart. After the lines have been drawn, we need to wait for the price action.

WHAT IS PRICE ACTION
Price action is nothing but the formation of candles that hint a reversal or continuation of the trend.
Let us say that we see the weekly chart of the NZDUSD pair and find lower highs and lower lows forming on the chart. From this we can ascertain that the pair is in down trend.

NZDUSD WEEKLY CHART


When we zoom to daily chart we observe that the pair is in uptrend as it is forming higher highs and higher lows. As shown in the image below.

NZDUSD DAILY CHART
Note: Please note that we will not enter a buy here as the main weekly trend is down.
As the main trend (weekly) is down, so we will look for a selling opportunity when the price reaches a valid resistance level. When it reaches the resistance, we will look for a reversal candle formation. A reversal candle is any of these.

Bearish engulfing: It is the candle that engulfs the entire body of the preceding candle and closes below open.

Bearish pin bar
: This candle has a long wick on the upper side, typically 3 times the body of the candle and a very small or no lower wick. This candle may close lower or higher than open but candle closing lower than open is better to sell.
Now when price reaches the resistance area, two things can happen.
1. Price finds resistance and gets rejected.
2. Price clears the resistance comfortably.

Note:
Please don’t take speculative position by selling near the line, as till now we are not sure if the resistance will hold or not.

CASE 1: PRICE FINDS RESISTANCE AND GETS REJECTED

If we see the price getting rejected then we will obviously see a red candle on the daily chart. This will be an indication of the beginning of the downtrend or a correction. If the price closes below the close of the rejection candle then a deeper correction or a reversal is confirmed.

HOW TO ENTER:
When you find a red candle whose wick has pierced through the resistance zone and has closed below the resistance level, I assure you that it will be either the bearish pin bar or the bearish engulfing most of the times. You will be entering only if there is a deeper correction or reversal. For this if you place a sell stop order below the low of the bearish pin bar then your order will be filled only if the correction is deeper or the trend has reversed.

STOP LOSS SETTING:
If we see that our idea is wrong and set up has failed we want to get out with minimum losses. So we need to think about the logic behind opening the sell and closing the position if the logic fails.
Here we are entering a sell trade as we think that the candle has closed below resistance and maximum resistance is seen at the high of the candle whose wick had pierced through the resistance level. So we will place the stop loss above the high of that candle by 5 pips.

SETTING THE TARGET PRICE:
The target price may be set 5 pips higher than the next support level. I will advise to bring the stop loss on break-even as soon as the position is in the money by 100 pips or more. 100 pips? That may sound big but yes it is true as you are trading daily charts and the targets will be 300 to 500 pips and you may be required to wait for one day to one week to reach the target price. In most of the cases you will find that risk to reward ratio is more than 3.

NZDUSD DAILY CHART

CASE 2: PRICE CLEARS THE RESISTANCE COMFORTABLY
If we see that the price has cleared the resistance level successfully then we can assume safely that there is huge upside momentum in the pair. In that case we will wait for the price to return to the level of resistance which now may become a good support as those who were left behind to buy will try to enter the band wagon at this level. So we will look for the price action again near the level.

HOW TO ENTER:
When you find a candle whose wick has pierced through the previous resistance zone and has closed above it, I assure you that it will be either the bullish pin bar or the bullish engulfing most of the times. You will be entering only if there is a continuation of the trend. For this if you place a buy stop order above the high of the bullish pin bar then your order will be filled only if the trend continues.

STOP LOSS SETTING:
If we see that our idea is wrong and set up has failed we want to get out with minimum losses. So we need to think about the logic behind opening the sell and closing the position if the logic fails.
Here we are entering a buy trade as we think that the candle has closed above the resistance turned support and maximum support is seen at the low of the candle whose wick had pierced through the support level. So we will place the stop loss below the low of that candle by 5 pips.
This was the example of a down trending market, but it is equally applicable to an up trending market also. There we will have to do the exactly opposite of what has been explained for down trending market.

SETTING THE TARGET PRICE:
The target price may be set 5 pips lower than the next resistance level. I will advise to bring the stop loss on break-even as soon as the position is in the money by 100 pips or more.


RIDING THE ENTIRE TREND: You will notice that we have placed a trade on the daily chart but we have entered a weekly trend. Weekly trends are really long trends and one may be willing to ride the entire trend. In that case close the part of the position at next level and bring the stop loss to break even and ride the trend with rest of the position amount for free.

Note : My dear readers there are many advantages of trading weekly and daily charts, some of which have been explained very nicely by our fellow community member killer195175 in his article titled “Reduce Trading Losses by Using Methods other than Stoploss". There are many other advantages of trading from daily charts as listed below:

Thank You.
Translate to English Show original