Using price action o enter high probability trades

Trading Strategy Insights 8 – Using price action to enter a high probability trade

Trade of the Week: S&P 500 Futures Trade on February 10, 2020 (52 Ticks Gain)

The topic of the week for our Trading Strategy Insights is how to use price action to enter a high probability trade. I will show you how I interpret price action signals, such as pin bars and engulfing patterns to time my entries.

Analysis and entry

ES chart showing Candlestick chart patterns

This is a shorter text, so I'm starting directly in my intraday range bar chart. Not on this chart I analyze the market mood. At this time of the day, the market is trading in a broad range.

I always look for enough confluence factors to make a high probability entry with a good reward-to-risk potential.

  • Steps 1 and 2: After a down move, I noticed the price is making higher lows. This is an early sign of a potential change in direction. This needs to be confirmed by other confluence factors.
  • Step 3: Cumulative delta is the first confluence factor I look at. It confirms to me that the order flow is stronger to the buy-side.
  • Step 4: This is the price action confirmation signal I needed to see. This is an engulfing pattern showing rejection of a down move. Price quickly reverses to the upside. In fact, I used this price action signal to enter a long trade at 3321.00.
  • Step 5: We can see two reversed pin bars showing a retracement to the settlement price (the orange line on the chart) and the price resuming its previous up move.

Note: Strategy workshop participants, for a detailed explanation of the settlement price strategy, please refer to the recording of session #2.

Exit strategy and trade results

ES chart showing trade results
  • Step 6: As I noticed cumulative delta increasing faster and faster, I realized this up move could overextend for a while. I decided to keep my target close to the high of the day.
  • Step 7: I specifically placed my exit order 2 ticks below the day's high, so my order had a higher probability of getting filled. And in fact it was filled not long after that.
  • Step 8: This trade produced a very good 52-tick gain in 37 minutes, with no heat at all.

Conclusion

This was a relatively easy trade to enter, due to the confluence factors present at the time of entry. That said, we cannot trade "by the book" all the time. If you notice, the moving averages were still not validating my entry. Bittersweet win for me, but the other signals were so strong that I decided to enter.

I'm a strong believer in reading the market and adapting my strategies. Strict entry rules do not always work in trading because the markets change, and we have to adapt.

I invite you to check our Strategy and Execution Workshop,
a unique hands-on live training program, done in small groups, in which participants learn the process of developing and testing trading strategies and then improving their trading execution through the use of exclusive tools that we provide at Mind Muscles for Traders.

I hope you learned something useful for your trading in this lesson. If you have any questions, please post them here or send me an email at trader@rogerioamado.com
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About the Author Rogerio Amado

With an Engineering background and a Masters in Business Administration from the Tuck School of Business at Dartmouth (New Hampshire, USA), Rogerio has a deep understanding of financial markets from both an academic and a practical perspective. His knowledge and trading experience includes fundamental, technical, and order flow analysis. In addition to his signature Strategy Development courses, Rogerio also publishes his Trading Strategy Insights on the Mind Muscles for Traders blog.

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