Being profitable trading in the stock markets does not depend only on the knowledge of indicators and technical. It has a lot more to do with understanding the natural laws of trading. If you are looking to read on to some simple concepts of price action trading, then the book is just right.
Rayner tries to share a logical example of the law of gravitation having an effect on a thrown object with that of trading without consistent actions. Even though this is a vague example, I’m sure you will grasp the message that he is trying to convey.
Consistent actions lead to consistent results. You cannot let this be dictated by emotions that force you to break the rules you have created for yourself. You get into fire-fighting, averaging down and whatnot to turn around from a poor streak.
Ground Rules – Natural Laws of Trading
Always have an edge in the markets. Unless you create an edge for yourself in trading, risk management, discipline, and psychology, you will still be a losing trader. I don’t agree with this thought process though.
An edge in trading does have wings of its own to fly. It is a combination of risk, management, discipline, psychology, trade set-up, and execution.
He goes on to discuss some more ground rules that can be considered a universal rule of thumb.
The law of large numbers.
Always take care of your downside.
You need money to make money.
You make big money by compounding your returns.
There’s no best trading strategy out there.
No trading strategy works all the time.
The secret to making profits every day.
Trading is a get-rich-slow scheme.
Point 7 mentioned might sound logical, but it gets you into the mindset of making money soon. If a newbie reads these statements will tend to cling to the thought process of making money quickly syndrome, which may prove to be fatal. Even if this is geared towards proving a point about HFTs, it may mislead the novice trader.
“The most important rule of trading is to play great defense, not great offense.” – Paul Tudor Jones.
Price Action Trading for Starters
Rayner drives home the importance of price as it is the leading indicator in the markets. He elaborates that price does not move up or down because of the number of people. Price moves depending on the buying or selling pressure when they overweigh each other.
Understanding the buying and selling pressure imbalance helps you better time your entries and exits. He elaborates on each of the benefits with an example.
Decoding the Secret Market Behavior
The author shares he made several mistakes in understanding the markets like any other trader would do. He finally started understanding the behavior of the markets after he read the works of Richard Wyckoff and Stan Weinstein.
He goes on to describe each of the market stages with examples. A fair idea is presented for each of the stages about the 200 DMA with a price chart.
Support and Resistances – Basics
Guidelines that the author uses to draw support or resistance lines are shared in this chapter. The most obvious levels where you find many price points touch will form your support or resistance. You should zoom your charts to show at least 300 candles to draw a proper support or resistance line.
Basic concepts about support becoming resistance and resistance becoming support are described.
Rayner elaborates further on support and resistances using trend lines and moving averages. Higher highs/lows and lower highs/lows are described with charts. They give you basic ideas for identifying support and resistance using trendlines.
Mastering Candlestick Patterns
Rayner now introduces basic bullish and bearish candlestick patterns to the readers. He elaborates further with images of commonly found bullish and bearish reversal patterns.
These candlestick patterns will be a clean learning experience for the novice trader. The below-mentioned reversal patterns are explained with supporting images.
Bullish engulfing pattern.
Similarly, the bearish reversal patterns are explained.
Bearish engulfing pattern.
Dark cloud cover.
He also discusses how to understand if the buyer or seller is in control of a particular candlestick pattern. The key is to identify who is in control of the price of a candlestick about the previous candle/s.
You will be able to identify if there is strength in a move and if the buyers or sellers are coming in with conviction.
The author stresses the need for effective trade management as that is the only aspect that will help you live another day to trade. He elaborates on how smart money hunts your stop loss with an example.
Important support and resistances are visible areas in the chart that every retail trader uses to place their stop loss. Big institutions who want to avoid slippages when they want to go long on a stock bring the price lower than the support price for once.
They take out all these stop losses that also sell orders of retail traders and take the price higher from there.
Rayner shares tips on setting a stop loss using ATR to avoid stop-loss hunting. He stresses the need to risk not more than 1% of the trading capital in a trade. This will help avoid a bigger drawdown even if you have 20 losing trades in a row.
Trade exists, and riding a trend is further explained with graphical examples.
Developing Winning Strategies to Beat the Markets
Rayner combines the different aspects discussed earlier in the book and puts them together to form the MAEE strategy. There are several examples shared as chart patterns showcasing the strategy he called the MAEE strategy. Here he elaborates on this as follows.
M – Understanding market structure.
A – Area of value.
E – Entry trigger.
E – Exit trigger.
More such strategies are discussed in this book which is a combination of what he had discussed earlier.
Price action trading secrets have been conceptualized on the basics of price action and understanding candlestick patterns to trade. It is a good read for the novice trader who wants to understand the basics of price action trading and candlestick patterns.
If you would like to read more about breakouts, retracement, and pull-back patterns, grab a copy of your book.
(Amazon paid link)
Guest Post - Written by Mr. Lal Bajaj, Bangalore
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