FOREX

Forex trader Johnathon Fox, contributor, DailyForex.com, explains the mechanics of two very simple and easy to identify price action trading signals.

Today's quick article is going to cover two very simple price action reversal signals that any trader can learn and start spotting today. These two signals are not complicated and even the newest of traders will be able to start spotting them all over their charts.

Pin Bar Reversal
I have covered in previous articles exactly what goes into making a Pin Bar a valid signal. Basically a Pin Bar is a candle that has a small body and a large nose that is rejecting either higher or lower prices. The thinking behind the Pin Bar is quite simple; Price has moved higher or lower before a wave of orders snaps price back in the other direction. See the chart below for what a Pin Bar looks like:

chart
Click to Enlarge

Like all price action signals, not all Pin Bars are created equal. There are certain factors that go into making one Pin Bar better than another. A few of these factors are:

  • The time frame the Pin Bar forms on
  • Where the Pin Bar forms. Does it form in a range or in a nice trending market?
  • Is there space for price to move into when price breaks the low or high of the Pin Bar?
  • Is the Pin Bar rejecting a logical support or resistance area

Learning all the factors that goes into making one signal better than the other is all part of the education process for price action traders.

Pin Bars form regularly, however, as traders we only want to be taking the very best signals that form at the very best areas. A recent example of a quality Pin Bar is attached below. Notice in the example price was rejecting a logical resistance area and the Pin Bar stuck out away from all other price.

chart
Click to Enlarge

Bullish and Bearish Engulfing Bars
Engulfing Bars are very obvious price action signals that are momentum trades. Quite often engulfing bars will be massive in range and one of the largest candles on the chart. A lot of traders become worried about large price action signals, where instead they should be getting excited. Large engulfing bars are showing a large shift in momentum and the bigger the better. Engulfing Bars are really easy to spot and identify.

Just like the Pin Bar and other price action signals, not all Engulfing Bars are created equal. The same factors that go into looking for the best Pin Bars are also valid for the Engulfing Bar. We need to see them sticking out and screaming at us that price wants to reverse. What I mean when I say "screaming at us" is many traders will get caught out trying to spot signals when they are simply not there. The best signals are always when they are really obvious, and as soon as you flick to that chart they stick out like a sore thumb! Stick to the really obvious and simple Engulfing Bars and avoid trying to trade something you have to search really hard to find.

NEXT PAGE: Examples of Engulfing Bar