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Ch 6 · Price Action

Price Action Strategies — Beyond Price Patterns

Every price pattern is just a fragment. A trading strategy is Market Bias + Setup + Exit Plan. This is how you turn pattern recognition into an actual repeatable system.

📖 18 min

Chapters 3–5 taught patterns. Patterns are triggers. A trigger alone is not a strategy. This chapter is the assembly manual: how to turn pattern recognition into a repeatable trading system with three defined pillars.

6.1 The three pillars of any price action strategy

  1. Market Bias (context) — what regime is the higher timeframe in? Bullish, bearish, or ranging? This decides which direction of setups you take today
  2. Setup (trigger) — the pattern or bar sequence that fires. Must be aligned with bias
  3. Exit plan — where you get out. Both target (profit) AND stop (loss) defined before entry

Skip any pillar and you don't have a strategy — you have a habit. Habits fail under pressure. Strategies survive.

6.2 Pillar 1 — Market bias (the context)

Every trading day, before touching a chart at the setup timeframe, define your bias on the higher timeframe. Concretely:

Ways to define bias on the higher timeframe (pick one — don't blend them casually):

MethodRuleBest for
Swing structureHH/HL = bullish; LH/LL = bearish; mixed = neutralPure price-action readers
Moving average pairEMA 20 > EMA 50 both sloping up = bullish; opposite = bearish; flat = neutralTraders wanting a mechanical rule
Simple close positionClose > prior day's high = bullish day; close < prior day's low = bearish; inside = neutralVery short-term intraday traders
💡 The bias rule
In a bullish bias, take only long setups from Chapters 3–5. Ignore short setups (they'll usually fail). In a bearish bias, take only shorts. In a neutral bias, either sit out or take mean-reversion trades at range boundaries (never breakout trades).

6.3 Pillar 2 — The setup trigger

Once bias is set, the setup is any of the patterns from Chapters 3–5 aligned with bias, at a meaningful level. Concrete template — the "level + reversal + trigger" setup:

  1. Bias = bullish (from Pillar 1)
  2. Identify support level on the setup timeframe (prior swing low, EMA, prior day low, round number)
  3. Wait for price to reach the level and print a reversal bar (pin bar, engulfing, hammer, morning star)
  4. Enter on the break of the reversal bar's high — this is the trigger

Mirror for shorts. The critical discipline is waiting for the trigger. Anticipating the trigger — buying "because we're near support" without a confirming pattern — halves your win rate.

6.4 Pillar 3 — The exit plan

Every trade has three exit types. All three defined before entry:

Compute the reward-to-risk BEFORE entry: (target − entry) / (entry − stop). If less than 2:1, skip the trade regardless of how clean the setup looks. This one filter eliminates most losing trades over time.

⚠️ The stop-loss trap
Widening a stop-loss after the fact is the single most expensive mistake in discretionary trading. If price is about to hit your stop, either accept the loss and exit, or acknowledge the setup is invalidated and re-plan the trade later. Never move the stop farther away "to give it more room" — that decision compounds losses.

6.5 Position sizing — the invisible pillar

Every trade should risk a fixed % of your account (usually 0.5–2%). Position size derives from stop distance:

Position size = (Account × Risk %) / Stop distance in points

Example: ₹5,00,000 account, 1% risk = ₹5,000 per trade. Stop 20 points away on Nifty (lot size 75) → 5,000 / (20 × 75) = 3.3 lots → round down to 3 lots. Never round up.

See the Options path Ch 2 on position sizing for the full risk-of-ruin math.

6.6 Building your own strategy — the assembly recipe

  1. Pick one timeframe for setups (e.g., 15-min for intraday, daily for swing)
  2. Pick one method for defining bias on the higher timeframe (swing structure OR EMA pair OR close position)
  3. Pick two or three pattern types you understand well (e.g., pin bar + engulfing + inside bar)
  4. Write down entry, stop, target, and R:R requirement
  5. Backtest for at least 6 months of historical data (chart replay tool on TradingView / Sensibull works well) OR paper-trade for 4 weeks live
  6. Journal every trade with reasoning at entry
  7. Review weekly. Refine one rule per month, no more

Every professional discretionary strategy is some variant of the above. There is no shortcut. The traders who make money have gone through this loop for a specific market (Nifty, BankNifty, a specific stock basket) and stuck with it long enough to have a genuine edge.

Advanced Sample beginner strategy — the '1-2-3 pin bar' setup
A fully-defined strategy you can start with today: **Market:** Nifty 50 index on 15-min chart **Bias timeframe:** daily **Bias rule:** EMA 20 vs EMA 50 on daily. Above & sloping up = long-only day. Below & sloping down = short-only day. Flat = no trades **Setup:** - Identify the day's key level: yesterday's high (for shorts on retest failure) or low (for longs on retest hold) - Wait for a pin bar (see Ch 3) to form at that level on the 15-min chart - Pin bar must have wick ≥ 2× the body **Entry:** limit order at the pin bar's body midpoint on the retest, OR market order on break of the pin bar's high (long) / low (short) **Stop:** beyond the pin bar's nose (long wick extreme) **Target:** the next daily-chart structural level (prior swing high for longs, prior swing low for shorts). Must be ≥ 2:1 R:R from entry **Position size:** 1% account risk per trade (fixed) **Time stop:** if trade doesn't hit target or stop within 8 bars (2 hours), exit at market **Journal:** every trade — entry reason, exit reason, outcome, screenshot Trade this for 3 months. You'll take about 15–30 trades. If your journal shows a positive expectancy (avg winner × win rate > avg loser × loss rate), you have an edge. Iterate. If not, redesign one pillar and retest.

6.7 Three more sample strategies — different temperaments

The 1-2-3 Pin Bar in the Advanced section above suits a patient discretionary trader. Different temperaments and time budgets need different strategies. Three more fully-defined setups you can start with:

Sample B — "Failed Breakout Reversal" (contrarian scalper)

Sample C — "Weekly Trend Rider" (positional, low touch)

Sample D — "Compression Breakout" (systematic-inclined)

All four samples share the same three-pillar structure. The differences are in timeframe, trigger type, and hold duration. Pick the one whose rhythm matches your life — not the one that promises the highest R.

6.8 Position sizing math — the pillar hiding inside every strategy

None of the four sample strategies works without correct position sizing. The formula:

Position size = (Account × Risk %) / Stop distance in points

Example — Nifty 15-min pin bar setup:
  Account:        ₹5,00,000
  Risk %:         1%
  Risk amount:    ₹5,000
  Entry price:    25,000
  Stop price:     24,970
  Stop distance:  30 points
  Nifty lot size: 75
  Risk per lot:   30 × 75 = ₹2,250
  Position size:  ₹5,000 / ₹2,250 = 2.2 lots
  Round DOWN:     2 lots (never round up)

Two rules that beat every other position-sizing scheme for retail traders:

For deeper position sizing (Kelly criterion, volatility scaling, drawdown recovery math), see Options path Chapter 2: Position sizing & risk.

6.9 The strategy-builder checklist

When you sit down to design your own strategy (rather than adopt one of the samples above), work through this checklist. Missing any item means the strategy isn't ready to trade:

  1. Is the market defined? (Which instrument, which contract, which timeframe)
  2. Is bias defined by a single, mechanical rule? (No "I feel bullish" — a chart-based rule)
  3. Is the setup trigger defined so precisely that another person could identify it on the same chart?
  4. Is the entry defined? (Limit / stop / market — which order type, at what price?)
  5. Is the stop-loss defined in absolute price terms before entry?
  6. Is the profit target defined? (Level, R:R multiple, or trailing rule — pick one)
  7. Is the time stop defined? (When do you exit if neither target nor stop hits?)
  8. Is the position size formula defined?
  9. Is the journal template ready? (Ex-ante + ex-post fields — Ch 9)
  10. Have you backtested or paper-traded for at least 4 weeks?

If any answer is "no" or "sort of," go back to Chapter 6 basics before trading real capital. There is no shortcut.

Advanced Turning a discretionary strategy into a semi-mechanical scoring system
Discretionary strategies suffer from consistency drift — you take the trade sometimes, skip it other times, and can't tell why. A fix: convert each pillar's judgment into a numeric score, and require a total above threshold to trade. Example scoring rubric for the 1-2-3 Pin Bar strategy: 
Pillar 1 — Bias score (0-3)
  0: EMAs flat / tangled (no trend)
  1: EMAs sloping but recently crossed
  2: EMAs sloping cleanly, price on correct side
  3: All of pillar 1 + weekly agrees

Pillar 2 — Setup score (0-3)
  0: Pin bar but no level
  1: Pin bar at a level with wick/body ratio 1.5-2
  2: Pin bar at a well-tested level with ratio >=2
  3: All of pillar 2 + volume expansion on the pin bar

Pillar 3 — R:R score (0-2)
  0: Reward-to-risk < 1.5
  1: R:R 1.5 - 2.5
  2: R:R > 2.5

Total: 0-8. Trade only when total >= 5.
Track the score alongside every journalled trade. After 30-50 trades, you'll see which score ranges are actually profitable. Often the "score 4-5" tier has near-zero expectancy, "score 6+" is where the edge lives. Raise your threshold accordingly. This is the honest bridge between discretionary and mechanical trading. You keep judgment, but you keep it measurable.
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