Trading an Indicator-less Pure Price Action Chart

August 19, 2014

Tuesday was a busy day of trading, with several market scenarios to account for during my European morning trading on the EUR/USD. There was also the small catch that no pivot points were in play, as the market was hovering between its daily pivot and support 1 levels. So I was simply going with just a basic price chart, which is fine. Although I do use pivot points quite a bit, I don’t necessarily rely that heavily on technical indicators. Price action, I believe, is the most important consideration and can be sufficient in itself when it comes to finding quality set-ups.

1. The market began in what appeared to be the beginning of a downtrend just after its 2AM open. The 2:20 five-minute candle was particularly bearish, moving eight pips down, which is pretty substantial for that hour. The 2:25 candle produced a doji, with nearly a four-pip lower wick, demonstrating that more buyers were coming into action. Naturally, I tend to mark off daily highs and lows and any notable levels of support and resistance on my chart. Consequently, I drew in a level at the bottom of the bodies of these two candles, roughly at 1.33466.

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When the 2:30 candle proved to be bullish, it proved that the desire to retrace up from 1.33466 had some strength to it. And whenever there are indications of increased buying interest, it supports evidence for call options. The 2:35 candle also showed some upward oomph behind it, but eventually fell to about a pip above 1.33466. Essentially price was in flux within a four-pip area.

But based on what I had seen, I felt that a call option at 1.33466 could be a reasonable trading decision. The 2:20 candle appeared to be an isolated event and didn’t seem indicative of a trend in itself. There seemed to be an inclination toward buying, and there was of course the support level itself that should provide a shelf to help fight against downward movement. Not a spectacular trade, given its win probability was realistically around only 60%, but I decided to enter on the touch of 1.33466 on the 2:40 candle. This expired four pips in-the-money.

2. Afterward, price went up to form a top around 1.34556, where I drew in a new white resistance line. I also began considering call options at 1.33466 again when it made a new journey back down. But there wasn’t a clear indication of a rejection, as price touched and closed below, so I passed on that trade opportunity.

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And while the 1.34556 resistance did hold on the move back up, no put option was taken. The move up from the 1.33466 support happened quickly, so I was also hesitant about the momentum involved. There was also no clear rejection of the level. So trade opportunities were passed on in both cases.

3. Following the recent level of support that had recently formed underneath the previous one, I had this level targeted on the way down for call options. (The line was drawn underneath the 4:35 and 4:40 candle bodies at 1.33458.)

Price did come down and reject the level of the 5:50 candle. Considering there was some downward steam here, I waited out the 5:55 candle to see if another rejection of the level would be had, or further downward movement would be in store, possibly to support 1.

On the 5:55, there was rejection of the 1.33458, and it eventually became a green candle in the process. The buying willingness boded well for call option possibilities here. Upon the re-touch of 1.33458, I entered a call option on the 6:00 candle. This trade teetered around breakeven or slightly in-the-money, but I received a slight boost on the closing candle to win by nearly two pips.

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4. Following this trade, price returned back down to 1.33458, but I decided against the trade based on a simple market pattern that I’ve come to trust. What I’m referring to is a descending triangle, noted after a down-sloping line that connects the tops of lower market highs descending into a support level. This is a bearish chart pattern and typically asserts that buying movement is tapering off in strength (due to the lower highs) and a break of the support is a possibility.

While taking a trade on the 7:15 candle (denoted in the image below) would have ultimately produced a winning trade, the break of 1.33458 did occur by about five pips including a close below the level.

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5. The market returned back up to the 1.33556 resistance level considered earlier. It had served as a reversal point earlier in the day, so I had to at least be mindful of it here. I determined that this would also be the last realistic potential set-up opportunity for the day, as I was already trading much later than I normally allow myself. Plus news time at 8:30 was quickly approaching, so any trade would have to expire right at 8:30, such that the market can set itself ablaze in whatever direction, if it needs to, after any trade’s conclusion.

The 8:15 candle was highly bullish, but the 8:20 candle provided a nice doji after touching and rejecting 1.33556. When it re-touched this targeted price on the 8:25 candle, I got into a put option, expecting the market to hold below for at least the very short-term, as there tends to be a lower amount of volatility before a news release.

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This trade was really back and forth. It initially held in my favor, then went up as much as three pips in-the-money, before going out of favor and resulting in about a one-pip loss.

6. And this final image is simply here as a gentle reminder to always check your economic calendar and stay out of these up/down binary trades around news time. The price movement following a news release can make the market you were following previously look very dwarfish by comparison. You certainly don’t want a trade to have merely 50-50 odds based on a mere failure to check what news may be coming out.

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Overall, a 2/3 ITM day.