Price Action Entry Signal

buy sell forex

This is one of the best entry systems I’ve ever used.

It has a remarkable accuracy because it takes advantage of traders emotions.

But first things first.

Here is a few consideration that you need understand before trading this entry signal:

  • This is only an entry signal, not a complete system, so you need to add more things like: money management, trade and risk management, when to close your trades, etc.
  • It is always recommended to trade this signals only in the direction of the market condition.
  • Don’t trade this or any other system when there is an important announcement
  • Only take one signal on correlated pairs

Entry Signals

Look for one of the following patterns:

Shadower Pattern

This pattern is formed by a hammer (for longs) or a shooting star (for shorts).

Look at the hammer, first it breaks through the previous low, but it bounces back, closing above that level. For a short trade, first the shooting start would need to break through the previous high, and bounce back down, closing below it.

Strong Pattern

This pattern is formed by either a bullish or a bearish piercing/engulfing pattern.

Look at the piercing pattern, first it breaks through the previous low, but it bounces back, closing above that level. For a short trade, the pattern needs to break through the previous high, and bounce back down, closing below the previous high.

Psychology behind these patterns – Read this

Lets talk about the shadower pattern. Imagine whats going on as the pattern is developing…

First bears break through the previous low. If the general sentiment of the market was bearish, this would have been the perfect opportunity to take the market to lower levels…

But what happens?

Just the opposite, at some point, bulls take control over the market, pushing it back up, closing above the previous low.

So there are a few things that we should note:

Bears are not as strong as they though they were
Bulls are stronger than they thought
The market doesn’t want to go down

This gives us an opportunity to go long.

Now, in order to be a valid signal it must have the following:

Reversal candlestick pattern must be valid (clearly visible)
Must be significant. The size of the candles that form the pattern must be greater than previous candlesticks; it indicates more momentum and volume.
When a candlestick closes below the previous dip (or above previous rally) on shadower patterns invalidates the signal. It is only valid on strong patterns.

When to open your trade

I’ve always liked to enter my trades using pending orders.

So in this case I take my trades:

For a long trade: 15 pips above the close price of the pattern (i.e. hammer)
For a short trade: 15 pips below the close price of the pattern (i.e. shooting start)

Don’t take your trade if there is an important news announcement due in 1 or 2 hours.

Time frames

You can take your trades on the following time frames:

15M, 30M, 1H and 4H charts.

Instruments to trade

You can trade all major currency pairs and crosses. You can also apply this entry signal on other markets, such as stocks, futures, indices, etc.

Just make sure you are trading a liquid instrument.

Stop loss levels

For long trades: 20 pips below the lowest low of the relevant pattern (i.e. hammer or bullish piercing pattern) 
For short trades: 20 pips above the highest high of the relevant pattern (i.e. shooting star or bearish engulfing pattern)

Take profit levels

That depends of the timeframe you are using to trade

Just make sure you are using at least a 1:1 risk reward ratio. Don’t take trades with a fewer RR ratio than that.

Entry Signal Examples

Shadower pattern off LOPS1 in direction of the trend

4-01

[Chart 1]

Since it is a trade in direction of the trend (and above LOPS2) we use a RR ratio of 2:1. Stop loss is placed 7 pips above the high of the relevant pattern (shooting star).

Shadower pattern off PP in direction of the trend

4-02

[Chart 2]

Signal off the 30 minute chart. To protect ourselves from a possible reversal off LOPS1, we only use a RR ratio of 2:1

Strong pattern off LOPS1 and EMA(144)

4-03

[Chart 3]

The pattern was against a possible trend (market trading below the PP) so we use a RR ratio of no less than 3:1

A trade off LOPS1 in direction of the trend

4-04

[Chart 4]

Significant pattern off LOPS1 (the market is trading below both LOPS). In this case we use a RR ratio of 3:1, because the market is likely to continue its way down.

A trade off both HOPS

4-05

[Chart 5]

This is a trade against the direction of the trend after 2 days of consolidation. This trade requires a 3:1 RR ratio.

A trade off the EMA(144) and PP

4-06

[Chart 6]

Strong pattern in direction of the trend off the EMA(144) and PP. The risk reward ratio of 2:1 is used in this trade.
 
Invalid Shadower pattern

4-07

[Chart 7]

This is an invalid Shadower signal. There must be no closing prices below previous dip or above previous rally.

Valid Shadower pattern

4-08

[Chart 8]

This is the result of trading signals that are triggered just before an important news announcement release.

  • Eric Aroh

    What is LOPS1, HOPS1, etc?

    • Raul Lopez

      Low of the previous session, High of the previous session

  • Gabri Ele

    Thank you Raul, this is a very interesting price pattern.

    • Raul Lopez

      Glad you liked it! It works very well!

      Let me know if you have any question!