How to employ the principles of price action forex trading to get maximum profit from trailing stops and take profit levels…
Our first example (see the chart below) uses a trade taken at the confluence of the 38% Fibonacci retracement level, a weekly pivot and old resistance now become support. This is indicated by the first white circle on the chart scanning from the left.
Note that this is such a perfect confluence of the 38% retracement with the weekly pivot that the 38% retracement itself is hidden directly under the actual weekly pivot!
(You can see where it extends beyond the current weekly pivot towards the left of the chart)
Take a look:
Price Action Trading 1: Fibonacci Entry
When trading Fibonacci retracements many traders opt to take full profits at the 127% extension level. I prefer to take at least half the trade off at the 100% retracement level. It is of course a personal preference, based on trader personality and experience amongst other factors.
In the above example we can see how taking half profit at the 100% retracement and moving our stop to breakeven on the remainder of our position would have locked in some profit before price reversed to take us out of the remainder of the trade. The trader holding out for the 127% extension would most likely have been stopped out.
By the way: I realise these charts look a bit cluttered. That is because I have plotted every pivot level going back several periods. Normally I would only have one set of weekly, monthly, daily pivots etc when actually trading live.
Our second example is another trade that incorporates Fibonacci. In the chart below price has rejected twice from a confluence of the 62% retracement level, round number, weekly pivot and old resistance now become support showing towards the left of the chart:
Price Action Trading 2: Fibonacci Entry 2
In this instance the trader going for the 127% extension level would have got it. Price bounded away from the entry and easily made all targets. If you were going for half profits at the 100% retracement level – indicated by the second white circle at the large white bull candle – it would be advisable to trail your stop on the remainder of your position to breakeven at this stage.
In fact, it might even be advisable to trail the stop up under the monthly pivot prior to that, since this signifies a significant support resistance level of its own that has now been breached to the upside.
Example 3 discards the use of Fibonacci and just relies on Pivots, combined with support and resistance at a confluence with the 20 EMA.
This is a classic Bladerunner trade, incorporating the 20 EMA with classic price action indicators:
Price Action Trading 3: Bladerunner Trade
In this example an old support level to the left of the screen was broken to the downside, price moved down and formed short-term support above a confluence of weekly and monthly pivots, moved below this level and used that level as resistance, then broke above it decisively only to run into the old support level – indicated by the first two white circle on the chart – which now has become resistance.
Price then moves strongly above that level, retests and stops exactly at that level (indicated by the white ellipsis) in confluence with the 20 EMA before bounding away in a classic bullish engulfing candlestick pattern. Note also that there is a yearly pivot at this level, indicated by the very thin red line. Some people don’t bother with yearly pivots but I do find them occasionally useful.
Having taken the trade straight after the bullish engulfing pattern, it would hardly have been necessary to trail the stop on this occasion if you were only going for either a 2 to 1 reward to risk trade, or aiming for the next level up weekly pivot, where price predictably stalled.
If you wanted to take this trade to the maximum you could have trailed the stop just slightly below the EMA This would have resulted in you staying in the trade until price came back to retest the EMA towards the right of the screen.
The next example simplifies matters even further. A trade is identified here at a level indicated by old resistance now become support in confluence with a weekly pivot. Price breaks through on a strong bullish candle, fades back to the old resistance level to retest, forms another bullish engulfing pattern and moves on up:
Price Action Trading 4: Buying Raw Price Action
With your stop set slightly below the wicks of the bullish engulfing pattern, you could have taken first profit at the swing high indicated by the large bullish candle that signalled the breakout just to the left of this. Your stop then could have been moved very easily to breakeven.
Note how the next serious resistance level for price in its move up here is yet another significant pivot level: the monthly pivot at the top of the chart. This would have been an excellent place to take full profit.
One final example, this time a sell. The following graph shows price at the left of the chart stalling repeatedly at a monthly pivot level. The sequence of events that follows is:
- towards the middle of the chart it seems to break above the resistance level
- but it fails, falls below once more,
- then reverses just as quickly – probably on a news announcement
- moves straight through a weekly pivot level and then tracks sideways
- before falling back to below the old monthly pivot resistance level that started the chart at the left:
Price Action Trading 5: Selling Raw Price Action
This hectic price action sets up the trade. The break through to below the old resistance level is the signal to watch for a good candlestick pattern entry sell. The confirmation comes rapidly, with a good evening starforming right at the monthly pivot level. Your target could very easily have been the next expected support level indicated by the weekly pivot. Price did indeed stall here briefly before breaking below and then forming another possible entry on another evening star rejection in confluence with the weekly pivot.
The basics of price action trading are straightforward enough. Even so, I find the subject endlessly fascinating. Try it out for yourself: scan through a bunch of charts with a good pivot indicator, good Fibonacci tool set and the round numbers defined. See how many entries and exits you can disocver using only these simple, on chart, PREDICTIVE indicators.
If you want to further your education in the subject of price action trading, there are several resources available, and two which I can highly recommend.
Click the following link to return to Price Action Trading to read more.