How price action and KISS principle indicators will get you optimal entries…
So how do we put it all together with regards to price action indicators in order to get optimal entries in our trading? Just to recap, the best forex indicators for use in price action trading are:
- Round Numbers
- Pivot Levels
- Support and Resistance Levels
- The Prevailing Trend
- Fibonacci Levels… used in conjunction with forex candlesticks.
The following chart shows bare price action candles, with only the daily period separators showing as extra data on the chart:
Price Action 1: Bare Chart
As you can see it’s a pretty difficult chart to read. Price appears to be heading nowhere, after an initial move up from a tight range at the bottom to the left of the screen. Even drawing support resistance levels is difficult, as no obvious level stands out as having been respected. Now let’s put weekly and monthly pivots on the chart and see if we can get a clearer picture. The weekly pivots are indicated by the blue dotted lines, the monthly by the dashed green lines:
(N.B. this is my proprietary Pivots Indicator, enabling the plotting of several weeks and several months worth of data for weekly and monthly pivots. This is why the chart shows several sets of weekly pivots.
Price Action 2: Addition of Pivots
It is immediately clear that price has become restricted within a range bound by two weekly pivots. Price bounces at the extents of the range are indicated by the white circles. This does not allow us to trade on its own, unless we intend trading the bounces within that range (a perfectly acceptable strategy by the way). On the other hand we now have clearly defined levels price needs to move convincingly beyond before a new trend is confirmed.
A third illustration shows a chart with the round numbers indicator attached, plotted by the light grey dotted lines:
Price Action 3: Addition of Round Numbers
Once more we have added valuable information to our price action chart. In particular we can see price respecting the round figures in several areas. There is also a wonderful entry offered in the middle of the chart (the second circle from left) where a monthly pivot (dashed line) occurs almost exactly at the same price as a round number. To cap it off the price reaction is confirmed by a perfect bullish engulfing pattern.
Next we add Fibonacci levels to the charts. The first example shows the same chart we have been looking at, with Fibonacci levels drawn from the bottom at the left of the chart to the first significant swing point in the long move up. We can see that there is an excellent level defined by the 62% Fibonacci retracement level, in confluence with a round number and a weekly pivot. This was a great entry to catch the big move up:
Price Action 4: Addition of Fibonacci
Our final example shows fibs drawn from the swing point where are our last trade entry began, to the next major swing point. At the 38% Fibonacci retracement level there are two possible entries in confluence with old resistance now become support (seen at the left of the chart) and a weekly pivot. Once more, an excellent entry for the trader who was alert to it:
Price Action 5: Using Pivots to Get Maximal Entries
Hopefully this section has given you some ideas on how to use price action in order to get the best entries for trades. Our next section shows how to use price action to manage trades via stop trailing, and to get the very best exits possible.
Click to go to trailing stops and exits