What is Price Action?
Price action trading allows you to analyse the Forex market without using indicators.
Instead of indicators you use candles, support and resistance, and other chart analysis to make trading decisions.
Price action is perfect for scalp trading because it allows you to make quick trade decisions.
I won’t cover price action basics here, if you want to learn the basics, check out my free price action strategy.
The point is that price action analysis allows you to predict with a high degree of accuracy what price will do next by understanding who has control of price, buyers or sellers.
If buyers are in control, you want to buy. If sellers are in control, you want to sell. It all seems very simple right? Well, some newbies make price action a lot more difficult than it needs to be.
So let me tell you a secret that will help you be a better price action trader.
Who’s in control of price?
Who’s in control of price?
Those five words are vital when trading price action.
If you ask yourself that question every time you look at a chart, you will be a better trader.
I do most of my trading on larger time frames, and even on those larger time frames I constantly ask myself “who’s in control of price?”.
That one simple question keeps me profitable and it keeps me from making mistakes.
And here is why.
The question only had three possible answers…
- Buyers are in control.
- Sellers are in control.
- Price is undecided.
If you spot a short trade which you want to enter and you ask yourself “Who’s in control of price?”, would you enter if the answer is buyers?
No, of course not, if buyers are in control you do not want to sell yet.
Asking yourself “who’s in control of price” forces you to think about price objectively.
It forces you to properly analyses price. Instead of making a hasty decision, you are forcing myself to make an informed decision.
Now, if I ask myself that question when trading 12 hour charts. Imagine how much more important it is when I am price action scalping a 5 minute chart; when I only have about 30 seconds to make a trading decision.
So, if you want to trade my Forex price action scalping strategy, memorise that question.
Who’s in control of price?
Being able to answer that question quickly and effectively is vital. And, it is also very stressful, which brings me to my next point.
The Right Mindset For Scalping
Mindset (trading psychology) is one of the most important factors in trading.
You can have the best strategy in the world, but if your mindset is wrong, you will fail.
And this is especially true when scalp trading.
The Three Core Skills of Trading
New traders think that strategy is the most important skill in trading. The truth is that trading breaks down into three core skills.
You need to master all three of these skills in order to be a successful trader.
In this article I will cover these skills as they relate to scalp trading. And in this chapter I will cover trading psychology.
You may think you don’t need this, but if you are scalping Forex for a living, you do…
Trading Psychology is More Important Than Strategy
If I gave a new trader a successful scalping strategy with a 80% win rate they would likely lose money.
Yes, even with such a powerful trading strategy they would lose money.
Because there is more to trading than having a good strategy.
Have you ever traded out of boredom? Have you ever closed a trade early out of fear? Have you ever held on to a losing trade in hope that it would turn around?
These are all common mistakes that new traders make.
And these mistakes slowly eat away at a traders win rate, confidence, and profit. It does not matter how good your strategy is, if you cannot handle the stresses of trading, you will lose money.
Successful scalpers know this, and they focus just as much on their trading psychology as they do on their strategy.
So how do you get master your trading psychology?
Price Action Scalping Basics
Before trading price action setups you need to know the basics. Don’t worry though, this scalping strategy is very simple to learn and use.
To scalp trade effectively you need to know how to do two things:
- Spot and place support and resistance areas.
- Identify continuations on small time frames.
And that is what I will cover in this chapter.
On larger time frames I specialise in reversal trading. I take price action based reversal from areas of support and resistance.
On small time frames reversals do not work very well. This is because reversal trading relies on identifying the precise moment in which a trend dies. On small time frames there is too much noise to effectively identify the death of a trend.
So a different approach is needed for Forex price action scalping.
We will be trading trend continuations. We will be watching for price action signals which indicate a trend is strong. We will then trade a continuation when price pulls back to a area of support or resistance.
This may sound simple but it is very stressful. One key component of this strategy is that you must maintain a risk to reward ratio of 1:3 at a minimum.
So, let’s sum up the basics.
- We will enter scalp trades only from areas of support and resistance.
- We will only trade trend continuations.
- We will only enter a trade if our target is 3x larger than our stop.
That third point is the stressful one. When a trade is two pips from target and then reverses five pips… many people just close it out. You cannot do that, you must maintain the 1:3 ratio. Even if it means your stop being hit, you have to stick to 1:3. I will explain this in more detail later.
For now, let’s look at the actual Forex price action scalping strategy.
You should now have a good understanding of how to place support and resistance areas. The next step is actually finding trade setups. And I am going to show you exactly how to do that.
There might be a small problem though. If you do not understand candlestick pattern and trend basics, the stuff below might not make sense.
If you find that your are struggling with the concepts below, jump over to my price action basics in the Forex education section. In there I cover basic price action and candlestick pattern concepts. Once you understand those concepts, the stuff below will be easy.
What a trend continuation looks like
I am sure you have heard the old saying, “the trend is your friend”. Well in this case, that saying is kind of true. We want to use price action to determine the trend, get a good entry and ride it for a short while.
You should already know how to identify a dominant trend, I talk about this in the education section linked to above.
But the thing about trends is that they are rarely, if ever, smooth. If sellers control price for 24 hours on a five minute chart (288 candles) price won’t move down smoothly every candle for 288 candles. Trends move like this:
See how buyers push back up to the former support after sellers break through it? (marked in green)
That is how a trend works. In a bearish trend, sellers are in complete control of price. Buyers try to take control all the time. Sometimes buyers take control briefly but sellers regain control and continue trending down
Here is an example of how trade continuation scalps play out. The image below is a gif, it will play like a video and show you how trade continuation trading works.
The basic concept is to trade with the trend. Using candlestick analysis with support and resistance allows you to determine if the trend is still alive. If the trend is still alive, you enter a trade for a quick 10-20 pips. Now, let’s look at some detail trade examples.
Pairs, Spreads, Stops & Targets
Now that you know the price action scalping basics, it’s time to talk details.
Pairs, spreads, stops, and targets are all a very important part of this scalping strategy.
Your stops and targets especially need to be on point if you want to get the most out of price action scalping.
So let’s take a look at all of this in chapter 4.
Pairs and spreads
The pairs you trade will usually be determined by their spreads. The common stop loss for this strategy is 5-10 pips. So you need to trade pairs with very tight spreads to be profitable.
Your spread must be included in your stop. With a two pip spread, you would end up having a three pip stop on some trades, which is simply not viable.
Here is a list of the pairs I trade with this strategy.
There are of course other pairs with tight spreads. However, I stick to the ones above as they work best for me.
Stops and Targets
Stops and targets are pretty simple. Generally my stop is 5 pips and my target is 15 pips. If a pair is moving fast and a 5 pip stop is too tight, I may extend my stop to 10 pips and my target to 30 pips.
Targets and stops are the most subjective part of this strategy. You should stick to a 5 pip stop and 15 pip target when you first start. As you become familiar with the strategy you will understand when to use a slightly larger target and stop.
The Forex Price Action Scalping Strategy
By now you should understand what to trade and how to trade it.
So let’s take a look at examples of the scalping strategy in action.
In the real examples I take you through real scalp trades I took step-by-step.
You now know how to place support and resistance areas. You also know what a trend continuation looks like.
All you need to do to trade this strategy is put these two things together. I am now going to show you how to do this with a lot of examples. We will start with and AUD/USD short trade:
In the image above you see AUD/USD is in a downtrend. An area of support is placed at 0.7633 based on the bounces marked in green.
Sellers manage to break support at 0.7633. Buyers take brief control of price and push it up to the former 0.7633 support area.
Buyers make several attempts at closing above the 0.7633 area. Since buyers cannot close above the 0.7633 area, a short trade is entered. The short is entered because price is trending down and it is clear buyers cannot regain control of price.
That is a trend continuation.
Why is the setup above a good trade? Well, let’s do some quick and simple risk analysis on the setup. This analysis would be done when price hits the resistance area and struggles to break above it.
- The major trend is bearish, this indicates sellers are in control of price (one point for sellers)
- Buyers caused a minor reversal back up to resistance, this indicates that buyers have some power (one point for buyers)
- Price is at a strong area of resistance (one point for sellers)
- Buyers are incapable of closing above the resistance area (one point for sellers)
Sellers have three points, buyers have one point. This risk analysis is basic, we could do more complex risk analysis but a strategy like this does not need it.
The idea here is simple. You are using price action analysis to make an educated guess as to what will happen next. If sellers have control of the major trend and buyers cannot close above resistance, the bearish trend has a good chance of continuing. So, you make an educated guess that sellers will continue and you short, why is this profitable?
AUD/USD long trade
This trade triggered a few hours before the trade above. The set up was good but the trade never took off. The support and resistance area was placed at 0.7485 based on the first two bounces show in the image for the previous trade. When buyers broke above resistance price quickly dipped back down to test the area.
Sellers could not close below the area so a long was entered at 0.7488 at 5:50am. The trade’s target was 21 pips and the stop was 7 pips. This trade remained open for over an hour but in the end price dropped and hit the stop.
Could I have done something differently to save myself from taking a 7 pip loss on this trade? Maybe I could have, but it does not matter.
The key to trading this strategy is to just take the trade and let it play out. DO NOT close trades early and DO NOT widen your stops. If the trade fails it does not matter, all that matters is that you maintain a minimum of 1:3 risk to reward ratio.
If you take one hundred trades with this strategy and fail 60% of them you will still be profitable, have a look:
60 trades x -7 pips lost = -420 pips
40 trades x 21 pips won = 840 pips won
840 – 420 = +420 pips up
This is why it is vital to maintain a risk to reward ratio of 1:3 and this is why losses like the one above do not matter.
Trading Forex is not about being right, it’s about being profitable.
Let’s look at another recent example.