EUR/USD-Using the Price action for Entries and Exits

Clearing your charts of all indicators forces you to focus on the price. Price movement is what creates profits and losses, and is therefore the most valuable indicator you have.

Price Action Entries

October 31 was a trending day for the EUR/USD; trending days are relatively easy to trade as long as you trade with the trend until there is evidence that suggests the trend is reversing. When a trend is potentially reversing, step aside, until the new trend asserts itself. Then, trade that trend.

Figure 1. EUR/USD 15-Minute Chart

Note: The yellow background marks the European session, pale yellow marks the start of the US session (overlap period).

Figure 1 shows a strong downtrend. Starting at the left of the chart, most of candlesticks are red/down, showing selling pressure. Three pauses in the downtrend are marked “Weak Pullback.”

The first is very weak, and is more of a pause than a pullback. If you were already short, you could have easily held through this pullback (See: Should I Hold Through a Pullback, or Get Out? Part 2). Only looking at a 15-minute time frame it would have been tough to get short on this pullback since it was so brief. Moving down to a smaller time frame such as a 5-minute or 1-minute chart provides a better entry signal in this case.

The second pullback starts out exactly the first, except that it continues to move sideways, then a sharp move down and up, followed by another strong move down which triggers the continuation of the downtrend.

Figure 2 shows how this could be traded. Once the price moves below the low of a green bar, enter short, with a stop above the recent high.

This happened twice during this pullback. The first time would have likely resulted in a loss, as the price made a quick run higher following the entry. The second trade would have caught the ensuing the downtrend, more than making up for the loss.

Figure 2 – EUR/USD 15-Minute Trade Example

Some traders would see the bigger up/green bar (right below “Stop”) as a buy signal. Buying in this situation, while it may work out from time to time, is unwise. Looking at the overall context of the market we can clearly see that the overall price action is to the downside. One slightly larger up/green bar does not change that.

Exiting With Price Action

Anyone can enter a trade, it is the getting out that can be difficult. If you trade binary options, you don’t have this problem.  Although you still need to choose a time of expiry for your option, which presents its own challenges (for a “Time based Target” see:  How to Trade the New Highs or Lows Strategy).

Exiting with price action means we hold the trade until there is some indication to exit the trade. Based on the trade in Figure 2, the short position is held until there is evidence to get out. One method is to continually move your stop loss down to the high of the last bar. This is a rather crude technique, but can work well in volatile markets or when there is very strong price movement and you don’t want to give back much profit if you expect a sharp pullback. Using this method, you’d be stopped out on the green bar at 17:45 for a profit almost double your risk.

Alternatively you can utilize a fixed profit target. I often use a 1.6 to 2.0 reward-to-risk ratio. If my stop is 10 pips, I place a target at 16 to 20 pips. During a strong trend your target will usually be hit, as it was here, but can leave some money on the table if the trend blows right through your target and keeps going. Even with this drawback, I believe it to be the most useful exit technique.

If the price is moving very strongly as it approached your profit target, move it out a few more pips, but bring your stop order to the original profit target level as soon as the price passes through it. This way, at minimum you lock in the original target, but may capture a few extra pips as well.

Final Word

Removing indicators will force you to watch price action more closely. Interpreting price action takes time, but is a valuable skill to have. It can help pinpoint entries and exits, as well as avoid low-probability trades.  Switch between time frames to see opportunities for entries and exits that may not be visible on the time frame you are watching. Trade with the trend; enter on pullbacks and exit using a fixed target (or some variation of it), or when the price action dictates the trend may be turning.