These are the key things I look for when day trading price action. You don’t need to know everything about technical analysis to trade well. These few key concepts greatly enhance my trading. If I stick to them, I trade well. When I deviate from the concepts discussed here, that is usually when bad things happen.
The cheat sheet is a short list of things I look for when trading my strategies to make sure that I am taking high-quality trade setups in favorable conditions.
These concepts are from the Price Action Stock Day Trading Course.
Price Action Day Trading Cheat Sheet
- Measure wave size. This helps establish reasonable profit targets. Assume the next wave will be smaller. (On whatever time frame you use).
- Stop loss size should be less than half of the upcoming estimated wave size (R:R) based on measuring the price waves (above).
- Trading is not about prediction. It’s about maximizing the chance of hitting the target based on what the market’s currently doing, with that target being at a decent reward:risk (2:1 or higher, 1.5:1 at the bare minimum).
- Can go for bigger targets, but this will often mean holding through pullbacks (totally fine, just be aware). Can still use wave size to estimate how far the price will move.
- I require a strong thrust coming into a TC. I also require a strong trust coming into an RT/RB.
- With a TC the strong thrust immediately precedes the pullback and entry.
- With an RB/RT, smaller waves may form the actual topping/bottoming pattern, so you need a big thrust coming into the pattern.
- What comes into a pattern often comes out.
- Are the candles whipsawing? That will make it harder to trade. Avoid.
- Are triggers working recently? Even if I wasn’t in those trades (because there was no setup) I can look to see if triggers are working. If not, avoid it. It is probably too choppy.
- Is there conviction in the price movement? If not, avoid. “Drift” is a killer”
- Drift is when the price is stuck inside prior price waves, and can’t gain traction outside. Candles stack beside each other (even when moving up or down), instead of moving in long stacked-ontop-of-each-other candles. Turns are ragged and unclear.
- Our patterns set the stage, but the context needs to be right to trade.
- Movement relative to SL (trigger candle) provides the R:R. Not good, don’t trade.
- Tough entry, don’t trade.
- No conviction, don’t trade.
- You get to decide when you trade and when you don’t.
- The market will try to lure you in. Don’t let it! That is its game. The battle is with yourself, not the market.
- Everything must align. A strategy/signal means all of it, not just a pattern. Context, Pattern, and Trigger all must work together.
- 1 or 3 trades where everything aligns is way better than 5-10 mediocre trades. That’s 2-4R per day. R is simply a unit of risk. So if we risk 1% per trade, then 4R means we added 4% on our account. Some days will be no worthwhile trades, and other days the market will produce many.
- Our job is to recognize our context, pattern, and trigger (R:R minimum) in this sea of data. That is it. Doesn’t matter what happens outside that. Integrate that belief to help avoid the fear of missing out (FOMO).
How to become a person without FOMO: see Tactics for Improving Self-Discipline because it will be impossible to trade well with FOMO.
For further reading on Price Action, see Become a Master at Price Action Trading.
Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.