Transcription
By far the best part of price action trading is that it is applicable across every market. The concepts and strategies you're going to learn in this video work in stocks, Forex, crypto, and essentially everything that uses a chart. These strategies and concepts are also applicable across any time frame. So whether you're a day trader, swing trader, or long-term investor, price action trading is a vital skill that can help give you an edge over the market. But like anything else, if you utilize price action trading incorrectly, then it can be a recipe for disaster. So that's why in this video, I'm going to be taking you all the way through the complete basics of price action to advanced price action trading strategies you can utilize to pull profits out of the market. So if that sounds good, you click that like button for me, go and subscribe if you are new, and I'll see you after the intro.
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Disclaimer: Realistically, there are five simple steps that can take anyone, even if they are a complete beginner, from knowing nothing about price action to having a profitable price action trading strategy. And we're going to go over these in detail throughout this entire video. But first, let's talk about what these five steps are.
Step number one is understanding candlestick charts and understanding how they move. Step number two is being able to differentiate between a trending market, a reversing market, and a consolidating market. Step number three is being able to spot optimal trading zones on a chart utilizing price action. Step number four is being able to identify entry reasons that give you a statistical advantage over the market. And step number five is combining all of these things together into a price action trading strategy you can utilize to pull profits out of the market.
So let's go ahead and get started with step number one, which is understanding candlestick charts. Now, for a lot of you, this may be review. Feel free to skip ahead if it is. But for those of you who are beginners, what we're looking at on the chart is a candlestick. And in order to understand a full candlestick chart, our first step is to understand what each single candlestick represents and means. So what these candlesticks represent is price movement during a certain period of time. We call these periods of time time frames. So this candlestick you see on the chart now can represent anything from one second of price movement up to one month of price movement. It doesn't matter what the time frame is, the candlestick just represents the price movement throughout that time frame.
For simplicity's sake, we're going to assume that the candlestick you see on the screen is the daily chart or daily time frame, meaning this candlestick represents a full day of price movement. Now, when we have a green candlestick, that represents a day that price went higher. And as you can see, the candlestick has two separate parts. Each candlestick will have a body, which is the colored-in part right here, and it will have wicks, which are the lines sticking out of the body on each extreme, the high and the low of the candlestick.
Now, in terms of the wicks, the wicks of this candlestick represent the highest point price made and the lowest point price made throughout that time period, which in this case, again, is a full day of trading. The body of this candlestick represents the open and the close of the day. So the story of this candlestick we see on the chart right now is that price opened at the beginning of the day right here. We then had price push lower, coming down to this low. Throughout the day, we then had price pushing higher and coming all the way up to this high we see right here. We then had price push lower and close at the end of the day right here. And that is the movement of the full day of price action represented by this single candlestick.
Now let's take a look at a red candle, or what we call a bearish candlestick. This represents a day, if we're on the daily time frame, where price dropped or went lower. Again, the time frame does not matter. This could just as easily be a one-minute chart or a four-hour chart. It just represents a certain time frame, a certain period of time, and it represents the price movement of that period of time. So with a red candle, this is a day where price went lower. And as you can see, obviously, there is a body and wicks to this candlestick as well. And the wicks are exactly the same. The wicks just represent the lowest point price got to throughout that day and the highest point price got to throughout that day.
The only difference between a red and a green candle is the open and close on the body. So for the body of this candle, the open is actually at the top of the candle for a red candle, and the close is at the bottom of the candle for a red candle. And the reason for this is obviously because this was a day when price went down. So the story this candlestick tells is that we had an open right here. We then had price push higher to this high. We then had price push lower all the way down to the extreme of this wick right here, to this low. We then had price push back higher and close right here. And that's the actual full movement of the price during that day, and that's the movement that this candlestick represents.
So just as a quick review, for a bullish candlestick, we're looking at a time period when price went higher. The wicks, or these lines at the bottom and top of the candlestick, represent the extremes of price, the highest point price got to and the lowest point price got to. The body of the candlestick shows you where price opened. For a green candle, that's the bottom of the body, and where price closed for a green candle, that's the top of the body. And again, this candlestick represents a full day of price movement if we're on the daily chart, a full minute of price movement if we're on the one-minute chart, so on and so forth.
For a red candle, or bearish candlestick, the wicks represent the same thing, the extremes of price, the highest point price got to and the lowest point price got to. The difference between this red candle and a green candle is that the open and close are in the opposite places. So the open of a red candle is going to be the top of the body, the close of a red candle is going to be the bottom of the body, and this candle is going to represent a day or time period when price went lower.
So the chart we're looking at right now is the one-hour chart. And what does that mean? That means that each and every one of these single candlesticks represents one hour of price movement. And the way we can utilize that information is by putting a lot of these candlesticks together to help us to identify whether a market is trending, reversing, consolidating, and to help us identify optimal levels to trade around. We're going to go through very detailed lessons on this coming up. But just this is a quick overview.
When we see price going from the bottom left of the screen to the top right of the screen, and when we see price creating higher highs and higher lows on the chart, that just represents a period of time there was a bigger volume of buyers than there was sellers, and that is what creates what we call an uptrend. And the exact opposite of that is true for a downtrend. When we see a downtrend, or when we see price going from the top left of the screen to the bottom right, and we consistently see price creating lower lows and lower highs, this is what we call a downtrend. And what this means is throughout this area on the chart we're looking at, there was a bigger volume of sellers than buyers, creating what we call a downtrend.
And at times, we will see price doing something like this, where we're just creating equal highs and equal lows, in other words, consolidating. And this is a period of time on the chart when the volume of buyers and sellers was nearly equal, again, otherwise known as consolidation.
So now you have a complete understanding of what a candlestick chart is and what it represents. Let's move on to step number two, which is utilizing that information in order to decide whether a market is in a trend, reversing, or consolidating. But before we even do that, I want to make it very clear that price action trading is never going to be completely objective. Here's what I mean: throughout this lesson, I'm going to be teaching you the exact rules that I utilize in order to spot trends, in order to spot reversals, and in order to classify a market as being in consolidation. But these rules are not set in stone, and they're more like guidelines that I utilize.
So my biggest piece of advice to you after watching this lesson and trying to identify trends, reversals, and consolidation on your own is that if you are at any point confused when you look at a chart on whether that chart's trending, consolidating, or reversing, the best thing to do is just sit on your hands. Just don't trade. Because chances are, if the market's not in a very clear trend or very clearly reversing, that it's probably consolidating, and you probably don't want to be placing trades at that moment anyway.
Now that that's out of the way, you've probably heard the phrase, "to trade with the trend, and the trend is your friend." And while that may not always be the case, it's a great rule of thumb to go by. And if you're going to be someone that's going to trade with the trend, the first step of that is being able to identify what trend the market is in. So let's get started with that right now.
The first thing we're going to look at is an uptrend. So the basic anatomy of an uptrend is a market that's making higher highs, higher lows, higher highs, higher lows, and doing this on a consistent basis, which eventually forms what we call an uptrend. But this is not what an uptrend actually looks like. As you can see on the chart, it's a bit more difficult to identify an uptrend when you're on real charts. So what we utilize is something called major swing highs and major swing lows. These two things, major swing lows and major swing highs, act as a map, helping us to determine whether the market's in an uptrend, a downtrend, or consolidating.
So if you don't have a good understanding of how to identify major swing highs and major swing lows, then you're going to have a very difficult time understanding what trend the market is in. For that reason, I'm going to go over the rules I have for identifying major swing highs and major swing lows right now.
So the starting point of our trend is right here, and the starting point will always be your first major swing low for an uptrend. And the reason this is the starting point is because it's the lowest point of price before this uptrend started. Now, after having a major swing low, this pushes up to a major swing high. Now, here's the first set of rules for a major swing high: that is, after this push up, I need to see at least three red candles in this pullback to classify this as a major swing high. So since we have that here, we do have at least three red candles. By the way, they don't have to be in order like this. It could have been two red candles, one green, and then more red, red candles. I just need to see at least three red candles in this pullback from our new high in order to classify this high as a major swing high. So first rule is that our major swing high must be followed by at least three red candles in an uptrend.
After that, we then push lower to the lowest point of our pullback before pushing up and breaking into new highs. The lowest point of this pullback is also a major swing low. So the rules for a major swing low is that it is the lowest point in the pullback before the break and close above the previous major swing high. So the only time we know we have a major swing low is after that major swing low has broken above the previous major swing high. And this is how we're going to be determining our trend.
At the point that we get a new major swing high right here, and why is this a major swing high? Because it's a higher point than our previous major swing high, and we have three candles or more in this entire pullback. So with that being the case, we can now classify this as our new major swing high. In terms of identifying trend continuation, there are two main levels I look at: the major swing low and the most recent major swing high. When we have identified our major swing low and major swing high, everything between this blue line and this blue line is just a part of the pullback before trend continuation.
What I mean by that is, as long as price doesn't come down and close below our major swing low, then I classify this as being in trend continuation to the upside. Everything between here and here is just the pullback of an uptrend. It doesn't matter if the market makes smaller swing lows and starts what looks like a smaller downtrend in the midst of this pullback. In terms of our major overall trend, we're looking to make sure price doesn't break below our most recent major swing low. And as long as it doesn't, we still consider this market in an uptrend. And it is verified to be in an uptrend once we break and close above our previous major structure high, which ends up happening right here.
So after we get this break and close above our previous major swing high, I now can classify this as our major swing low. And since we do in fact have this three-candle pullback after our new major swing high, then I can classify that again as a major swing high. So at this point of having this major swing high, here's how I would look at trend: we have this as the most recent high, we have this as the most recent major swing low, because this is the bottom of the pullback from our latest major swing high. So with that being the case, anything that happens in between here and here is just a part of the pullback before the continuation of trend. And anything that happens in between the two here and here, I'm still considering the market in an uptrend unless the market breaks and closes below this major swing low, which would identify a reversal. But until that happens, we're still in what I consider an uptrend.
So let's keep going here. We have price pushing up to our major swing high, we have a pullback, and then we have a break and close above our major swing high. What does that mean? That means we now have a new major swing low right here, which is our new level that can't be broken below. Now, at this point, we don't have a new major swing high yet, because in order to classify something as a major swing high, we need to see at least a three-candle pullback from swing low to the bottom of the pullback. That has not happened yet. So we keep pushing price forward until we see that, which happens right here.
So here now we can classify this as the new major swing high. And just to make sure this is clear, it is because of the fact that we have went from the lowest point of our pullback from our previous major swing high, we've pushed higher, and now since our swing high to the bottom of our pullback, we have more than a three-red-candle pullback in this pullback, which classifies this as a new major swing high. Now, with this being the case, I can move my line from my major swing high, and this is what we're looking at for our pullback area. Anything that happens in between here is all just the part of a pullback of an uptrend, and doesn't mean we're starting a new downtrend unless we come down and close below this major swing low, which would indicate a reversal.
I'll keep pushing price forward here, and now what do we have? Now we have another major swing low because price came down to the bottom of this pullback and then broke above our previous major swing high here, making this our new major swing low. So what can we do here? We can now bring this up, and this is now the level that we don't want to see price break below. And as long as price does not break below this level, we still consider this market to be in an uptrend. In terms of a major swing high, we do have a high here that's higher than our previous major swing high, and that does in fact have more than a three-candle pullback. So again, this can be classified as a new major swing high.
Now I'm going to keep doing this until we find a reversal. But as you can see, before we do that, we have what? We have a new higher high compared to our major swing high looking left with this close above candle here. So with that being the case, what can we do? We can move our major swing low up to the low of the pullback before that break above. So now we have a new major swing low, which is just the level price cannot break in order for us to continue to be in an uptrend. Let's push forward. We eventually get what? Right here is a new major swing high because we have a swing high followed by more than three candles pulling back. And if we push the price forward, we eventually get the close below our previous major swing low. That indicates a reversal. And this is the only time that I tell myself the uptrend is over, and we're more likely to start a new downtrend than to continue higher in this uptrend.
So those are the guidelines and rules I use to point out major swing highs and lows. And again, these major swing highs and lows act as our map to determine whether the market's in an uptrend, a downtrend, or trying to reverse. As we see over here, as price closes below that previous major swing low, that's when we classify something as being in a reversal. And until this major swing low in our uptrend is broken, then we still consider this market to be in an uptrend. And I know that may have been a lot, especially for those of you who are brand new. So please feel free to go back and rewatch that section as many times as it takes for you to have a good handle on this, because this is a vital part, and you being able to identify trends in the market.
Now let's take a look at a bearish trend. And in the same way, we're going to be utilizing these major swing highs and lows as our map to help us identify that this trend is in fact bearish until it reverses and is no longer bearish in nature. So as we get started here, the bearish version of this is a mirror image of the bullish version. We're going from a major swing high because it's the start of the trend, the highest point before price started this downtrend. We're coming down to a major swing low. The difference here, again, it's a mirror image of the bullish rules. Instead of having three red candles pulling back in a bearish trend, we're obviously going to need three green candles in the pullback, and that's the rule for us to have a major swing low.
In order to classify this as a major swing low, it needs to be the lowest point, and it needs to have a pullback of at least three candles. So since that's the case, we do in fact have a major swing low here. After having that major swing low, we're looking to see the top of the pullback, which is right here, and we're looking to see price break and close below the previous major swing low in order to have the start of this trend and in order to classify this as our major swing high.
So in this case, we get that. We have price pushing lower, breaking and closing below our previous major swing low. Now, the reason we need that breaking close before we can classify this as a major swing high is because we don't know where this major swing high is going to be. What I mean by that is price could have continued going up before creating this major swing low, and in that case, this would have been our major swing high, because our major swing high has to be the top of the pullback.
So with that being the case, and the major swing high needing to be the top of the pullback, we cannot identify it correctly until we see a break and close below the previous major swing low, because the top of this pullback could continue higher. But after this break and close, we then get a pullback, and this pullback consists of three or more green candles, which makes this a valid major swing low. And what that means is we need to see price break below this major swing low before pushing back above this major swing high.
As we can see, price pushes up here to our major swing high, which we know is a major swing high once price closes below our previous major swing low. So with that happening, what we can now do is move this line down to our major swing high here. And what this means is that as price pushes up, we're still considering this market in a downtrend unless, unless we break above this previous major swing high. So since that obviously doesn't happen, and instead we get a push lower and a pullback of three or more candles, we now can move our major swing low down to this level. And once we get that break below this major swing low before crossing above this major swing high, we now move our major swing high down as well.
Now, in this case, we get a push down to a major swing low. We have more than three candles in this pullback, so we now have a new major swing high looking left and major swing low. And in this case, price pushes up and makes an equal high with our previous high. Since we did not get a close above this level, we still consider this market in a downtrend until it closes above our most recent major swing high. Now we get a close below our previous major swing low, validating this as our major swing high. And our major swing high is going to stay essentially at the same spot because we had equal highs from our last one. We have more than a three-candle pullback here, so we can now classify this as our new major swing low.
As price pushes up to this major swing high, it eventually breaks below our major swing low, validating this as our new major swing high. Drawn in, this is what it would look like pushing up to another nearly equal high as our previous swing high, and then pushing down to our major swing low because we have more than three candles in this pullback. Now, at this point, we have our major swing high right here, we have our major swing low right here. Everything that happens in between this is all just a part of the pullback with anticipation of price continuing lower. The only time we do not anticipate price continuing lower in this downtrend is if what happens? If price pushes high enough to break and close above this previous major structure high. And if that in fact does happen, what that insinuates is that there's a higher chance we see a reversal or the start of a consolidating market than us seeing a continuation of this trend.
So if we push forward here, what ends up happening in this case is price eventually closes above our previous major structure high. This takes me out of the mindset of this market being in a downtrend. Again, now my anticipation is that we either see a reversal or the start of some consolidation. In this case, we ended up seeing a pretty nice reversal to the upside here on the Euro Aussie. So that is how I utilize the major swing high and low concept that you've learned throughout this lesson in order to identify bearish trends and to identify when those bearish trends could likely be over.
Now that we've talked about bullish and bearish trends, let's go over reversals. And these will be extremely simple because now you understand the concept of major swing highs and lows. So we'll go over a bullish reversal first. For a bullish reversal, we need to see a market that was in a downtrend, consistently putting in lower highs and lower lows, this being our latest major swing high. A reversal is anytime that price pushes up and closes above that previous major swing high. What this indicates is that price is now more likely to pull back and continue in that reversing direction, going from bearish up to bullish, than it is to push lower and break below this previous low.
So we use this reversal scenario not only to indicate the end of this downtrend, but also to indicate the possible start of a new uptrend. And just taking a look at that simple anatomy of a reversal one more time. Now, for a bearish trend, this is what that would look like. We would have price putting in higher highs and higher lows, higher highs and higher lows, higher highs and higher lows, this being our latest major structure low or major swing low. And then seeing price break and close below that major swing low, not only indicates the end of this uptrend, but also indicates that we have a higher probability of seeing this market start a new downtrend.
So I'm sure you can see why this could be a beneficial thing to understand and utilize in your trading. But now let's go take a look at this on some real charts. So one of these that we've already seen is here on the Euro Aussie. We were just looking at this chart, and as I discussed, price pushed up, broke above our previous major structure high, broke and closed above that level. This is what indicates, again, not only the end of this downtrend, or likely the end of this downtrend, but also a likely scenario where we see price push back and then continue in that direction of that initial reversal, in this case, going from bearish to bullish. So that's how we're spotting these reversals.
Let's quickly take a look at this in the bearish direction here, again on the Euro. I'll another chart we've already seen. We have this is our most recent major structure low, this is our most recent major structure high. As price pulled back, everything up to this point was just a part of the pullback, and we anticipate from this that price will close above our major structure high eventually. The only time we stop anticipating that is when we get a close below this previous major structure low, which we obviously got right here. And this insinuates that we're more likely to see a reversal out of this market and a start of a downtrend than we are to see price push higher and close above this previous major structure high.
So in this case, that's what we can see has kind of started here on the Euro Aussie, as we did break below this previous major structure low, we've now had a pullback and what looks like is going to be trend continuation, breaking below this low and starting a new downtrend, in this case, going from an uptrend to a reversal situation and now the start or possible start of a new downtrend.
Great job so far getting through that. I know that was a lot of information, especially if you are a beginner. What I want you to understand is that it's perfectly fine to go back and rewatch any of this video that you haven't understood yet, because everything's building blocks. So if there's anything you didn't understand about the last couple of lessons, it's going to be really hard for you to build on that to the point of creating a profitable price action strategy. Also, I want you to keep in mind that identifying trend is not a trading strategy. What we're doing with identifying trend is just what it sounds like, we're identifying the trend of the market so we can stay aligned with it when we're searching for trading opportunities. And also remember that these are guidelines, not set in stone rules. For instance, there may be times that I use a two-candle pullback instead of a three-candle pullback to mark off a swing high or low, depending on how big those candles are. There's nuances like that that will come along, and subjectivity that comes with price action trading. But those are the guidelines that I utilize in order to spot major swing highs and lows that help me identify the trend of the market and identify if the market's reversing.
And if the market isn't doing either of the things that we talked about, trending or reversing, or if it looks confusing and you can't identify what is happening on the chart, then the likely scenario is that is when the market's in consolidation, and we just sit on our hands and do not trade. But with that being the case, let's go ahead and move on now to step number three, which is identifying optimal trading zones utilizing price action. After learning about the concept of major swing highs and lows in the last lesson, that is going to make learning optimal trading zones very simple, because we're utilizing the same major swing highs and lows in order to point those out. Let me give you an example of that on the whiteboard.
So here we're going to draw out a trend. Let's say this trend starts at a starting point, pushes up to a high. Let's say this is an uptrend. We're going to talk about some trend continuation levels. At the point that we see this one, two, three move after our starting point, our new major swing high, our new major swing low, and our next major swing high. At this point, what I always do is point out the latest level that was broken. What I mean by the latest level that was broken is the latest major swing high that was broken in an uptrend is where my optimal trading zone is going to be in an uptrend.
So with this being the case, there's only one more nuance that actually makes this an optimal trading zone, and that is that this level must have been tested multiple times. So once we've established a trend, in this case an uptrend, what I'm now looking for is the latest major swing high that was broken. After I find that level, I look left to make sure that level has been tested multiple times. And after identifying that this level has been tested multiple times, then I have a zone that I can trade in. That is my optimal trading zone, meaning this zone is going to give you the best chances of winning a trade if this trend does in fact continue.
So to give you an example of that, if we get a pullback here into this zone, this is where I would look for an entry reason. At the point that I find an entry reason in this zone, I would place a stop loss somewhere below the zone, entry right here, and a target somewhere at or above this previous level of resistance. And with this being the case, if I enter here with a stop loss here, the chances are that the market is going to continue in this trend. In that case, this target will be hit. And obviously, we can talk about higher targets, which we will in later lessons. But it's important at this stage that you understand this optimal trading zone in an uptrend, which is going to be the previous major swing high, as long as it's been tested multiple times for trend continuation.
In the bearish direction, it's quite the opposite, almost a mirror image of that. We're going to have a starting point, pushing down to a low, pushing up to a lower high, pushing down to a lower low. At this point, we have our major swing low, and that's the level I'm going to be looking at as a possible optimal trading zone. Now, what's the other stipulation that has to happen? I have to look left and see that this level has in fact been tested multiple times. As long as I have this major swing low, as long as we are in fact in a downtrend based on what you learned in the last lesson, and as long as this level's been tested multiple times, then this is my zone where I'm looking for possible short trades to follow along with that trend.
So in trend continuation trading, we're expecting price to eventually continue in trend. So this is just marking out the optimal trading zone to continue that trend, to place a trade in, so that that trend continues and we can make some profit. So now let's actually go take a look at a couple of examples of this on real charts. Our first example is going to be on the Dollar Swiss, and we're on the four-hour chart. But again, price action trading works across any time frame in any market.
Here we have the start of an uptrend. We push up to a high, we then have a higher low, we then have a break and close above this high right over here, followed by another higher low. We then have the break and close above this level. So at this point, how would I point out an optimal trading zone? Well, I would take a horizontal line and put it at my previous major structure high. In order to classify this as an optimal trading zone, what else do I need to see? I need to see that it's been tested multiple times. So in this case, we can already see that looking right back here, we have a test of this level right here. We also have it as the major swing high that has just been broken. This already is identifiable as an optimal trading zone. So making up the zone looking something like this, and what I would be waiting to see is price push down into this area and give me an entry reason that we're going to be talking about in the next lesson.
So let's see what price does. In this case, we do in fact get into this area, and after that, price pushes higher into what we call trend continuation, as we break into brand new highs. Now let's take a look at an example of a bearish version of this trend continuation optimal trading zone. So we're pushing down from a starting point here, down to our first major swing low, up to our first major swing high, down to our major swing low, up to a major swing high, eventually breaking through this major swing low. At this point, we have an established downtrend. So if we have this established downtrend, and we've just made an impulsive move breaking our previous major swing low, what I do in this case is go ahead and mark out that major swing low.
Now that I have that major swing low marked out, I need to scroll the chart left and see if that level has been tested multiple times. The answer in this case is yes. We have a test there as support, a test here as support, a little test here we could call resistance. So we have a level that's tested multiple times, and with that being the case, we create our zone here. And just like with the bullish version of this, we're waiting for price to get into this area, but in this case, we're looking in this area to sell in anticipation for a continuation of this overall downtrend.
So let's see what price does. As we push forward, we do actually get into this optimal trading zone, and the reason this works so well is that we're aligning ourselves with the overall trend. We're in a downtrend, we're also looking at the most likely area price is going to continue in that trend, which is going to be the previous major structure low. We're adding to that fact with the fact that this level's been tested multiple times, which adds even more accuracy. Then we're waiting for price to get into this level, and we're waiting for an entry reason, which we'll discuss in the next lesson. But that is the logical reasoning around why trend continuation trading works so well. We've now had this pullback back up into our optimal trading zone. Let's click play, and as you can see here, price does in fact push down, push lower than our previous swing low, making us in trend continuation at this point.
Let's do a final example on a smaller time frame just to show you that price action tends to work across all time frames and all markets. Here we're on the alien on the five-minute chart. As you can see, this market is in what type of trend? We're in an uptrend, right? We have a push higher to a new high, to a new low, to a new high, to a new low. We're consistently making these higher highs and higher lows in price, meaning that based on our rules for swing lows and highs, we're currently in an uptrend. Now, how do we spot our optimal trading zone? We look at the latest level, the latest major swing high that was broken. That is right here. Where already have optimal trading zone drawn out. Now, in this case, if we scroll left, we can see that this level was also tested right back here as resistance as well. So that gives me what I need to identify this as an optimal trading zone. With that being the case, what I'm waiting for is price to get down to this zone, and from this zone, I'm expecting trend continuation to the upside. Let's push price forward and see what happens. We eventually do in fact come down into our optimal trading zone, and if I push play, you'll see that price did form trend continuation from there by making brand new highs and hitting what would have been our targets. Again, we'll discuss entries, stops, and targets in the next lesson.
But before we do that, I want to make this very clear. I know every example I've shown you throughout this lesson has been winning examples where this worked out. This is in no way a 100% guarantee. Optimal trading zones do not work out every single time. Nothing in trading does. The reason we utilize the trend identification and the optimal trading zones is because these are things that have proven to give me a statistical advantage over time. So I'm just teaching what's worked for me to you. What I mean when I say statistical advantage is that it's not like every single time I place a trade like this, I win. But over a large sample size of trades, if I utilize this exact price action analysis and the exact strategy you've been learning throughout this entire video, then over a large sample size of trades, I will be profitable.
So what you just learned is how I utilize optimal trading zones for trend continuation trades. Now, what I want to teach you is how I utilize these zones for possible reversal trades. So let's go ahead and take a look at the chart here. On the chart, we can see that we have a downtrend based on our major swing low and major swing high concept. What happens when our previous major swing high is broken, closed above, in a downtrend? This was our major swing high here, is the break and close above of that with this candle here. What does that signify? That signifies that we have a possible reversing market.
So the way I utilize optimal trading zones is very similar in a reversal market. Once I get this, I get a previous downtrend that has now broken the previous major swing high. This would be a bullish reversal. So now that I have this bullish reversal scenario, the way I'm going to utilize an optimal trading zone again, very similar, I'm going to put a line right at that previous major swing high that was broken. I'm going to scroll the chart left and see if that is in fact a level that's been tested multiple times. If it is, then I have an optimal trading zone here. And in a very similar way, what I'm going to be waiting for in this case, after the breaking close above our previous major swing high, is a pullback into this optimal trading zone. That's where I'm going to look for possible entry, and that's where I'm going to look for the reversal to take place and price to start continuing in that upwards direction after signifying a possible reversal.
Let's hit play and see what price does here. As you can see, we push a little bit higher, and then eventually do get a pullback into this optimal trading zone for a possible reversal trade. After that, let's click play, and as you can see, price does in fact reverse and start going in that bullish direction based on the reversal scenario we discussed.
Now let's take a look at a bearish reversal situation. Here we have a starting point, starting an uptrend, swing high, swing low, swing high, swing low, swing high, swing low, swing high. And what has price just done? Price has just broken below our previous major swing low. What does that mean? That's a possible reversal, in this case, a possible bearish reversal situation. So in order to classify this as an optimal trading zone, I not only need it to be the reversal level, the previous major swing low that was broken, but also I need it to have been tested multiple times. In this case, it was tested here as the major swing low and here. That is multiple times tested. That's what I need to qualify this as an optimal trading zone for a possible reversal trade.
Let's push price forward. As you can see, we have now made it into that reversal zone, and if I click play, price does in fact start that reversal into the bearish direction from this zone. So that is how I utilize the optimal trading zone for reversals. And now that you have that information, let's go ahead now and move on to step number four, which is entry patterns.
Now, when it comes to entries that I utilize in my price action trading, and with this particular price action trading strategy, I use a number of different candlestick patterns and chart patterns. But if I described them all in this video, it would be two hours long. So instead of doing that, what I'm going to do is give you one of my favorite candlestick patterns to utilize with this exact strategy you've learned throughout this video. This candlestick pattern is extremely simple, so this is going to be a very short lesson.
The candlestick pattern I'm referring to is what I call the close above candle and the close below candle. The close below candle is going to be used for possible bearish entries, whereas the close above candle is something I utilize for bullish entries. When trading this price action strategy, the close above candle is very simple. It is a green candle that closes above the high of the previous candle. That's as simple as it is. And the previous candle can either be red like this, or it can be green. The color of this previous candle does not matter. The only thing we're looking for for a close above candle is a green candle. For a bullish close above candle, that must be green. A green candle that closes above the high of the previous candle.
Next up, we have the close below candle, which is the opposite of the close above candle. For this candle, we're looking for a candle that closes below the low of the previous candle. Again, this previous candle can be green, or it could be red. Either way is completely fine. We just want to make sure that we have a candle closing below the low of this previous candle. That's what I refer to as a close below candle. And as simple as it is, it's one of my favorite and a very accurate entry reason to utilize with this particular trading strategy.
So now that you know the entry reason we're going to be using as well, let's move on now to step number five, which is combining everything together. So now is the time we're going to take all the building blocks you've learned throughout this video and combine them all in order to create a profitable price action trading strategy. So let's go ahead and do that right now. We're on the Dollar Swiss on this pair. We're going to take a look at a trend continuation trade based on this full strategy by combining everything you've learned so far in this video all together.
So we have a starting point here, we have a push up into a high, a pullback to a higher low, a push up to a higher high, a pullback to a higher low, and a push up to a higher high for our trend continuation setup. After identifying our trend.
Our next step is to identify an optimal Trading Zone. How are we going to do that? We're looking back at the previous major swing high, and we're going to put a horizontal line on that area. We're then going to create a zone out of that area, and this is our optimal Trading Zone.
So, at this point, we have the trend going in the correct direction, being an uptrend. We're looking for long trades, and we know where we're looking for long trades now because we pointed out our optimal Trading Zone. What's next? The next step after this is just to look for an entry reason. And the entry reason we discussed in the very last lesson is going to be that close above candle for a bullish trade. So, we're looking for a pullback that touches our zone. This did not. So, we're looking for something to touch this zone and then give us that entry reason of a close above candle. Let's go ahead and push price forward and see what we get. We are now inside of the zone, so now we're just waiting for that entry reason. And there we go, we have a close above candle. This doji candle, the high of it is right here, that is followed by a green candle that closes higher than the high of the previous candle. This is the complete strategy all the way to the entry point. At this point is when I personally press the buy button. So, I would be pressing the buy button to place this trade. I would then be putting a stop loss below our zone or below the swing low, depending on which one's lower. If this doji candle had a long wick and the swing low was way down here, I'd be putting the stop loss down below that swing swing low. But for a target, for these examples, one of my favorite set targets is a 1.4 to 1 reward risk ratio. That's what we'll use. And in this case, we have the entire strategy set up, and we've actually placed the trade in this scenario. Let's click play, and after a lot of consolidation, we do in fact eventually come up and hit those targets on this trade. And that was a full example of the strategy when it comes to trend continuation and in the bullish direction.
Now let's take a look at a bearish trend continuation trade utilizing the entire strategy. Here we have an established downtrend. We're pushing lower, creating new lower lows, new lower highs, new lower lows, new lower highs. And what have we just done? We have just broken and closed below our previous lowest low, or our previous major swing low, giving us an established downtrend. And what's our next step after we've established that we're in a downtrend for a trend continuation trade? That's going to be to find the optimal Trading Zone, which is going to consist of the previous major swing low, as long as that level has in fact been tested multiple times. In this case, we do in fact have that. Looking at a zone drawn in something like this. And what are we looking for next? Next, we're looking for a pullback into our zone, followed by an entry reason for a bearish entry. That's going to be a close below candle. Let's take a look at what happens with price. We do in fact push up into our zone and eventually get this red close below candle right here. With that being the case, this is where I would place my short position. I would actually be pressing the sell button at this point. That's the entire strategy for the bearish version of this trend continuation strategy up to the entry point. At that point, I'd be placing a stop loss above the swing high or the zone. In this case, above that swing high. And again, for these examples, we're going to use a 1.4 to 1 reward to risk ratio, which is around there. Let's go ahead and hit play. As you can see, price continues in that trend based on this trend continuation strategy and does in fact come down to hit those targets.
And just to show you that I utilize this price action strategy you're learning in my own personal trading, this is a trade I sent out to all the members of the TTC Forex University. I'll put the screenshot of that analysis to the left. This is an email they get three to five times a week with the trades that I'm placing based on what they're learning inside of the course. If you want to learn more about the TTC Forex University, we do have some space available, and it'll be the top link in the description, or you can go to www.thetradingchannel.com to learn all the details about that full mentorship program.
So, those were examples of the trend continuation version of this strategy. Now let's take a look at examples of the reversal version. In this case, we're going to look at a bullish reversal. We have a set trend already in this market, pushing lower to a low, up to a new lower high, down to a new lower low, up to a new lower high. We then have a push down to a little bit of a higher low, and this break, this break is what signifies what? A possible reversal in the bullish direction. So, since we broke above this previous major swing high, we now have everything that constitutes this as a possible reversal. In this case, the next step is going to be to draw out an optimal Trading Zone. We can see that we do have multiple tests of this level here. So, with that being the case, we have an optimal Trading Zone in this area. With that being the case, what is the next thing that I'm going to be looking for? I'm going to be looking for price to pull back to this area and give me the bullish entry reason, which for this video is a close above candle, like we discussed in the last lesson. Let's take a look at what price does. Price does in fact push lower and eventually gives us this. This is a bullish close above candle after the indication of a reversal. So, with that being the case, for the reversal strategy, this is where I'd be placing the trade. I would be placing a trade right at the close of that candle. I'd be placing a stop loss below the swing low or below the zone, and for the sake of these videos, we're going to be looking at a 1.4 to 1 reward to risk ratio. By the way, this as well was a trade that I sent out to all members of the TTC Forex University, again, just to show you that I utilize the exact analysis I'm teaching you in my trading every day. That analysis can be seen right over here. And after sending this trade out, if we press play, you can see that price did in fact push up and start a new uptrend from this reversal scenario, utilizing our price action analysis you've learned throughout this entire video.
Now let's take a look at a bearish reversal scenario here on the Aussie dollar daily chart. We have an established uptrend, right? We have a push up to a high, a higher low, a higher high, a higher low, and a higher high. Now, in order to indicate a reversing situation or a reversal scenario, what do we need to see? We need to see the breaking close below this level right here. This is our previous major swing low. I'm going to push the price forward quite a bit because it took a while to break below this level, but let's take a look at that. So, as you can see, that did take some time as price consolidated and through here before finally breaking and closing below our previous major swing low. At this point, we have what? We have a possible reversal situation in the bearish direction. So, what is our next job? Our next job is to point out our reversal zone, which is going to be an optimal Trading Zone based on the fact that we have a level here that not only has acted as our previous major swing low, but that also has acted as support and resistance multiple times. With that being the case, what I'm going to be waiting on is price to push up into this zone, then give me the bearish entry reason, which for this video is a close below candle, before expecting the reversal, taking a trade, and hopping on this reversal to the downside. Let's see what price does. As you can see, price does in fact eventually pull back to our optimal Trading Zone during this reversal situation, and if I zoom in, you can see that we do in fact have that entry reason being this close below red candle right here. So, in this case, the trade would look something like this, with an open position right after the close of that candle, a stop loss right above our zone, and for targets on these trades, a 1.4 to 1 reward to risk ratio. Again, clicking play, and as you can see, price did in fact push down low enough to hit those 1.4 to 1 targets here in this case.
So, there is a full rules-based price action trading strategy based on everything that you've learned throughout this video. I really hope you got some value out of this video. If you did, don't forget to click that like button, subscribe if you're new, and comment if you made it all the way to the end. And also, don't forget that if you're interested in some more advanced training and if you're interested in our complete mentorship program that includes a full course, email analysis, trades that I'm actually placing based on what you learned in the course three to five times per week, personal help where it will be me answering any of the trading related questions that you have personally to ensure that your journey to your trade goals is as smooth as possible. If that sounds interesting to you, don't forget to click the top link in the description or go to www.thetradingchannel.com.