Price Action Masterclass

Price Action Masterclass

©2017 ScottPhillipsTrading.com

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Contents I: Introduction Reading Price Action Without Indicators The Most Important Thing – Is it a Trend or is it a Range? Talking Indicators in Front of the Colosseum

II: Lessons Trading Ranges & Vacuuming in Trading Ranges The Psychology Underpinning Trends Telltale Clues Behind the Kickoff to a Trend Recognizing Counter-Trend Price Action in Trending Markets End of Trends: Blow off Tops When Is it Appropriate to Pick Tops? Short Term Volume Spikes Dow Theory Opening Gaps Microgaps

III: Putting it all together The Fakeout Setup Retests How Should I Trade? Definitions

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I. Introduction

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Reading Price Action Without Indicators Objective: Throughout this Course, I’m going to show you how to remove all the indicators from your chart and read price, bar by bar. My background: I’ve been trading since 2002 and like everyone, I lost money early on. A lot of money. But I’ve been profitable since 2010. I have a lot to teach you, so I won’t focus much on myself during this Course, but if you’d like to read more of my background you can check about my website ScottPhillipsTrading.com and my Quora. I’ve learned much of what I know from working with a collection of traders, including Ivan Krastins, Van Tharp, Ed Seykota, and Linda Raschke. I’ve also worked closely with dozens of other traders, including Laurent Bernut, Mole from EvilSpeculator (a great blog!), and many others. Why is trading so difficult? From my view, two reasons: 1. We’re pattern matching animals, evolved from necessity. It’s in our DNAs. We look for patterns, even when they’re not there. Try it by putting any indicator on your chart and after a short-time, you’ll see patterns? This is an edge, that’s an edge! It’s simply not true. And many indicators, such as Pivot Levels, are complete garbage. 2. We hate being wrong. We’re unable to differentiate emotional pain from physical pain. Being unable to admit loss in trading is the fastest way to blow-up. Personally, I’m a martial artist, I like physical pain. Check out the video 10 minutes in to see me smash myself in the face. Doesn’t bother me. But being wrong in the market? THAT HURTS! So where does Technical Analaysis fit into everything? •

We all learn classical Edwards and McGee technical analysis. Trend lines, triangles, head & shoulders, etc. Do you think a head & shoulders is an edge? Have you ever tested it? Of course not! We avoid being wrong by not testing something we’ve learned. We see patterns where they aren’t there (ie, RSI is an EDGE!) o Some TA is good, some is bad, but that’s besides the point. You need to test or else you will lose over the longterm! Whether it’s classic technical analysis, RSI, a custom indicator, anything – if you haven’t taken the time to test it you need to stop right now and ask WHY!? Why have I been so stupid? Because you’ve seen it a thousand times and know it’s an edge? Well I’m here to tell you that your brain lies to you. As human beings, our brains are terrible at calculating odds in real time, which is a serious impediment to making money in the markets. So go out, test your indictors, and then commit your money!

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We look at a chart and we take a view. Say you’re a bear, and you think a top is forming. So all you look for is evidence confirming that view. Or you’re a bull that thinks the low is in! Doesn’t matter, you’re now biased. After losing trade after trade, you begin to feel wronged, “Oh it’s Janet Yellen’s fault.” “Oh it’s Trump’s fault.” That’s loser thinking. You can make it even worse by looking forums to confirm your viewpoint. This Course is designed to end that loser thinking and begin looking at price

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through an OBJECTIVE lens. •

We lie about our losing trades and only mention our winners. We avoid keeping proper records to avoid feeling the emotional pain of our losses. Again, This Course is designed to end that loser thinking and begin looking at price through an OBJECTIVE lens.

What do I need to do to become profitable? I grew up and I stopped believing in fairytales. I started believing in statistics. Here’s what I think: 1. Only about 20% of technical analysis has any real statistical validity. 2. My other opinion is you have absolutely no business at all of using any technical analysis unless you’ve done your own rigorous testing and analysis. Do your own backtests! Do your own work! That will remove 75% of the problems we call trading psychology problems, which are really just problems with your method. 3. I want to show you how to remove indicators from your chart just like you remove training wheels from a bicycle. We’ll look at price bar by bar so we can capture this whole level of granularity that you miss when you look at classical TA. You can use this method of trading to trade like a scalper (ie, Al brooks), or by doing better analysis on your charts, or by using it how I use it today:

To identify situations where the risk vs rewards odds are in your favor and you’re making a series of rational bets that you can build trading systems around *Being able to identify these kinds of situations is possible on both a discretionary and mechanical basis. Of course, the discretionary approach is far more difficult as it requires a level of precisision and discipline that few people posess. Personally, I have found tremendous success building mechanical or quantitative trading systems that allow for about 5 to 10% of decisions to include a discretionary component. I limit my discretion to specific decisions – where to place a stop, where to take profits, what setup to enter, etc. I avoid lumping together multiple discretionary decisions together…for obvious reasons. If you’re interested in putting together everything you learn in this Price Action Course then you may be interested in my upcoming System Building Course. Make sure to send me an email at [email protected] if you’re interested in being one of the first people to have access when it’s out. In the next cheaper, we’re going to dive right in and start learning the most important thing...

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The Most Important Thing – Is it a Trend or is it a Range? This video is the longest and the most important. Before you do anything, you need to establish: Is it a trend or is it a range? What is a trend? It’s obvious to a 5 year old. If there’s any doubt whether it’s a trend or a range, then it’s a range. The definition might sound simple, but it can be tricky to establish exactly what is and isn’t a trend. Personally, I like to incorporate multiple time frames into your analysis to establish the exact characteristic of the move. Make sure to watch the video, about a minute in you’ll see a GBPUSD example of what looks like an uptrend, but is actually part of a larger timeframe trading range, causing a very choppy, difficult to trade move up. What is a range? We’re looking for lots of overlapping bars, lots of sequences of up/down/up/down bars, lots of confusing & hard to trade price action. We’ll see this continue for quite some time on a chart. We can see a trading range begin after just 20 bars of price action, but it can continue for quite an extended period. Look to enter Long at the bottom of the range, and Short at the top of the range. Professionals avoid the middle area, as the risk/reward odds are not in your favor. Betting on breakouts out of trading ranges can be difficult, but there is numerous opportunity to take smaller R wins near the range’s extremes. Make sure to watch this video in detail and carefully observe the various charts I analyze. I go through various currency pairs and futures contracts, including the S&P 500, Euro, Cable, Yen, Coffee, Copper, and more. Some notes: • •

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Lower probability outcomes cause bigger moves. After about 20 bars, we can discount the influence of the previous trend and see evidence of a trading range. Later on, I’ll tell you how to trade double tops and double bottoms. This is a major part of one of the systems that I trade today. Easy or tradeable periods of price action are followed by difficult to trade action. Adjust your trading accordingly. About 11 minutes in: I go into further detail of what happens at the top of a trend. A doji bar represents a whole lot of piss and wind, going nowhere. Bulls drive it up, bears drive it down, or viceversa. Both sides think they’re right in a trading range. Lots of dojis, lots of outside periods, inside periods followed by outside periods, and overlapping bars are all things seen in trading ranges. You can often get fooled by a trading range that looks like it’s a trend, but it just ends up being choppy garbage. I believe markets spend about 80% of their time in trading ranges, which is why I’m focusing so much time on them in this section and in the videos. You have to be able to identify trading ranges and adjust accordingly, or you’ll quickly erode any results you’ve made during the trending periods. Of course, you can design trading systems around these trading ranges, which is something I’ll be covering throughout my videos and in my upcoming System Building Course. Stay tuned! 19 minutes in, I’m going through an example of a downtrend (USDCAD) that transitioned into a trading range. Being able to identify how trends come to an end will give you a massive advantage for adjusting your systems. The game is here to be greedy when others are fearful, and fearful when others are greedy.

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Talking Indicators in Front of the Colosseum We established earlier that humans are nothing more than pattern matching animals. This has a profound effect on our ability to properly analyze indicators, unless we’ve done a proper back test and statistical analysis. Try it for yourself, put any indicator on a chart and after just a short time you’ll start seeing edges that aren’t even there! There’s a few specific ways that we use indicators that really hurt our trading: 1. Pattern matching bias – We see patterns that aren’t there. 2. Justify trades we wanted to take anyway – nothing more needs to be said on this. Search the internet and you’ll find your share of permabears like Tim Knight, Robert Prechter, or the guys at ZeroHedge who use technical analysis constantly to justify their own bias. So what are indicators good for then? •

Not much, honestly. Test them for yourselves, what I’ve found is that they are…not an edge. And I’m talking about most of your standard indicators, oscilliators, etc. Your RSIs, Wilders, MacD’s, etc. They work great in very short periods of time and then completely destroy you.

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As a predictive method, almost all of these indicators and oscillators are useless. Back in the 80s, all these muppets created these indicators like the Williams %R indicator or Elder Indicators or any of these other scams that are included in trading packages. At the end of the day, most of these are just price turned into a squiggle.

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Indicators aren’t completely useless though! They can be an objective method for identifying rules in your trading systems. Make sure to watch my video from around the 3.5 minute mark for more details. Personally, I use the Bollinger bands to objectively define a rule for one of my mean reversion systems. You can use any indicator, even things like the RSI which I just shit on in the last paragraph, as long as it’s done in an objective, rule based manner. Again, none of these indicators (Bollinger bands included) have any predictive value. But you can use them to build a specific rule.

What sort of things may have predictive value? •

Check in around the 5 minute mark for a few indicators I think may have some predictive value. But don’t get your hopes up, beyond satisfying your curiosity, I don’t think there’s THAT much predictive value in anything. To me, trading is not about predicting the future, as we covered earlier. Understanding and internalizing the message below is what really helped me turn my own trading around nearly a decade ago and the reason for putting together ScottPhillipsTrading.com Trading is about being able to identify situations where the risk vs rewards odds are in your favor and you’re making a series of rational bets that you can build trading systems around.

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II. Lessons

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Trading Ranges & Vacuuming in Trading Ranges By now, anytime we look at a chart we should immediately ask: Is it a trend or a trading range? 80% of the time we’re in a trading range, even if it’s not immediately obvious. Sometimes, it does become obvious, which creates a trading opportunity for us. At the end of the day, trading ranges are just two sided buying pressure. Unlike a trend, we have opposing forces, both of which think they’re right! We’re not looking to predict. What we’re looking for are clues that we’re in a trading range. • • •

Overlapping bars. One or two bars up, a few bars down. Choppy mess. Doji bars. Outside periods. Evenly matched price action.

How do we trade in a trading range? •

Buy at a Limit at the bottom of a trading range or Sell at a Limit at the top of a trading range.

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We’re looking for mean reversion. A very small target and a high win-rate. What I mean by high winrate is any trading system which has over a 50% win-rate, sometimes as high as 70% if you’re looking for winners that are smaller than your losers. Personally, I prefer systems that have win rates around 50-55% and slightly larger or equal win vs losses, as they’re easier to recover from when a drawdown does occur.

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This Course is mostly focused on identifying and analyzing Price Action. You can check out my System Building Course for more information on how to build a trading system that allows you to incorporate these Price Action principles with the other components of a trading system: Risk Management, Money Management, Entry Rules, Exit Rules, Analysis / Review Procedures, Discretion, and more. I will include some of my Setups in this Course though, to help get you started!

What about vacuuming in trading ranges? •

Vacuuming takes place in the middle of trading ranges. Institutional buyers & sellers place their limits at the extremes.

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Price SHOOTS up to the top, hits all the institutional selling limits, and is brought back into the range. Amateur buyers who bet on the breakout are now losing on their position and forced to cover.

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As the price approaches the middle of the trading range, it will again SHOOT down to the bottom, till it hits the Institutional Buyers’ limit orders. Amateurs are again caught betting on the breakdown.

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A breakout will eventually occur, but there can be multiple failed attempts or Fakeouts, which presents a fantastic entry opportunity. I’ll go over my Fakeout setup later on in this Course, stay tuned!

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The Psychology Underpinning Trends Here are some key points on trends: •

The markets typically spend about 80% of the time going nowhere. Trading range action that is difficult to predict.

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Markets move 87% of the price in about 11% of the time. After extended periods of going sideways, one side is exhausted and the market kicks into gear and starts driving in one direction.

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The nature of trends is a positive feedback loop. You see buying pressure from sideline bulls, bears covering, and the people who were already long adding to their positions.

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You also start to get textbook top setups which don’t work, time after time. Classic technical analysis stops working as the trend is in full gear, overwhelming any action you think “should” happen.

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About 3 minutes in I cover a trend in the USDCAD, showing reversal setup failing time after time while the trend persists in a positive feedback loop.

How does a trading range transition into a trend? •

Once a trading range has gone on for too long, it begins to attempt trending action. (We’ll cover that in more detail later in the Course. There are tell-tale signs that a trading range is nearing it’s end, also pointing to the most likely direction of breakout!)

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A strong kick-off is a great indication that the trend will go on for some time. If you missed the initial breakout, getting in with a small position and wide-stop is a great way to be involved in the move. You won’t get an extended pullback for quite some time, waiting for a retest might never happen after a strong kick-off! Professionals know if a move is strong, you just need to be on!

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After a strong initial move breaking out of a range, we can expect a high probability of continuation after the first pullback. This second leg of the trend is an excellent time to add to your small position from earlier, possibly establishing your full risk for this trade (ie, a certain % of your capital.)

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How Trends Come to an End How does a Trend come to an end? 1. Transition from a trend into a trading range. a. Larger than normal range candles are an indication that the end of a trend is close, but not quite here yet. We want to start getting more conservative with banking profits, taking some risk off the table, skipping new continuation setups, and looking at potential counter-trend scalps. b. After about 20 bars of sideways action, we can discount any of the action from the previous trend and begin to work with the new information in front of us: That we’re now in a trading range. Sideways action can be confirmed with any action unable to break the previous spike high or low. Being able to change your view as a with new information that may be counter to your previous thesis is a critical part of transitioning yourself into a winning trader. 2. Blow-off tops. a. About 5.5 minutes in I dive into the Nasaq during the 2000 DotCom bubble top. b. I don’t usually use Average True Range (ATR) but I do like it to quickly see how volatility has changed overtime. c. Once you see volatility begin to spike, you’re looking at a blow-off top. You don’t want to be shorting strong moves though, as they can continue on for some time. d. Big candles mean big emotions in the market. Please have strong opinions, they’re scared, they’re greedy, they’re emotional. It’s a scary time to be trading, as the market is moving big amounts. It’s easy to look back 15 years later and see great opportunities, but real time these high volatility periods are challenging as there’s a lot of misdirection in the market. e. Once the blow-off top is in full-effect, the reversing bear move can be devastating. Of course, the 2000 and 2008 downturns are famous examples, but we see this price action on small intraday movements as well. We can also see it on other markets, such as currencies, futures, bonds, cryptocurrencies, and more. Note: Everyone who gets into trading gets attracted to the short side. We want to show them, show the market! Maybe we have something to prove (maybe you got burned in a past bear market and now you want to make it back, show you’re a pro!) This is harmful thinking. It’s very challenging to hold an entire bear market, they’re terrifying to trade, and even if you’re an expert level trader you can walk away with significant losses. Of course, designing trading systems can help you stay in control during these active periods. I have a few systems in my arsenal that I deploy only during such high volatility, bear market phases.

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Recognizing Counter Trend Price Action in Trending Markets Trending vs Counter Trend Price Action: •

Profit taking is the psychology driving counter trend moves. This happens in both uptrends and downtrends. Make sure to watch the video, about 45 seconds in I cover a downtrend and take you into the psychology of the Sellers riding the downtrend down.

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People get nervous when the market isn’t going their way and tighten their stops. You see small moves against the trend which creates these little microchannels. Classical TA calls these bull flags and bear flags.

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Poor traders see counter trend moves and think the trend has reversed. These premature buyers or sellers realize they’re wrong, forcing them to cover their position, which adds to the continuation of the trend.

When is it Appropriate to Pick Tops? Why do we like to pick tops so much? •

Because we’re fucking stupid. And we’re retarded. And we’re driven by ego and emotion. We get this thrill when we pick a top, that I’m so right, I’m so clever. That’s bullshit thinking, but I get it, I’ve done it too.

Is it ever appropriate to pick tops then? •

Yes, under the 2 ways in which trends end: o Transition into range then reverse o Blow-off tops

Short Term Volume Spikes What are short term volume spikes? •

Any volume spike, in a single bar, with a 2 or 3x spike in volume nearly always represents capitulation, especially if it happens after a prolonged move.

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Make sure to watch this video in full, it’s just 90 seconds and has a few examples of short term volume spikes that lead to tradeable movements. This is certainly a concept that you can build a system around.

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Dow Theory What is Dow Theory? •

It’s a way of knowing when a trading move is nearing it’s end.

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You take two markets that were correlated for the move (ie, Gold & Silver), and you look for nonconfirmation. If a market is strong, two related markets should be going up together.

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This holds true for many markets, including US Stocks Indices, Soybean Oil/Meal, Gold/Silver, Residential/Commercial Real Estate, etc.

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This holds true on every timeframe – you often see this on 5minute with markets such as the ES and YM futures. Also the spot currency rates and it’s corresponding future market. Bonds are another great example, 5 year vs 10 year, etc.

Opening Gaps There’s a lot of content online about gaps, what’s true and what’s bullshit? •

Things like “all gaps must be filled” are complete garbage.

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The best research I’ve seen is by a guy called “The Gap Guy.”

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Gaps are created by an imbalance between buyers & sellers.

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Very small gaps are extremely likely to be filled. But there’s generally not good risk vs rewards odds,

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Medium gaps are somewhat likely to fill, about 65%, and you have an excellent risk vs reward trade.

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Very large gaps have a small chance of being filled and are difficult to trade.

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Make sure to watch the video for a few examples of how to analyze price in terms of the gap and being able to identify if it’s a trading range or a trend. I also dive into currency and future markets, which often see gaps to open the week (I call it a Monday morning gap, which is my time Australian.)

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Microgaps What is a microgap? •

Microgap is an open above the previous close. It doesn’t necessarily have to be above the previous high (which is nice!) but just above the previous close. Reverse that logic for microgaps down. This represents an imbalance of buyers & sellers – one side is so eager to get in which created a quick burst in price.

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Microgaps are one of the very hidden signs at the start of a move that it’s a kick-off to a trend. This can be a great indication that we’re about to enter a tradeable period in price in which trending systems and other breakout style approaches can work well.

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In a trading range, these gaps aren’t that useful, only at the start of trending moves.

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Microgaps followed by a large series of unbroken bars (ie, consecutive higher high / higher low bars.) We also see very little overlap and very limited pullbacks. Microgaps can often times be one of the earliest indication that these kinds of powerful moves are coming.

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III. Putting it all Together

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The Fakeout Setup What is the fakeout setup? •

A way to trade double tops & double bottoms, which are mentioned in every book ever written on technical analysis and price action. What most of those books fail to mention is a specific, actionable way to trade these double tops and bottoms. The fakeout setup is a rule based setup entry. Here are the rules below for a Fakeout Buy (reverse for Sell) o Spike Low o The first bar to break the spike low. o We enter on a Stop order on a break above the bar that broke the spike low.

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The Fakeout is also made better by a Hammer or Shooting Star.

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Fakeouts in the direction of the general (larger timeframe) trend are also more powerful.

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This setup works best if it happens within 3 or 4 few bars. So you have quick action, a spike low, a few bars up, a thrust down to break the spike low, and then you enter on that fakeout.

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About 5 minutes into the video, I cover a number of examples of the fakeout setup.

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Here’s a fakeout on Priceline recently that led to some significant downside action.

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Retests When do I know it’s safe to start top picking? •

Trends that are weakening are in their 3rd, 4th, or even 5th leg with moves that are shorter than the previous legs. Of course, this can go on for quite some time.

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Retests are a great way to start picking at a top. You are looking for a spike high, followed by a move down, and then a retest of the spike high without breaking the spike high. I’ve found that placing the stop at the absolute spike high offers a solid risk vs reward trade.

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Here’s a great example of a retest on Apple that offered some nice risk vs reward odds.

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How Should I Trade? It’s a bit of a mystery to most people exactly what they should be doing in the markets…when…and why? In this video, I’ll breakdown how you can accomplish that: 1. Is it a trend or is it a trading range? a. Trading Ranges i. Buy near the bottom of the range, sell near the top. Sell near the top and buy back at the bottom if you’re shorting. ii. You don’t want to try and hold for a massive winner in trading ranges. iii. My mean reversion systems aim have win rates of roughly 60 to 65% as I only aim for winners within the range. Betting on breakouts, or big winners, is a low probability game – the odds are against you! This isn’t trend trading where “one good trend pays for them all.” b. Trends i. If you find a trend in its early stages, get in (even if it’s a small position), with a widestop. A classic mistake trader’s make is putting a tight stop early in the move and a wide stop late in the move. If you’re entering on a breakout of the range, you’ll want to put your stop at the other side of the range. ii. Once the trend is going, I like to buy 2 legged pullbacks. This is easier to explain visually – make sure to watch my video around the 2.5 minute mark to see examples of 2 legged pullbacks that I like buying and those that I like to avoid.

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Definitions Spike High: Highest high in a three-bar sequence, i.e. a bar with a lower high low before and lower low after it.

Spike Low: Lowest low in a three-bar sequence, i.e. a bar with a higher low before and higher low after it.

Hammer: Bar with a lower wick and small real body. Lower Wick Must be 2x Greater than 2x the Real Body. Formula: Lower Wick >= 2x Real Body -Can be lower lower, inside period, or outside period. Any form is fine.

Shooting Star: Bar with an upper wick and small real body. Upper Wick Must be 2x Greater than 2x the Real Body. Formula: Upper Wick >= 2x Real Body -Can be higher high, inside period, or outside period. Any form is fine.

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Fakeout Setup: A powerful setup, found at market turns. Requires the following stops:

Fakeout Buy: 1. Spike Low 2. 1 more more bars up 3. 1 more more bars down 4. First bar that breaks the spike low is the completion of the Fakeout Buy Setup

Fakeout Sell: 1. 2. 3. 4. Setup

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Spike High 1 or more bars down. 1 or more bars up First bar that breaks the spike high is the completion of the Fakeout Sell

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Retest Setup: A setup found 90% of the time at reversals.

Retest Buy: 1. A Spike Low 2. 1 or more higher closes away from the spike low. 3. 1 or more lower closes, down to the spike low without breaking the spike low. 4. Setup complete on step 3 if it’s within 5 bars of the spike low and that low has held.

Retest Sell: 1. A Spike High 2. 1 or more lower closes away from the spike high. 3. 1 or more higher closes, up to the spike high without breaking the spike high. 4. Setup complete on step 3 if it’s within 5 bars of the spike high and that high has held.

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Thanks for reading! Make sure to check in to the membership section to see the full list of videos and any new updates I post. Also be on the lookout for my System Building Course….

Scott

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