I am Uncle Ying, 37 years old, settled in Chengdu from Changsha. After 8 years of hard work in the cryptocurrency circle, I entered the market with a capital of 30,000 and earned over 30 million. I currently own 4 houses and a Range Rover!
Not relying on news, not gambling on luck, but solely depending on a set of undervalued 'foolish methods'. By learning from the three pitfalls I've encountered, understanding one can reduce losses by 100,000, and by implementing three strategies, one can outperform 90% of retail investors.
When I first started trading with price action, like many beginners, I faced numerous pitfalls—constant stop losses, repeated losses, and growing confusion. However, after years of practical experience and refinement, I finally developed my own price action trading strategy process. It is through this process that I transformed from a consistently losing trader into a stable profit maker.
Today I will teach you this entire process. Before discussing the process, let me review the three fatal mistakes I made back in the day and how I corrected them. Understanding these lessons will elevate your win rate and depth of understanding of price action strategies.
01
First avoid the pitfalls
The three fatal mistakes I made back in the day
Error 1: Having 'unrealistic expectations' of price action, blindly confident and over-leveraging.
When I first encountered price action, I naively thought that as long as I learned this method, I could win every trade. This misconception gave me great blind confidence; I often entered with large positions and high risks, driven by greed, making all the mistakes that losing traders tend to make.
The result is predictable; I fell into a vicious cycle of 'loss - unwillingness - heavy position reversal - further loss'. Later, I realized that whether it is price action, technical indicators, or so-called 'smart money' strategies, there is no method that guarantees 100% profit. All trading strategies have periods of profit and loss; this is the norm of the market.
Correction method: establish reasonable expectations and accept that 'losses are part of trading'. At the same time, combine strict risk management with disciplined trading behavior; do not place your hopes on 'winning every trade', but aim for long-term profit advantages.
Error 2: Lack of risk management means a single loss can be devastating.
Tied to the first mistake, because I overly trusted my price action strategy, I set my risk on single trades too high. Once I encountered consecutive losses, my account capital would significantly shrink; once the capital was lost, my mindset would collapse, leading me to doubt the strategy and search for new strategies, falling into a vicious cycle of 'changing strategies - losing - changing strategies again', never being able to settle into a truly advantageous trading system.
Correction method: engrain 'risk control' into your bones; the loss on a single trade must not exceed 1%-2% of total capital. Remember, the core of trading is 'staying alive'; only by being able to withstand consecutive losses can you wait for the profitable period of your strategy.
Error 3: Overlapping too many technical signals leads to chaotic charts and decision-making errors.
When I first started with price action, I always thought that 'the more signals, the higher the win rate', so I piled all the price action patterns and technical indicators I learned onto the same chart. The result was a chart as chaotic as a 'spider web'; many functions of technical analysis actually overlapped, providing no help, but instead making me increasingly confused and often misled by false signals, resulting in losses upon entry.
Correction method: do 'subtraction'. Only retain fixed price action tools and core candlestick patterns; just enough is fine, there's no need to pursue 'many and comprehensive'. A simple and clear analytical framework is essential for making decisive and correct trading decisions.
02
Core understanding
Trading requires 'reasonable expectations + long-term perspective'; do not get caught up in the win or loss of a single trade.
Before discussing the process, I want to emphasize a key concept: trading is not a game of 'pressing the entry button and making money'. Many people hope that prices will immediately move in a profitable direction after entering, but the reality is that most of the time, prices will consolidate near the entry point, even moving in a losing direction.
Therefore, before trading, it is essential to prepare psychologically, accept short-term fluctuations, and use a set of 'trading strategies that can provide long-term advantages'.
What is a 'strategy with an advantage'? For example: if your strategy has a 60% win rate, a 2:1 risk-reward ratio, and a risk of 1% of total capital per trade, making 100 trades over the long term would result in 60 wins and 40 losses, ultimately yielding a profit of 80%.
Here it is essential to emphasize 'long-term' and 'large sample sizes'—the advantages of a strategy can only be reflected in a sufficient number of trades. If you only look at 10 trades, even a strategy with a 60% win rate can lose 4 or more trades because the fluctuations in small samples are too large. Trading must be viewed long-term, pursuing high-probability events rather than getting caught up in the win or loss of a single trade.
03
Practical process
Three major skills of price action to build your own profitable system.
My price action trading process is fundamentally based on three key skills: determining the direction of price trends, identifying key entry price levels, and waiting for confirmation entry signals. These three skills are interlinked, and below I will explain step by step how to use them based on real-world case studies.
Skill 1: First determine the trend direction, and prepare two response plans in advance.
The first step is always to determine the trend; this is the foundation of trading. Look at this real-world example:
The price has formed a 'higher high, higher low' upward trend structure, clearly indicating that we are currently in an upward trend. However, further analysis using price action reveals that the momentum of this upward trend is very weak—the price increases are very small each time, and it is now near a key resistance level.
At this point, I will not rush to enter but will prepare two response plans in advance:
Plan A: If the price is pressured at the resistance level and rebounds downwards.
I will wait for the price to break below the recent low, forming a 'lower low' downward structure. Only when this signal appears can we judge that the upward trend is likely to end and reverse downwards, after which we can look for short opportunities based on resistance levels and downward structures.
Plan B: If the price breaks through the key resistance level.
This indicates that upward momentum is strong, and the trend will continue to maintain the 'higher high' structure. At this point, wait for the price to pull back to form a 'higher low' before looking for long opportunities.
The benefit of preparing a plan in advance is that regardless of how the price moves, there is a corresponding response strategy, ensuring consistency in trading and preventing impulsive decisions due to short-term fluctuations.
The subsequent trend is that the price successfully broke through the key resistance level, which gives us the signal of 'strong upward momentum', and we can then find key price levels and entry signals to go long.
Skill 2: Find key entry price levels, refusing to 'enter at arbitrary price levels'.
One of the core principles of price action trading: absolutely do not enter at arbitrary price levels. The win rate and risk-reward ratio for random entries are very poor, making it easy to fall into losses.
In this example, after breaking the resistance level, the optimal key price level is 'previous resistance level turning into support after a breakout'.
Once the resistance level is broken, market sentiment shifts from bearish to bullish; this price level will turn from a resistance level to a support level. When the price pulls back to this point, the chance of a rebound is very high, and the entry point is close to the stop-loss point, making the risk-reward ratio very favorable. Therefore, we should wait for the price to pull back to this support level before looking for entry signals.
Skill 3: Wait for confirmation of entry signals; two types of signals to choose from (major time frame candlestick / minor time frame patterns).
After identifying the key price levels, you cannot enter directly; you must wait for confirmation signals—this is key to avoiding false breakouts and improving win rates. I often use two types of entry signals, which everyone can choose based on their trading style:
Signal 1: Major time frame candlestick patterns. Wait for the price to form a bullish candlestick pattern at key support levels, such as in this example:
The price has formed a bullish engulfing pattern at the support level, where the bullish candlestick completely covers the previous bearish candlestick. This pattern confirms the effectiveness of the support level and bullish momentum; the price is very likely to rebound upwards here, and it can be a good entry point for going long.
Signal 2: Minor time frame chart patterns. If you feel that major time frame signals are too 'lagging', you can switch to minor time frames to find more precise signals. For example, this case:
In the minor time frame chart, the price has formed a double bottom pattern at the support level—previously it was a 'lower high, lower low' downward structure, but after forming a double bottom at the support level, it no longer makes new lows, but instead forms a 'higher low' upward structure. At this point, you can wait for the price to break through the neckline of the double bottom and form a 'higher high' structure before going long.
The advantage of minor time frame entries is that the signals are more precise, allowing for more confirmations, further improving win rates and trade quality.
Revalidating: Practical applications in downward trends.
Using the same three skills to analyze a downward trend case:
First determine the trend; the price has formed a 'lower high, lower low' downward structure, clearly indicating that we are currently in a downward trend, and we will only look for short opportunities (in a downward trend, the probability and magnitude of price declines are greater, leading to a higher win rate for shorts).
Next, find key price levels: choose price levels that turn from 'previous support levels breaking down to resistance levels'. Once the support level is broken, it becomes a resistance level, and when the price rebounds to this point, the probability of being pressured down is very high.
Finally, wait for the entry signal:
There are also two options: one is to look for bearish candlestick patterns on a large time frame, such as in this example:
The price has formed a long upper wick + bearish engulfing pattern at resistance; both patterns confirm strong bearish momentum and the effectiveness of the resistance level, allowing for a short entry; or you can look for bearish patterns on the minor time frame to obtain a more precise entry point.
Stop-loss and take-profit settings: set stop-loss above the resistance level and recent highs + 1 ATR value (to avoid getting stopped out by false breakouts); take-profit can be set according to a fixed risk-reward ratio (for example, this case uses 3:1) or based on key price levels from technical analysis. Following this process will allow you to successfully take profit and exit.
TIPS
Final summary
Price action trading is not 'mystical', but a replicable process: first determine the trend direction and prepare response plans in advance; then identify key price levels and refuse to enter randomly; finally, wait for confirmation signals from candlestick patterns or smaller structures, combined with reasonable stop-loss and take-profit strategies.
More importantly, avoid the three pitfalls I encountered back in the day: do not hold unrealistic expectations, ensure proper risk management, and simplify analysis tools. Remember, the core of trading is 'long-term stable profits', not how much you make on a single trade. Master this process thoroughly and refine it through real trading, and you too can build your own profitable price action system.
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