Price-action-trading-strategies-#Chapter-03

Chapter 3: False Setups

Trading comes down to who can realize profits from their edge in the market. While it is easy to scroll through charts and see all the winners, the market is one big cat and mouse game.

Between the quants and smart money, the false setups are everywhere.

As a price action trader, you cannot rely on other off-chart indicators to provide you clues that a formation is false. However, since you live in the "now" and are reacting to directly what is in front of you, you must have strict rules to know when to get out.

For me, in lieu of a technical indicator, you can use time as a gauge.

Just to be clear, the chart formation is always your first signal, but if the charts are unclear, time is always the deciding factor.

I did a study of all my winning trades and over 85% of them paid in full within 5 minutes.

If you have been trading for a while, go back and take a look at how long it takes for your average winner to play out.

Let's review a few head fakes to get a feel for what we are up against in terms of false setups.

I just showed you two examples of head fakes in both equities and futures markets.

In each example, the break of support likely felt like a sure move, only to have your trade validation ripped out from under you in a matter of minutes.

Chapter 4: How to Protect Against the Head Fakes

I could not leave you hanging with the feeling trading is impossible.

There are many ways you can protect yourself against head fakes. For starters, always have a stop in place to protect yourself against loss.

Next up, do not go hog wild with your capital in one position. Make sure you leave yourself enough cushion, so you do not get antsy with every bar that prints.

Again, let time play to your favor. I know there is an urge in this business to act quickly. However, there is some merit in seeing how a stock will trade after hitting a key support or resistance level for a few minutes.

If you think back to the examples we just reviewed, the security bounced back the other way within minutes of trapping traders.