5m TF Price Action Strategy

Update June 2015: Hi folks, this strategy is still getting the odd comment and viewing, glad to see it's still of value to you! I'm still actively trading with (most) of the principles below. I only take 3-4 trades per week, and use the higher timeframes (daily chart) to establish my overall trading bias/direction. Also in lieu of the 5m timeframe opening range, I use the "Asian" range from 0 GMT to 5 GMT as a high and low to either take reversal entries from the extremities or as breakout pullbacks.
Cheers & good luck, JN.

Welcome to my thread on my 5 minute timeframe price action strategy. This is a discretionary strategy that trades with the trend on a 5 minute timeframe. This strategy has evolved from Price Action techniques I’ve learnt via Lance Beggs at yourtradingcoach.com & PeteFader’s MadScalper strategy here on babypips.

This strategy trades with the trend on a 5m TF, taking pullbacks that utilise the 14ema and volume. While also being aware of Support & Resistance, Stopping Volume, upcoming news announcements & session opens.

I currently day-trade this strategy full-time at the Asian Open for a few hours, then the Frankfurt Open for a few hours. I focus on trading AUDUSD, USDJPY and EURUSD. I liken trading to a mix between fishing and playing poker, I’ll use these analogies throughout as they work quite well.

I'll discuss each component of the strategy, and then post trades each day showing it all working together. Things will be easier to understand if you read through the basics so we're all speaking the same language.

The first six posts in this thread are prerequisite, as there are a few price action basics to introduce. There are also links around the web that reinforce the concepts. Like all forums on babypips, please feel free to participate but try & avoid any question that you could google for yourself.

I’ve bookmarked the next few posts, and I’ll fill them up over this week to include:

Trading with the trend,
Trend Definition,
Trend Simplification,

Support & resistance levels,
previous day’s high and low,
opening range,
support & resistance,
100 levels,

Risk/reward,
stop loss levels,
position sizing,
trade management,

Volume,
VSA,
stopping volume,
confirming trend volume,
no supply / no demand,

Nitty gritty,
brokers,
demo accounts & practice,
chart setup,
trade execution,
orders,
pairs,
references & indicators*,


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Trade with the trend! The trend is your friend! The trend is your friend until it ends or bends! Trade against the trend, never again! Blah blah blah. This is a pretty obvious & basic topic, but I thought I'd cover it.

Price action basics has an uptrend making higher swing highs and higher swing lows, a down trend consists of lower swing highs and lower swing lows. Dow theory I believe? Anyway, determining the trend is *fairly* simple, if it looks up, it's up and vice versa. The tricky thing is when does the trend change?

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Using an uptrend as an example, the trend is broken (no longer an uptrend) when the swing before the highest swing high is broken. Take the highest high, go back to the swing low before it, and that is the key price on the chart. When price breaks lower than that, the buyers don't have control anymore.

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More often that not though, you can use a simple method that a fellow Australian day-trader uses, a trend line. How to determine the trend with two lines and why they make me horny

For this 5m TF price action strategy, I use a 50ema and 14ema to simplfy my trend, I've found that when the 14 is above the 50, this more often than not signifies an uptrend. Vice versa for down trend. I'm cautious when price breaks sharply below the 14ema. In an ideal world of trending pullbacks, price remains above the 14ema, and the 14ema stays above the 50ema.

Here's an example on this morning's UDJPY:


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Again much like the previous post on identifying the trend, this topic is basic but a must for this strategy. I'd say this is the second most important part of the strategy, after the trend.

Support & Resistance (S&R) levels are real, they aren't voodoo, and they're easily identifiable on any chart, index, timeframe, asset etc. They are live though, and if price strongly rejects one, it can "weaken" the S&R level, and vice versa if price spins on a dime at an S&R level, this further confirms the level. S&R levels can be made up from price, previous day's highs or lows, key levels after news announcements, opening range prices or trading session prices. Basically any key price level that screams out on a chart.

Basic Support & Resistance Levels

S&R prices/levels are "zones" and aren't exact to the pip or price. This strategy is a 5 minute timeframe strategy, so zooming out to the 1 hour timeframe, place key support & resistance lines. I find the easiest way to do this (without and indi) is to grab a highlighter app (highlight for mac) or similar for windows, and draw basic lines on the chart, connecting swing lows and swing highs. There will be key prices that repeat themselves, they are your key S&R!

Further reading from internet wizards:

Search for "support resistance" | YourTradingCoach
Support And Resistance Basics
http://www.dailyfx.com/forex/educati... in_Forex.html

Previous Day's High & Low (PDHL)

The PDHL is key in my eyes, I define the day as starting at the Sydney Open and going through to the end of New York, so the high and low that occurred throughout that time period. For me, these two prices were the be all and end all. I'm not sure whether the "big players", "huge banks" or giant pending orders were sitting at these prices, but I find that the following day, they're significant enough to provide strong resistance for price to break through, and if price is strong enough to break through, then it takes off!

The Two S/R Levels You Must Have On Your Charts

Opening Range

For me there are three opening ranges I take note of during the day; the Tokyo, Frankfurt & New York open. I define the opening range as the high and low of the first 5 minutes of the session. I see this as the arm wrestle at the start of the session. If price breaks above the opening range, there's a higher probability that the buyers won the wrestle, if price breaks below, the sellers won.

The opening range high and low act as support & resistance lines, price retests these lines and they've a good risk/reward location to enter from.

From the guru -> Search for "opening range" | YourTradingCoach

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R-Multiples

When talking about risk/reward, I refer to 'R-multiples' instead of number of pips, % equity of dollars profit. This way someone with $100 capital can speak the same language as someone with $100,000 capital. If you can consistently make 3R return per day (12 pips for 4 pips risk, 30 pips for 10 pips risk etc.) then you're a star!

The idea behind this, is each trader define what % of his account is equal to "his" (or her) 1R. I could risk 5% per trade, 2%, 0.25% etc. If I make 4R, for the 5% trader, they've just made 20%, the 2% trader has just made 8% and the 0.25% trader has just made 1%! But each trader took the exact same trade.

Position Sizing

From the start, I define the $ amount (or percent) of my capital that I'm going to risk per trade, this is fixed for me, and changes each week as I compound my account. For example, let's say on a $10,000 account I'm going to risk 1% of my account, or $100.

R = 1% or $100. 1R is the definition of how much I'm willing to risk per trade, it is a dollar amount. On the chart, it is the amount in pips that's between my entry and my stop loss. If I lose on a trade and let it my initial stop loss, I'm going to lose 1R.

Sizing a position (lot size) is as simple as heading to Position Size Calculator: Free Online Forex Position Sizing Calculator and inputting your capital, % risk (R), and your entry and stop loss levels on your particular setup. This ensures that even when losing, you'll stay in the game.

So now if someone says "I made 4R on a trade", this means they made 400% for that trade, or 4 times their risk. This is why it makes me laugh if a trader says "wow I made 200 pips!"... if they risked 100 pips (stop loss) to make 200 pips profit, they made 2R. If I make a 12 pip profit but only risk 3 pips, this trade is 4R, or twice as profitable as the 200 pip trade. Then I'd ask how many 12 pips moves the market makes versus how many 200 pips moves it makes, but that's another story! :P

Setting a Stop-Loss

I set my stop losses quite tight on a chart for a particular setup, placing the stop-loss below a recent swing low (in an uptrend) or above a recent swing high (in a downtrend). If price is near a support & resistance I'll look to try and include that in the stop-loss. Depending on your broker, you'll also need to include the spread in your stop-loss, it's very frustrating being stopped out by half a pip, so give the trade some room to breathe.

Here's two recent setups today on USDJPY and EURUSD of stop-loss placement examples:

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The forex & volume debate has been going on since the caveman did his first Fibonacci retracement. If you're not a believer in volume in forex that's ok, but this isn't a debate about whether the volume in forex is valid or not. Some of the bigger brokers (IBfx, XM, Axitrader) have reliable volume tick activity feeds.

VSA - Volume Spread Analysis

A good primer on volume and VSA (Volume Spread Analysis) is available here - Trade Using VSA (Volume Spread Analysis) @ Forex Factory.

Volume in forex is about measuring the cause versus the effect. Does the volume correlate with the price? In a nice trending move, is volume increasing on the 'positive' moves and decreasing on the pullbacks? Did volume spike at Support & Resistance? Did that tiny doji candle produce a massive volume? Volume in conjunction with candle price bars can tell you quite a bit of information.

I'd recommend reading and re-reading "Master the Markets" by Tom Williams (there's a version available by TradeGuider but they try and sell you their software).

Stopping Volume

Stopping Volume doesn't occur throughout each session, but it's worth being aware of. My take on stopping volume is when a large amount of sellers in an uptrend (or buyers in a downtrend) come in and literally "stop" the current move. On the chart this is usually a nice strong bullish candle with a decent sized wick on the top, which indicates the sellers coming in. Without volume on the chart, you wouldn't know a heavy amount of sellers have come into the market.

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And we're almost ready to put it all together! This is the last of the introductory posts, some house-keeping stuff about brokers and chart setups, and the finer detail of entries and order.

Brokers

There are all sorts of opinions about brokers, good & bad. I'd recommend heading forexpeacearmy.com and checking the reviews there. My criteria for a good broker is fast execution, minimal slippage and low fees. I use DukasCopy personally but this isn't a recommendation for them, I'd advise to choose your own that suits you. I'd highly recommend visiting cashbackforex and signing up via them for a broker, as you can get big rebates on your trading fees.

Demo Accounts & Practice

As always, demo trade a system until you're comfortable with risking real money. There is software available such as forex tester 2 which lets you back-test a discretionary system in a MT4 type environment.

Trade Execution & Orders

Once I've confirmed my trend, am happy that price is moving, checked that there is no S&R in the way (or stopping volume) and that I've got a nice pullback on low demand, I'll look to size my position and place a stop buy or sell order at the candle close. During the European & New York session I use stop buy or stop sell orders faded above or below the candle close. During the Asian session I'll have these prices marked out & enter at market, as sometimes the broker is a bit sleepy to fill Asian orders!

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Here's a nice example to kick the thread off.

Trend - 14ema < 50ema, short,
Opening Range (OR) - below, short,
S&R - broken through & pulled back to,
14ema - price pulled back to 14ema,
Volume - signs of No Demand,


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