In my previous post…
I said if you want to be a consistently profitable trader, you need to avoid indicators, news, and opinions.
Now you’re wondering:
“So what should I focus on?”
Price action trading is a methodology that relies on historical prices (open, high, low, and close) to help you make better trading decisions.
Unlike indicators, fundamentals, or algorithms… price action tells you what the market is doing—and not what you think it should do.
But first, let’s dispel the biggest myths surrounding price action trading…
Myth #1: Price action trading doesn’t work on stocks or cryptocurrencies
The term price action is popularized by Forex traders.
Thus, it’s not surprising that stock (or even crypto) traders think it won’t work for them.
But don’t be fooled.
Price action trading can work across different markets.
Price action trading takes into account the historical movement of prices, and then, use that to make an informed trading decision.
If a market is in an uptrend, then a price action trader can look for buying opportunities.
Here’s an example:
As you can see, THC has made a series of higher highs and lows—so it’s in an uptrend.
As a price action trader, this is a market condition where you want to look for buying opportunities so you can trade along the path of least resistance.
If the market is in a downtrend, then a price action trader can look for selling opportunities.
Here’s an example:
Bitcoin (Daily Timeframe)
As you can see, Bitcoin is in a downtrend.
So if you want to put the odds in your favour, you should look for selling opportunities.
If the market is in a range, then a price action trader can look to buy at support and sell at resistance.
EUR/GBP (8-hour Timeframe)
As you can see, EUR/GBP is in a range market.
So in this market condition, you can look to buy low and sell high using tools like support and resistance.
The best part?
Price action trading can be applied across different timeframes.
Earlier, you’ve seen charts from the daily timeframe, 8-hour timeframe, and 4-hour timeframe.
Now, let’s move on and destroy the next price action myth…
Myth #2: You must pay attention to fundamental news
I wish news trading could be as easy as…
- Good news = buy
- Bad news = sell
Unfortunately, that’s not the case.
Because the market can go up on bad news and go down on good news.
Let me repeat that once more.
The market can go up on bad news—and go down on good news.
Here’s an example…
During the 2016 presidential election, many thought if Donald Trump won the election, it’ll be bad for the country.
That’s because he has no experience in politics, doesn’t know what he’s doing, and is more emotional than logical.
But guess what?
He won the 2016 presidential election.
The day the election results came out, the US stock market dropped 100 points in a matter of minutes—as most pundits predicted.
Within the next few hours, the market recovered from those losses and closed higher—and over the next few days, the market broke out to all-time high.
Here’s what I mean…
S&P 500 (Daily Timeframe): Presidential election
So now the question is…
How do you “predict” the market reaction to the news?
Well, the secret is this:
Just follow the price.
That’s because if the market is in an uptrend, it’s likely to continue higher.
So if you want to predict what the market will do, predict it will move higher (and vice versa).
When you look at the market in this manner, news release no longer matters.
That’s because the market usually makes its move before the news.
Here’s an example…
European Central Bank rate cuts
On September 4, the European Central Bank cut interest rates to combat low inflation—which is bearish for the Euro.
But if you look at the chart above, the EUR/USD has been in a downtrend for a few months before the news release.
So based on the market’s price action, you can predict the news will be bearish for the Euro—even before it’s out.
But don’t take my word for it.
Study a trending market (on a daily timeframe or higher) and pay attention to how the news affects the price.
Does the price lead the news or, does the news lead the price?
Myth #3: You need to watch the markets all-day
You might think you need to watch the markets all day…
To stay updated with the news and to analyse every candle on the chart.
But the truth is, you don’t.
The price leads news
As you’ve seen earlier, you don’t need to follow the news if you follow the price.
That’s because the price leads news (at least that’s my belief).
And what about analyzing every candle on the chart?
Well, you can pay attention to every candle on the chart without watching the markets all day.
By trading off the higher timeframe like the 4-hour and above.
This means a new candle is “painted” once every 4 hours—which means you don’t have to watch the markets all day.
And because you’re on the higher timeframe, your stop loss is wider and it’s enough to withstand most news releases in the market.
This means you get to stay in your trade longer without getting stopped out unnecessarily.
Here’s what I mean…
EUR/USD (5 Minutes Timeframe): Non-farm payroll (NFP) news release
As you can see, the price spiked up and down on the 5 minutes timeframe and you’ll likely get stopped out of your trade.
However, look at the daily timeframe…
EUR/USD (Daily Timeframe): NFP news release
You can see the NFP news release is only a small blip on the daily timeframe.
So if you set your stop loss based on the daily timeframe, it’s unlikely you’ll get stopped out.
I’ll teach you how to set a proper stop loss in my next post.
But for now, let’s move on…
Myth #4: You need a lot of capital to start with
This is true in the early days when technology isn’t as advanced and commissions were high.
But today, things have changed.
You can start Forex trading with as little as $200
Yes, you read me right.
You can open a Forex trading account with as little as $200 (and some brokers require less than that).
You don’t have to pay commissions when you buy/sell stocks
That’s because brokers like Robinhood and TD Ameritrade offers commission-free trading.
This means you don’t need a large amount of money to trade stocks as commissions no longer “eat” into your transaction cost.
It’s smart to start small
When you’re new to trading, you’ll make many mistakes along the way (like pressing the sell button instead of buy, using the wrong position size, etc.).
The good news is…
If you start with a small account, the cost of your mistakes is small (in monetary terms).
However, if you start with a 6-figure account, the cost of your mistakes is a lot more expensive.
So, if you want to pay lesser tuition fees to the market, then it’s smart to start small.
Myth #5: You need a lot of time to learn price action trading
Can you recall the toughest exam paper you took?
No matter how long you stared at the question paper, you can’t seem to find the answer to it.
And let’s be honest, even if you were given 10 hours to complete, you still can’t get it right.
Now, it’s the same when learning price action trading.
If you don’t know what to look for, you can spend years trying to figure out how it works—without success.
But the good news is…
You don’t need to spend years to learn price action trading.
Because once you’ve learned the formula behind it, everything will instantly make sense—and you’ll never look at price action trading the same way again.
I’ll reveal the formula in my next email.