Getting Started With Price Action Trading on Nadex
There are a lot of reasons to recommend Nadex as an exchange. One of those reasons is that they provide excellent tools for traders who are serious about making money. Usually we have to recommend that traders download charting software like MetaTrader 4 to plan their trades. With Nadex, depending on the system you use, that might not actually be necessary.
You can access Nadex charts by clicking on the icon with the three little ascending bars right next to the contract names in the middle of the screen.
Nadex charts are awesome for several reasons. They display beautifully; they include a ton of technical indicators and tools for planning trades, and you can expand the window to a large size. If you look in the upper right-hand corner of the chart window (where you find the buttons to minimize, maximize and close out of most windows), you will see icons to expand, pop out, or close the chart. Click the leftmost icon with the four arrows pointing to the corners to expand the chart to full size.
In a recent article, I went in-depth into the technical indicators which Nadex provides (will be posted and linked).
In this article, I want to talk about another approach to trading which you can try on Nadex: price action.
If you follow this blog on a regular basis, you probably already know that I am a price-action trader. I love the elegance of price action. It is an incredibly simple and straightforward approach to trading which can yield consistent, powerful results across numerous different assets. This makes it ideal for trading binary options.
What Is Price Action?
Price action quite simply is allowing price itself to tell you what is going on in the market. You look for patterns in the bars themselves, and when you spot them, you have the potential for a trade.
I say potential because price action works best when there is confluence. Confluence means that there are other indications that price is going to do what you expect. You have multiple signs telling you, “Trade now!”
These other signs can be technical indicators, or they might be lines of support and resistance. They might even be fundamental in nature.
How Can You Trade Using Price Action on Nadex?
Most price action systems only involve placing a couple of indicators or lines on your chart—not elaborately stacking up dozens of indicators. You could do that on Nadex (the indicators are available), but it is not the best way to trade price action.
A lot of charts provided by other binary options brokers are really small, and some do not have an option to display bars or candlesticks. On Nadex, you have nice, clear, big candlesticks which are already conveniently colored red and green. So you can get a very clear picture of what is going on with price. Spotting patterns is a breeze once you are trained to recognize them. You can zoom in and out just by using the scroll wheel on your mouse.
Common Examples of Price Action Patterns
A pinbar is a bar which has a long, protruding high or low. This looks a bit like a “nose” which sticks out of the bar. A perfect pinbar has an open and close which are close together, so the body of the candle is relatively flat. The open and close should be in the bottom third to fourth of the bar if the nose protrudes upwards. If the nose protrudes downward, the open and close should be in the top third to fourth of the bar. You do not want the open and close to be in the middle; that is a neutral bar.
“Pinbar” is actually short for “Pinocchio bar.” This is because the nose of the bar is lying about price. It is pointing one way, and price is going to go another. Pinbars signal reversals when they appear at swing highs and lows.
So imagine you are at a swing low. A pinbar is pointing downward with its nose. This actually indicates that traders have tested whether they could sell the asset further, but have discovered the market is oversold. For this reason, the close of the bar is close to the open. The nose indicates that price cannot go down anymore.
At this point there is a reversal, and price goes back up.
This works the same way with swing highs. At a swing high if you see a pinbar with the nose pointing up, it means that price tried to go higher and failed to get there. The close of the bar is close to the open, and price is about to reverse and trend downward.
Bullish and Bearish Outside Bars
Sometimes you will find a smaller bar followed by a larger bar. If the larger bar entirely encompasses the smaller bar, that larger bar is referred to an “outside bar.” Bullish outside bars are the ones which close higher; bearish outside bars are the ones which close lower. Unlike a pinbar, a bullish or bearish outside bar usually does not signal a reversal. These bars signal continuations in the direct of the trend.
DHLC and DLHC
You will sometimes come across what is known as a “double high lower close (DHLC)” or “double low higher closer (DLHC)” at a swing high or swing low. These patterns, like pinbars, indicate that the market is testing a high or low and cannot break through.
So if you have a DHLC, you have two bars with the same high, with the second bar closing lower than the first. The high was tested twice, and the market could not break through. The lower close indicates that traders have given up trying to push the price higher. When this happens at a swing high, the market is reversing and probably about to start down-trending.
Note that you can have more than two bars in this price action formation. You could have three bars as well with a triple high or triple low.
A DLHC works the exact same way as a DHLC, but in the opposite direction. The market has reached a swing low, and is testing whether it is possible to push down price any further. Since it is not, you end up with a higher close which signals a reversal toward a bullish trend.
Previously I have talked about outside bars; now I would like to discuss inside bars. An inside bar is a smaller bar following a larger bar, with both the high and low contained within the range of the preceding bar. Oftentimes inside bars form one after another. You can end up with four or more in a row. In fact, there is even a price action formation known as an “inside 4 bar.” Quite often when you get this, you see gradually compressing bars into shape that is a bit like a triangle.
Inside bars are the market consolidating. Price is being pushed along an increasingly narrow channel, but that cannot go on indefinitely. Eventually price will probably break out in either direction. Since it is difficult to determine which direction price is going to go, you usually should be prepared to pick either direction to trade. Consolidating patterns like these often signal the beginning of a new trend.
What Makes a Good Setup?
You now know the very basics of price action trading. But there is more that goes into a good setup than simply finding a pattern of bars on your screen. You may have some luck trading this way, but eventually you are bound to encounter difficulties. The reason for this is that it is very difficult to identify whether you are in the middle of a trend or at a swing high or swing low. Since these price formations need to occur at particular points to have meaning, you need a way to identify the context of your setup.
For example, a pinbar needs to be located at a swing high or swing low to signal a reversal. If you find one in the middle of a trend, it may not be helpful.
This is why these price action traders look for something called “confluence.” Confluence simply means that you are getting the same signal to trade from some other indicator that you place on your chart. This helps you to establish the context for your price action trade, and move forward with confidence knowing that your decision is backed by more data.
What Can You Add for Confluence and Context?
One cautionary note is not to add too many indicators or lines to your chart. The whole reason that price action is so wonderful is that it gets you away from overly complicated charts. The best price action systems usually only have one or two indicators on the charts. This keeps them easy to read, and provides you with confluence without the likelihood of conflicting data.
Nadex includes a number of different technical indicators you can add to your charts. If you have your chart in front of you, check the menu at the top. You will find a tab labeled “Technical.” If you click on this tab, you will be able to access a drop-down menu which offers you more than a dozen technical indicators to choose from.
While you can create a system using any of these indicators. Here are some of the most common and helpful choices for a price action trader:
Nadex allows you to place simple or exponential moving averages on your charts. These lines help you to see the trend. They exponential averages have more weight placed on recent data than the simple moving averages; they follow price more closely.
You can also create what are referred to as faster- or slower-moving averages. You do this by inputting different values when you set up the moving averages. The faster averages follow price more closely. So if you have a faster- and a slower-moving average on one chart, and the faster-moving average crosses the slower-moving average, this may signal a reversal. If you see this in conjunction with a well-formed price pattern that also signals a trend reversal, you have confluence and the right context to place the trade.
Moving Average Convergence Divergence (MACD)
MACD is a bit more complicated and difficult to learn, but it does work particularly well with price action trading. When you plot MACD, you need to choose three numbers which are used to calculate to moving averages and generate a histogram.
Getting into the details would take quite a bit of time. I actually written a detailed article on this topic, which you can find here.
To get to the bottom of things, if the faster-moving average crosses the slower one as the histogram expands, this may signal the start of a new trend. If you see the histogram going in a direction that is opposite of the movement of price, this may signal a reversal. Trading with MACD in this manner is often referred to as “divergence trading.”
Returning to the Nadex charting platform, looked back up at the top of the chart to the menu which included the “Technical” tab. Next are, you will see another tab which says, “Drawings.”
If you click on that tab, you will find more useful items that you can add to your chart to understand context for trading price action. Here are some examples.
Horizontal, Trend, Vertical, and Point to Point Lines
These are exactly what they sound like. There are not indicators; they are just simple lines that you can draw on your chart based on your own judgment. With them you can more easily visualize trends and channels in the market. So if you see a price action formation signaling a new trend, and one of the bars breaks through a strong line of support or resistance that you have identified, then you have confluence telling you that a breakout is likely.
Fibonacci Retracement Levels
With this tool you can draw Fibonacci retracement levels on your charts from swing highs and swing lows that you have identified. Price likes to hesitate around these lines, so they tend to act as support and resistance. As with the other trend lines that you can draw, these can help you to stay alert for areas where price may hesitate or reverse. Once again, if you have a breakout formation, and one of the bars breaks through the Fibonacci level, it may indicate the start of a new trend.
Watch Out For Retracements
On that note, it is important to briefly talk about what is known as a “retracement.” Sometimes price will appear to be moving in a certain direction. It will then halt at a line of support or resistance, reverse, and head back in the opposite direction. When it hits another line of support or resistance, it will then bounce off the line and resume in the direction that you believed it was going before. This is called a retracement.
Retracements are tricky, because they may lead you to think that you have been faked out, and price is going against you. You may then be tempted to use Early Close to get out of your trade. And then price reverses again, and continues in the way that you originally predicted. So you end up losing money for no reason when you should have won your original trade. Few things can be more frustrating.
Of course, sometimes price really does reverse and go against you, so it can be very difficult to identify when an actual retracement is occurring.
There are two things that can help you to avoid making mistakes because of retracements. The first is to be aware of areas where price may retrace. Drawing the lines discussed above can help you to visualize these areas.
The other thing you can do is wait to get in a trade until the first retracement has occurred. The drawback of this is that you might lose out on some money. But the benefit usually is going to outweigh the drawback. Not only will you avoid being faked out by a retracement, but if price does retrace and then continue in the direction that you predicted, that only strengthens that line of support or resistance, bolstering your trade from that point forward.
Share Your Charts
There are a couple of other tools that you will find under the Drawings Tab which can help you to become a better trader. These are Arrows and Text.
Neither of these tools help you to visualize what the market is doing directly, but they do help to take notes on your charts. These notes can help you indirectly with visualizing, and can also save your charts with a screenshot to reference later.
The best thing about this is that you can also share your screenshots and have everything nicely labeled. There are a lot of forums for traders where people will gladly help you out, especially with price action systems. Because so many traders use the same formations to plan their trades, you will find many people who can give you feedback on your trade setups.
Because you are learning, a lot of the setups that you think you spot may not actually be proper setups at all. The irony of that is that someone else who is more experienced may miss those “setups” looking at your charts. The Arrows and Text allow you to point out what you believe you see and label it clearly. This helps more experienced traders to understand what you are asking about.
You may feel hesitant about asking for help, but there is no reason to. Every expert trader has been where you are now, and there is no reason to reinvent the wheel. You can learn from the experiences and mistakes of others, which saves you from having to repeat it all.
Be Sure to Test Your System First
On a final note, it does take time and hard work to learn, even if you are getting help from more experienced traders. Price action may be simple at its heart, but that does not make it as easy as you might think. It can be challenging to identify a perfectly formed set of bars from one which is mediocre. It can be even harder to put it in context and correctly interpret the bigger picture that your bars fit into.
There is only one way to learn how to do this, and that is practice. Practicing price action trading has two steps (as does testing any kind of trading system).
1-Backtest your trades.
2-Demo test your trades.
Backtesting is something you do on your own time using historical charts, not current market charts. Unfortunately Nadex charts are restricted in that they do not allow you a way to scroll back in time; you can only view relatively recent data. So you will need to download MetaTrader 4 or another program for this purpose.
The idea with backtesting is to simply move back in time and then move your charts forward one bar at a time as if price is forming live (obviously you do this much faster than real-time on longer timeframes). If you see a setup forming, you “trade” according to your price action system on paper, note the result, and see what you can learn from the experience. You can go over weeks, months or years of data in a matter of hours this way. As you go, make adjustments to improve your performance and post any questions you have online for more experienced traders to answer.
When you get really good results with your backtesting, you are ready to demo test. Here is where Nadex becomes very useful once again. On Nadex, you can sign up for a demo account without depositing real money. You can then use that demo account for as long as you need it—weeks, months, even years. Very few binary options brokers allow this. Since most of them trade against you (unlike Nadex), this should not be a surprise. Those brokers are not invested in your success; Nadex is.
With your demo account, you can practice trading on the Nadex platform using live data. The results you get will tell you exactly how you would perform with real price action trading using actual money. You do not have to risk a single penny however, so you can keep saving up for when you are ready.
As you now know, Nadex offers a world of advantages to price action traders. Sign up for a demo account and check out the platform. Whether you are new to price action or you have been trading price patterns for a while, you will be impressed with all this exchange has to offer. Once you are profitable in demo mode, you will be ready to trade live and start making bank!
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