Okane’s Trend Targeting Price Action Technique

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Okane’s Trend Targeting Price Action Technique

If you have been following my price action trading then you may already know that I prefer to analyze the candlesticks and price patterns rather than following indicator-based strategies.

That’s why I decided to share a technique I use for trading the trends by first identifying support and resistance areas and breakouts. In my opinion, you should already have an understanding of how to draw horizontal lines and be familiar with;

Therefore, I can only recommend my strategy to the more advanced traders.
Anyhow, this is a three step price action technique that starts with finding an area of divergence… or the trend… or the targets. Well, it’s kind of a “chicken or the egg” situation to be honest. It’s like a circle, so it doesn’t really matter where you “jump in”. Just hang tight and follow the instructions and you will see what I mean. In my experience, currencies are the assets that perform best with my technical analysis, especially the EUR/USD.

Step 1. Identifying the Divergence

So what is a divergence? These areas often occur at the end of a trend. Of course, there are different trends on different timeframes. However, during the first step, I like to use the hourly charts to find a trend with clear highs and lows. If the trend is bearish, then you should find lower lows and lower highs. In that case, draw a trend line at the top of the highs (sometimes a mix of candlewicks and bodies). If the trend is bullish on the other hand, then you should see clear higher lows and higher highs and you can draw a trend line based on the higher lows.

Here is such an area on the H1, trend was bearish!

Notice that at the end of the line, at the bottom right, price seemed to reach a strong support and is no longer creating lower highs and lower lows! We can actually see that price is even creating higher lows and higher highs! And the final candlesticks at the end of the trend line are “tightening” up, one goes down, the others goes up as if the market is waiting for something to happen. Yes, in fact it is waiting for a breakout!

At this point, we should get ready with setting up target support or resistance lines. This is step 2.

Step 2. Setting up the Target Lines

Before price breaks out of the trend line, we need to have an idea of where it wants to go. In other words, we need to identify the next resistance or support. In the case above, the divergence was bullish so we were expecting a bullish breakout and hence, we need to draw a resistance line.
This is the difficult part because you must understand where to draw your lines. The easiest way is to look at a few different timeframes such as H4, H1 and sometimes even the daily charts to see where the recent support or resistance is. In the case above, we could easily identify the resistance on the hourly charts based on recent price action history. See the picture below.

Based on recent price action (support/resistance) we can guess that this is the area price wants to reach once again after the breakout. I have also marked the bullish divergence! You can also see that price went up to our target resistance.

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Step 3. Entering Trades towards the Target

Now that we have a target and the trend line is broken, it’s time to trade towards the target resistance and make some money! Once price breaks out, usually there is either a big jump in the direction where price broke the trend line or a “smaller” movement. Sometimes, the price will even fall back to the trend and use it as support, this is a good area for entering the trade so I suggest you don’t remove your trend line yet so you can see the “kiss good bye”. If, as I said before, the jump is sudden and a volatile one, you might want to wait for a retracement first. The picture above shows price providing us with a good opportunity to enter at a higher low after the breakout. I prefer to move to the lower timeframes after the breakout to ride the smaller higher lows (bullish breakout) or lower highs (bearish breakout).
Below is an example based on the M15 but whether you use M15 or M5 depends on where you can place your trend line the best. Meaning where you can best adapt it to the price.

You may find more examples of live trades in my trading diary here as I use this technique quite often. Learn from them!

The Cycle of a Trend

I hope you now understand what I meant with “this is like a circle”. I mean, if price is already trending then you can just use trend lines to take trades towards the target support or resistance line.
If the price is at the end of the trend and diverging after it has reached a target, then wait for the breakout and trade it towards the next target. So where you “get in” depends on what price is doing at the moment of looking at your charts. Use the hourly and above timeframe to set up strong support and resistance lines and use the lower timeframes to ride the trend toward those targets. If you wish to use longer expiries then you can obviously just use the hourly timeframe for riding the trends as well, no problem! Adapt it to your liking and feel free to use a Stochastic Oscillator as an extra confirmation when entering on higher lows or lower highs (also helpful when looking for divergence).

Trend Trading: The 4 Most Common Indicators

Trend traders attempt to isolate and extract profit from trends. There are multiple ways to do this. Of course, no single indicator will punch your ticket to market riches, as trading involves factors such as risk management and trading psychology as well. But certain indicators have stood the test of time and remain popular among trend traders.

In this article, we provide general guidelines and prospective strategies for each of the four common indicators. Use these or tweak them to create your own personal strategy.

Moving Averages

Moving averages “smooth” price data by creating a single flowing line. The line represents the average price over a period of time. Which moving average the trader decides to use is determined by the time frame in which he or she trades. For investors and long-term trend followers, the 200-day, 100-day, and 50-day simple moving average are popular choices.

There are several ways to utilize the moving average. The first is to look at the angle of the moving average. If it is mostly moving horizontally for an extended amount of time, then the price isn’t trending, it is ranging. If the moving average line is angled up, an uptrend is underway. Moving averages don’t predict though; they simply show what the price is doing, on average, over a period of time.

Crossovers are another way to utilize moving averages. By plotting a 200-day and 50-day moving average on your chart, a buy signal occurs when the 50-day crosses above the 200-day. A sell signal occurs when the 50-day drops below the 200-day.   The time frames can be altered to suit your individual trading time frame.

When the price crosses above a moving average, it can also be used as a buy signal, and when the price crosses below a moving average, it can be used as a sell signal. Since the price is more volatile than the moving average, this method is prone to more false signals, as the chart above shows.

Moving averages can also provide support or resistance to the price.   The chart below shows a 100-day moving average acting as support (i.e., price bounces off of it).

MACD (Moving Average Convergence Divergence)

The MACD is an oscillating indicator, fluctuating above and below zero. It is both a trend-following and momentum indicator.

One basic MACD strategy is to look at which side of zero the MACD lines are on in the histogram below the chart. Above zero for a sustained period of time, and the trend is likely up; below zero for a sustained period of time, and the trend is likely down.   Potential buy signals occur when the MACD moves above zero, and potential sell signals when it crosses below zero.

Signal line crossovers provide additional buy and sell signals. A MACD has two lines—a fast line and a slow line. A buy signal occurs when the fast line crosses through and above the slow line. A sell signal occurs when the fast line crosses through and below the slow line.

RSI (Relative Strength Index)

The RSI is another oscillator, but because its movement is contained between zero and 100, it provides some different information than the MACD.

One way to interpret the RSI is by viewing the price as “overbought”—and due for a correction—when the indicator in the histogram is above 70, and viewing the price as oversold—and due for a bounce—when the indicator is below 30.   In a strong uptrend, the price will often reach 70 and beyond for sustained periods, and downtrends can stay at 30 or below for a long time. While general overbought and oversold levels can be accurate occasionally, they may not provide the most timely signals for trend traders.

An alternative is to buy near oversold conditions when the trend is up and place a short trade near an overbought condition in a downtrend.

Say the long-term trend of a stock is up. A buy signal occurs when the RSI moves below 50 and then back above it. Essentially, this means a pullback in price has occurred, and the trader is buying once the pullback appears to have ended (according to the RSI) and the trend is resuming. The 50 levels are used because the RSI doesn’t typically reach 30 in an uptrend unless a potential reversal is underway. A short-trade signal occurs when the trend is down and the RSI moves above 50 and then back below it.

Trendlines or a moving average can help establish the trend direction and in which direction to take trade signals.

On-Balance Volume (OBV)

Volume itself is a valuable indicator, and OBV takes a lot of volume information and compiles it into a single one-line indicator. The indicator measures cumulative buying/selling pressure by adding the volume on up days and subtracting volume on down days.

Ideally, the volume should confirm trends. A rising price should be accompanied by a rising OBV; a falling price should be accompanied by a falling OBV.

The figure below shows the shares of Netflix Inc. (NFLX) trending higher along with OBV. Since OBV didn’t drop below its trendline, it was a good indication that the price was likely to continue trending higher after the pullbacks.

If OBV is rising and the price isn’t, price is likely to follow the OBV and start rising. If the price is rising and OBV is flat-lining or falling, the price may be near a top. If the price is falling and OBV is flat-lining or rising, the price could be nearing a bottom.

The Bottom Line

Indicators can simplify price information, as well as provide trend trade signals or warn of reversals. Indicators can be used on all time frames, and have variables that can be adjusted to suit each trader’s specific preferences. Combine indicator strategies, or come up with your own guidelines, so entry and exit criteria are clearly established for trades. Each indicator can be used in more ways than outlined. If you like an indicator, research it further, and most importantly, test it out before using it to make live trades.

Learning to trade on indicators can be a tricky process. For those who have yet to enter the market or start trading, it’s important to know that a brokerage account is a necessary first step at getting access to the stock market.

Forex Entry Methods – Where and How

Hello, Forex Traders!

Often I mention the importance of establishing whether there is a trend in play, or not. Logically when there is a trend in place, the trader has the opportunity to trade with the trend setups or countertrend reversal setups. If the market is range-bound, then the trader would be best advised to deploy range trading tactics. Take a look at how to determine the best forex entry methods and the tools for entries.

MARKET STRUCTURE

Obviously, it is vital to Forex traders to be able to recognize which environment the market is currently operating in so that they can employ the best-suited tactics and strategies at any particular time. Some traders tend to specialize in one type of trading; others can successfully trade all different styles. In any case, when building your trading strategies it is wise to be aware of these factors:

a.) What type of market structure do you want to trade?

b.) Will you focus on 1 type of trading or all types of trading?

    • i) When a trader is focused, they would need to compensate that with scanning and viewing more currency pairs.
    • ii) When a trader is more all round in their approach, the trader can focus on fewer currencies varying from 1 to a couple.
      Read here more about how to build a trading strategy part 1 and part 2.

ESTABLISHING THE TREND

Establishing the trend is an important factor for the above process. Using the classical definition of higher highs and higher lows versus lower lows and lower highs is the right step. But putting it all in practice on multiple time frames leaves a lot of space for interpretation. Having clear guidelines and rules is therefore very useful and important. Basically, a crystal clear trend definition is worth gold, or in the case of the Forex trader: it is worth a lot of pips.

Do you have that in your trading plan? Do you feel comfortable with your definition but there could be space for improvement? If yes, let me know down below and I will write an article next week on Friday defining the trend and how I approach the topic.
Read more about the following topics here:
1) Trading impulsive and corrective price action
2) How to trade impulsive moves
3) How to trade corrective chart patterns
4) How to trade breakouts of those corrective patterns

ENTRY OPTIONS

Regardless of the type of trading strategies and market environment you seek to trade, the methods of establishing an entry point in the market can be classified or grouped together into 3 different categories. Here are the groups and classification of entries:
1.) The 1st group: choosing levels/level picking, which is an early entry.
2.) The 2nd group: confirmation signals, which is waiting for proof of price respecting a level
3.) The 3rd group: momentum entries, which is waiting for a breakout of a certain area/level
Irrespective of what the actual entry signal is, I do think that each and every one of them fits in one of the three groups mentioned above.

Here are some examples for all of the situations above:

1) I would qualify an entry based upon the Fibonacci retracement tool as level picking because a trader is expecting the price to turn at that exact spot. The trader has the anticipation of a turn without any current evidence for that. The trader might, of course, have historical evidence that the entry methodology has proven to be successful but every new entry still remains to be seen.

2) A confirmation signal entry would be one when a trader uses the Fibonacci retracement but this time around only takes an entry when they see a candlestick formation taking place which confirms the fact that price is respecting that Fib level.

3) A momentum entry is when a Forex trader is waiting for a break of a (key) level. These entries are always waiting for the price to go through a tool drawn on the charts, such as a trend line. These traders are also called breakout traders. Here you can learn how to find opportunity in Forex.

TOOLS FOR ENTRIES

Here is a list of tools used by those traders:

1.) Level pickers:

  1. Top and bottom
  2. High and low
  3. Fibonacci retracement
  4. Fibonacci target
  5. Trendline bounce
  6. Bottom and top of the range
  7. Chart pattern bounce

2.) Confirmation traders:

  1. Candlestick pattern formations in areas where they expect support and resistance based off of various tools and indicators
  2. Indicator confirmations
  3. A break of fractal in the anticipated direction of move

3.) Momentum breakout traders:

  1. Trend line break
  2. Chart pattern break
  3. Fractal indicator break
  4. Break of the top or bottom
  5. Break of the high or low

TREND VERSUS ENTRIES

Irrespective of the fact whether you are trader the trades trends, counter-trends or ranges, all of us are still confronted with the choice of how to exactly enter the market. The paradigm Winners Edge Trading uses for its trading room is the following process:
1) Define the trend/market structure
2) Search for the opportunity
3) Check for filters (blocking the trade)
4) Qualify the exact entry
Therefore once traders have completed the first three steps, all of us traders then need to decide how they want to enter the market. In some cases, an opportunity for one group would be an entry for another. A momentum trader might consider a pullback as an opportunity but take the actual entry up to the break of a trend line, whereas the level picker might see use the pullback for an actual entry.

PROS AND CONS

There are some advantages and disadvantages when using the various entry signals. Most of them are quite straight forward and I am sure that they are many more elements, aspects, pros and cons than the ones I mention here below, so please mention those down below in the comment section!

An Early Entry:
a) Suitable for long-term position traders that are aiming for larger swings in the market.
b) Less problematic to identify exact entry but in cases with tops and bottoms, more difficult to use. An optimal stop-loss position, in cases with Fibs stop loss is clear.
c) Suitable for traders who want to monitor price action development less intense.
d) There is a higher risk for that trade (due to no evidence of turn) and trade probabilities tend to be lower, which needs to be offset by the higher reward to risk.
e) The trade takes longer to develop compared to the other 2 groups.

A Confirmation Entry:
a.) Traders can await the reaction of the market to the desired level, which for some traders might make it easier to take a trade.
b.) The confirmation has the danger of turning out to be small but the price, however, continues in the same direction (the confirmation turned out to be a small pullback for a continuation of the momentum opposite of the direction wanted).
c.) The entry and stop losses are easily defined.
d.) The reward to risk can sometimes be very high: a tight stop loss above a rejection wick targeting a with the trend continuation move could see high R: R’s.

A Momentum Entry:
a.) Suitable for traders who want to optimize their entry point and clear stop loss level.
b.) Suitable for traders who are very active in the market.
c.) These entries have a higher chance of skipping sideways price action and catching the faster impulsive part of the move, which means that the trade usually is shorter
d.) Danger of trading false breakouts and getting whipsaws.
e.) Exact entries and stop-loss levels depend on where the break occurs.

Some traders choose 2 or all of the above entry styles, which does give the opportunity for a trader to scale in and scale-out. Scaling in and out is a great technique to maximize the profits when a trader is winning and minimize the losses when the trader is losing. The practical implementation of the technique, however, is not as easy as it might sound.

A good tip for making this part of the trading easier is by treating every single entry as a separate analysis but with one risk management plan. Here is an example: regardless of the fact that your early entry is ahead a certain amount of pips, you want to make sure that the confirmation or momentum entry qualifies as a legitimate entry (even if you did not have the early entry which was making pips) and that there is sufficient space within your risk management parameters. Also, read about Scaling in and Scaling out in Forex.

TRADING STYLE AND PSYCHOLOGY

The entry preference will vary for every trader, depending on their trading style and trading psychology. Some traders might not be able to handle early entries that well as they rather wait for a momentum break. Others might find it easier to trade a pullback as they are able to plan the trade more ahead of time. Your trading style and trading psychology are important factors that influence this choice, so those are elements that everyone will need to take into account for their own trading.

Despite the individual traits, there are some common elements that all entries share. Here is the table:

Type Trend range counter-trend
Early good perfect good but difficult (reversal)
ok but difficult (retracement)
Confirmation perfect ok (big range) ok (reversal)
bad (small range) bad (retracement)
Momentum perfect ok (big range) Horrible
bad (small range)

When a trend is in place, most entry possibilities are deemed desirable. The difference between good and perfect is a personal choice and up for debate. However, the advantage of waiting for confirmation and momentum in a trend is that there is more clear guidance when a corrective pullback is over and has finished.

In a range environment, the best entry to use is the early one. Waiting for momentum or confirmation can be ok if the range is wide enough and has sufficient space for a trade to develop with a decent reward to risk ratio. If the range is too small, the latter two entries are not desirable.

With counter-trend trading, it is important to note that generally speaking this type of trading is considered to be more difficult. If you do want to trade counter-trend, then trading it with an early entry signal does provide the best prospects for both a reversal and a retracement. But once again, catching a reversal is difficult. A confirmation entry is ok if a trader is expecting a reversal, but if the market is only making a retracement then the confirmation entry might happen right at the turning spot for more trend continuation. Momentum entries are definitely not advisable for counter-trend trades.

THE ENTRY MOUNTAIN

To give a visual example of the different types of entries, look at the screenshot down below.

I am using an example of a mountain to give an idea of how the entries relate to each other.

Top of the mountain: At the top of the mountain a trader is very lonely, as he is the only one thinking that price could go down, whereas the majority of the traders are in the valley thinking how far can the price go up. Nobody knows yet where the peak of the mountain (price) will be but the early entry trader makes a decision and goes for a certain level. If all goes well, his entry is right at the peak.

A third away from top: The confirmation entry is about at a third away from the top. These traders have been price hit the top and move down away from it and are trying to ride the trade back down to the valley.

Close to Valley: Momentum traders are waiting for the price to move down lower and pick up speed when the price is rolling down the slopes. It jumps on board when the price has a good speed and angle and is trying to catch the last but fast roll down into the valley, after which prices bottom out and due to its velocity rolls out and up the next hill (retracement).

Conclusion: Entry Methods

In any case, whatever entry method you decide to use, it is always important to plan the trade ahead and wait for those market circumstances to emerge. Stop chasing the market is the motto. More information on that can be found in this article.

This wraps the article on entries. Make sure to look at the article on stop losses and take profits as well.

We recommend you follow up with our articles about the factor of time as well, you can find both parts here: part 1 and part 2.

Thank you for reading!

Please leave a comment below if you have any questions about Forex Entry Methods!

Also, please give these methods 5 stars if you enjoyed them!

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