Opening a Trading Forex Position With Price Action Indication
This article exemplifies how we should apply the price action strategy in opening a position, and the reason why we enter along with the entry and exit parameters.
Note: Price action is a method of trading by relying on observations of formation bars that are formed on a given market condition. Pin bars, fakey bars and inside bars are the authors’ terms for bar formations that are considered a benchmark in price action trading. For an explanation of price action, the pin bar, fakey bar and inside bar have been discussed on several articles about price action in this section
Example 1: GBP / USD – Fakey Pin Bar Setup – April 18, 2011:
- Formed price action with fakey pin bar.
- Ema8 and ema21 daily as supporting factors pointing upwards, resulting in momentum for open buy is high enough.
- t the level around 1.6150 (horizontal line), the price is rejected in the day at which pin bar is formed.
With these three factors we have a reason strong enough to open a buy position.
Entry way and risk / reward setting:
- With a pending buy limit order at the 50% retracement of the pin bar, and the stop loss level below the pin bar’s lowest level
- At the break level of its inside bar (in the picture: i.b = inside bar), with stop loss level at about 50% pin retracement level
The first way is quite aggressive because usually a new fakey pin bar is valid if the highest / lowest level inside bar is broken. But given the 50% level of the pin bar is above the ema21 level then the open buy at this level is still possible. Setting risk / reward ratio in way 1 should be 1: 3, and in 2nd way can 1: 2
Example 2: GBP / JPY – Fakey Pin Bar Setup – May 11, 2011:
- Formed price action with fakey pin bar on May 11, 2011
- Ema8 and ema21 daily as supporting factors are pointing downwards, so the momentum for open sell is quite high.
- At the level of about 134.00 (horizontal line), the price rejects (rejection) on the day when the pin bar is formed, and that level is now the resistance level.
With these three factors we have a reason strong enough to open a sell position.
We can entry with a sell stop pending order at the 50% retracement level of the pin bar as well as the previous example 1, and the stop loss level above the highest level of the pin bar.
Well, for an aggressive trader, here the problem is a significant support level at 130.00, where the price should break through those levels if you want an adequate profit. In Example 1. it works well, but in this case, we must be satisfied with a little profit or even loss of risk that we have set at risk / reward, if the ratio is 1: 2 or 1: 3 like example 1. For traders who are not aggressive enough and only want to open positions after the support level breaks, it certainly will not trade if market conditions continue as in the picture above. This is an example of applying risk and reward in forex trading.
Example 3: EUR / USD – Inside bars after false break – 24/25 May 2011:
– On May 23 there is a ‘false break’ bar at 1.4000 support level (false break in this case is the bar that broke the support level, but closed around the support level, and the next bar closed above the support level) So the bar that did not really penetrate the support , or false / false).
The next day that happens is the formation of the inside bar and closes above the support level indicating buy signal after breaking the daily 8 ema level. Although this assumption contradicts the previous bearish trend, but with the formation of a price action and a favorable ema indicator, then the indication is valid enough.
– The entry entry level is set above the highest bar level inside the bar, and the stop loss level is set slightly below the inside bar level.
Risk / reward ratio can be set 1: 2 or 1: 3.
Example 4: NZD / USD – Pin Bar / Inside Bar Setup – May 25, 2011:
– On May 25, 2011 NZD / USD formed an inside pin bar on its daily chart, after a rejection at the weekly support level that occurred at 0.7750.
– Valid bullish momentum occurs after the two moving averages (ema 8 and ema 21) are broken, and this is a strong signal for open buy.
– Stop loss level can be set below the lowest level of the inside bar, and setting the take profit level (reward) at its monthly resistance level, around the level of 0.8200 (see NZD / USD monthly chart below), so the risk / reward ratio can be around 1: 2
Example 5: GBP / USD – Pin Bar Setup – June 3, 2011:
– Pin bar formed on June 3, 2011 and denial of 1.6300 level (red line) which became support level.
– The pin bar has also penetrated the ema 8 and ema 21 levels, but if seen from the overall trend, the bar that happened 3 days earlier has failed to create a new high level, so this condition can not be summed up as an uptrend but a shift from bullish to bearish or from bullish to sideways (ranging).
– To open the position is quite risky, because the main supporting factor is very weak, or pin this bar can be said is not valid enough.
Example 6: GBPUSD – Pin Bar Setup – June 14, 2011:
In the last example above, bearish pin bar formed on June 14, 2011 at resistance level around 1.6500-1.6450. Two bearish pin bars previously valid enough to support this third pin bar to open sell, with key level (resistance) is also valid.
Although market conditions are not in the trend, but with the price action and key levels that have been tested, the signal to open sell position is quite strong. We can set the stop loss level slightly above the resistance level, and take profit at the support level around 1.6200, so it is possible to determine the risk / reward ratio of at least 1: 2.