A simple price action approach

Much has been written and debated about PA and I wanted to share a simple approach that works, for me
at least. There are many who are struggling and perhaps this will help some of you out. Maybe with
everyone's help we can develop these ideas into something bigger, who knows?

This is an approach for trending markets, which means you must know how to identify the trend. Once
we know the trend we look for pullbacks to enter in the direction of our trend. That is, we need some
momentary counter-trend move to create an opportunity for an entry.

How do we determine the trend? By means of channels. A channel is created from a trendline that has been copied
to the swing high (for an uptrend) or to the swing low (for a downtrend) between the two points from which the
trendline was originally drawn. Here's a down channel followed by an up channel:



Now that we know the trend we look for the trendline to be broken to create an entry opportunity. The idea being
that if this is a pullback in a trend then price will get back inside that trendline and the move will continue.

There are many ways to enter, here's a simple one: Let's say it's an uptrend. We buy when a price bar gets back above
the uptrend line and closes there. Our stop is just below the swing low that went below our trendline.

Now that we're in, where do we exit? We use the opposite channel line. When price hits it we exit.

metal

 

We got a second entry on the same channel today. You can take this one separately or use it to average up.



metal

 

Adjusting our uptrendline because we made a high swing, price is now restesting it. If we get a close below it and then one above it we can add to our long.



metal

 

You changed your trendline between those two last posts. Can you do that?

 

Yes, now that we made a higher high our trendline is drawn using the last swing low before that high. In today's case our channel failed and price is now inside a bigger channel.

We can also draw trendlines by connecting successive high swings and cloning that line to the lowest swing low between them:



metal

 

You might have something there.

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=3181969>

 

very nice, baro-san. This is exactly what I'm talking about only I was keeping it very simple as I gently introduce the concept.

metal

 

i use a much more sophisticated yet simple version.

can't talk about it.

 

Do others like using limits on the trendline or do you like the market to show signs of a bounce off the line before entering? I see the OP likes waiting for signs of life before entry, Close below line followed by a close above.

I've always run into problems clearly defining an entry approach that I find would work best for trend line trades. I like to see a long shadow cross and snap back though a trend line. Haven't done extensive testing on this approach yet. Looking forward to the thread and testing different ideas.

 

Zr1,

There are many entry methods, such as trendline touch, trendline pierce, a lower low below it, a pattern, two bar reversal underneath, three bar reversal underneath, volume exhaust, etc.

Pick one or two as your approach and stick with it. You can't encapsulate every possibility but you can be consistent with your trading plan.

metal