In the second installment of a three-part series, professional trader, Ken Calhoun of and, details the nuts-and-bolts of trading signals.

In the first article of this series, we looked at price action patterns using daily trading ranges and single trend breakout entry signals. This time, we’ll be taking a closer look at the “mechanics” of trading signals. As president of Day Trading University, our training has reached literally thousands of active traders in price action day and swing trading entry patterns using a very specific series of professional trading setups. We will review some of the most useful price action trading strategies in this series of articles.

The difference between using price action as a primary strategy, compared to other technical trading approaches, is that the volatility and price movement is considered the most important trading signal. While other indicators can still be used (most notably volume), it’s the overall “profile” of price action movements that takes precedence when making trading decisions.

Price Action Pattern #1: Using Moving Average Breakouts with Wide-Range Candles
On daily candlestick charts, it’s important to use the 50, 100 and 200 simple Moving Average (MA) lines, since those are widely used by institutional traders. One strong price action pattern to follow is a breakout above one of these lines, as seen in Figure 1 [Goldcorp, Inc. (GG)].

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Not only did this price action break above the 41.5 level at the 200 MA crossover, but this was shortly followed by a wide-range candle that took the price from 43 to 45 in a single day. Oftentimes these setups can be observed, where an entry just above the MA breakout leads to a volatile price action move on a subsequent trading session, as seen here.

Initial entries can be made over the MA breakout signal, with secondary entries made following wide range candles, using stops of 1 to 1.5 points. Adding to winning positions by scaling in is an important component of price action based trading which will be covered in an upcoming article.

NEXT PAGE: Two Other Price Action Patterns

Tickers Mentioned: GG, GILD, TPX