Identifying Forex Trading Signals From Price Action

Identifying Forex Trading Signals From Price Action

Compared to other methods, these ways can help to show more precise trading signals.

The common sense of signals in forex trading is a gesture to open a buy or sell position complete with setting stop loss level and target profit level. Trading signals can be directly obtained from trading software or robots, or in the form of notices via sms, email or other communication media from a company or a broker that specializes in trading signals trading. Signals can be made by an analyst manually or sent automatically through trading software, even if you are trading with robots You do not need to know trading signals, your trading robots.

No matter how you get a signal, trading with clear signals or cues will reduce the emotional impact and increase confidence when making trading decisions.

In this article exemplified how you can obtain trading signals manually by recognizing the price action setup formats on the trading chart. In general, trading signals are quite valid and less valid. Trading signals that are considered valid are those that have a high probability. For that we must be able to distinguish both and only entry when trading signal is valid. In the following examples used daily and 4-hour charts, 2 time frame forex is often used by swing traders .

Some tips for recognizing trading signals from the price action setup formation:

1. Find the pin bar with the ‘tail’ that protrudes out and shows the false break condition . 

If we find a reversal bar ( reversal bar ) coupled with rejection at the support or resistance level either static (horizontal) or dynamic line (moving average line) to the ‘tail’ the pin bar appears protruding from the line, then usually this formation is a trading signal with high probability, or a signal that is quite valid. The ‘tail’ pin that protrudes out shows a rejection at that level until it has more weight than the signal of the other price action.

Rejection at the support or resistance level indicates that the movement of market price is not able to penetrate that level so the possibility to reverse is very big. Here is an example of a reversal bar with a rejection at the support level indicating a false break condition. This is a fairly valid trading signal.

Price Action

In the picture below looks 2 pin reversal bar which is a trading signal. Both are rejected, only the reversal pin bar 1 is rejected by the minor resistance level, while the pin bar reversal 2 is rejected by the key resistance level. In the case of probabilities that indicate the validity of the signal, pin bar reversal 2 is clearly more valid as it occurs at the key resistance level more important than the more easily penetrated minor resistance. For entry on the pin bar reversal 1, it is advisable to take less risk. Another consideration for bold entry on the pin bar reversal 1 is the doji formation on the candlestick which also implies a reversal .

Price Action

2. Pin bar reversal with a very long ‘tail’ is a fairly valid trading signal. 

The ‘tail’ factor on the pin bar is important. In the candlestick bar pattern, the ‘tail’ denotes the rate of rejection of a particular price. The longer the ‘tail’, the stronger the price level is rejected, which means the market is pushing to a higher or lower price. This does not mean that any long-tailed candlestick bars can be made to determine trading signals, of course, must be seen in the position of the bar and some other supporting factors. However, the long ‘tail’ is certainly more significant than the shorter one. Here’s an example of a reversal pin bar with a very long ‘tail’. Coupled with the rejection that occurs at the key resistance level, of course this is a fairly valid trading signal with high probability.

Price Action

3. Pin bar ‘long tail’ as a signal forwarding trend (trend continuation).

If the pin bar reversal ‘tail’ moves in the direction of the main trend ( the previous example ), then on the pin bar indicating trend forwarding, ‘tail’ moves in opposite direction with the main trend. The ‘long tail’ that occurs reflects the sentiment of market participants who initially pushed strongly the price movement to reverse against the trend, but for some reason the market sentiment turned. True to market players who tend to follow a strong one , the price peg will be pushed back strongly to form a ‘long tail’ which is only a ‘retracement’ of the whole trend, not ‘reversal’ .

In the following example we see the long tailed ‘bar pin’ which occurs in the downtrend direction of the EUR / JPY daily. This is the initial signal for forward direction forwarding. Since we are working on the daily chart, we should wait for the next day’s price movement to ensure market sentiment strength despite strong support factors with rejection in its resistance level. In this case market sentiment may turn around if there is consolidation around the resistance level.

Price Action

Can be considered as a benchmark: if in the next days the price does not move away from the 50% retracement level of the pin bar, this can be considered as a trading signal and we can immediately entry. In this example the stop loss can be set a few pips above the resistance level, with a risk / reward ratio which certainly depends on your strategy. But with other supporting factors, namely candlestick engulfing bearish formation formed after entry, you could just enlarge the risk / reward ratio.

4. Avoid ‘betting’ by guessing there will be a ‘breakout’. Wait for clear confirmation. 

Avoid breakout traps in the form of bull trap or bear trap , consider candlestick pattern and price action setup formation that is formed. Many traders are quickly tempted by the possibility of a breakout that will occur if the price has crossed the level of support or resistance level it. This is very risky, especially if playing around in the key support level or key resistance level . Unfortunately, many consider the breakout trap as a trading signal regardless of the psychology of market sentiment or its price action setup (please know the price action setup reflects the psychology of market players’ sentiments).

Usually the market will test a support or resistance level that has been broken before it reverses course, or the market price movement does not continue but returns to the original area and let the condition as a false break or false breakout signal. It is not always the case, but the stronger the support or resistance level, the greater the possibility. If you happen to be trading on the stock market, this will be easier to anticipate with a volume indicator. The greater the trading volume at the key support or resistance levels, the likelihood of greater breakout due to a clear market sentiment sentiment.

Unfortunately the forex market does not have a central exchange so the volume indicator is completely invalid and certainly can not be used as a reference. One way to find out the true breakout and false breakout signal is to pay attention to the psychology of market participants’ sentiment through candlestick patterns and price action setup formations.
In the daily chart picture NZD / USD is exemplified by a trap breakout (bull trap) that causes a false break condition at the resistance level.

Price Action

Avoid to ‘bet’ with direct entry when the resistance is broken before at least the price is really above its resistance level. In this example it turned out to be false break and the price did not really break the resistance level. Trading signals can be seen from the inside bar setup that is formed. The inside bar shows a short market consolidation, before the market players finally make a clear decision, in this case the price movement continues towards the downtrend.

5. ‘long tail’ bar pin as a reversal signal even without support or resistance supporting factors.

One aspect that usually occurs in the ‘long tail’ pin bar is that in an uptrend or downtrend movement and suddenly experience rejection in its candlestick formation (restrained) with a doji pattern, indicating a reversal movement (reversing direction), even the possibility of a trend reversal. Usually this trading signal is quite valid at daily time frame.

If the price action setup is a ‘long tail’ pin bar is formed, the supporting factor of the support or resistance level as a confirmation is not absolutely necessary.The ‘tail’ of the doji will form a new support or resistance level. This happened because of the market participants’ refusal to continue the increase or decrease in prices to a further level. The longer the ‘tail’, the stronger the rejection. The doji formation formed due to the opening price level and the closing price level on the same day reflects market participants who are consolidating by tending to reject further price increases or decreases.

The act of these market participants can be seen from the candlestick bar formation in the following days. The following is an example of the movement of USD / JPY daily with trading signals as intended, with a reversal from downtrend to uptrend:


Without supporting factors of support or resistance levels, confirmation can be in the formation of a price action setup the next day. As shown in the picture above, the inside bar setup that formed on the day after the ‘long tail’ doji signaled unfinished market consolidation. Only the next day is clearly seen the highest level of the inside bar is exceeded and the candlestick formation is white (the closing price level is higher than the opening) which suggests prices will tend to rise. Entry can be done as soon as the bar is finished, which means there has been confirmation.

6. Trend continuation signals on support and resistance levels.

Somewhat different from the example (3) before, the pin bar as a trading signal in this case does not have to be long-tailed and doji- patterned, but which gets rejection from support or resistance levels. The stronger the support or resistance level, the more valid the signal will be. Confirmation can be obtained from the previous pin bar or technical indicators such as moving averages which are also as dynamic support or resistance levels. In the event that you have opened a position based on the signal from the previous pin bar, then the signal that occurs afterwards is a new trading signal, can be to maximize profit through averaging or pyramiding techniques and others. The following is an example of the trading signal referred to in GBP / USD daily:

Pin bar sell signal: in this case the market has signaled from the previous pin bar and the price has broken the support level (which has now changed as resistance). It appears that the market has also tested this resistance level before trying again to penetrate. The rejection indicates that the sentiment of the players remains bearish , seen in the bar formation the day after.

Pin bar buy signal: the price has broken the resistance level strong enough (white candlestick) before trying to test the level but experiencing rejection, so that the level changes as a new support level. Although the candlestick pattern is not a doji , market sentiment has signaled the rejection of the bar formation in the following days that did not exceed the lowest pin bar level.

7. Avoid entry with pin bars in conditions of ‘choppy’ price movements .

‘choppy’ situation occurs when price movements are consolidating with the formation of short and close bars. This shows market participants are ‘wait and see’ . Choppy often occurs at a certain period after the movement of price trend long enough, when there will be a breakout or when there will be a reversal direction trend (trend reversal). The setup pin bar that is formed is usually not only once, but several times with almost the same formation so it does not show a clear trading signal. Here’s an example of a choppy situation that occurs in AUD / USD daily:

If you encounter the above conditions, it is recommended not to enter. Some pin bars that occur sequentially with such less obvious cues are invalid trading signals. Always pay attention to the position of the pin bar, the bar formation that occurs afterwards and even better if there are factors supporting the support or resistance levels. Wait for the right momentum for example during breakout after choppy condition. The example above shows some invalid pin bars that are formed after the price has experienced resistance to the resistance level.

8. If in doubt, use the moving average indicator as a confirmation.

This concerns the strength of the support and resistance levels . There are times when you doubt the support factor of horizontal line of support or resistance level which is not the key level , whereas the pin bar setup is quite good. In this case you can use the moving average indicator as a support to get confirmation.Usually used exponential moving average (ema) period 8 and 21 daily (for daily frame time). Moving averages indicate dynamic support levels or dynamic resistance. The following example of NZD / USD daily shows the pin bar experiencing rejection on the horizontal line of the support level but penetrating the ema-8. The next day it was confirmed that the trading signal from the pin bar was sufficiently valid with the bar rejection by the ema-8 line dynamic support.

9. Avoid entry in the time frame below the daily without a strong support factor.

Time frames below the daily commonly used for trading with the price action method are 4-hour. In terms of using 4-hour time frames, you should always compare the direction of the trend with the daily time frame. If opposite, it should be avoided. If the direction is the same but no strong signal support factor should not be entry. Such trading signals are usually wrong (invalid). Here’s an example on EUR / USD 4-hour as mentioned:


  • If you have found a trading signal on the daily time frame, you must be patient to wait for confirmation of the signal that has been seen, at least the next day. Trading signals that have not been confirmed cannot be said to be valid.
  • If you have found a trading signal that you estimate is valid (with or without a supporting factor), but you are in doubt, you should not enter.Psychologically, doubts can have an impact on your emotional instability, even though you might be able to profit from the trading signal.


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