Filtering Your Trades With the Triad of Price Action (Key Points/Cheat sheet)
Here are the key points from our video ‘Filtering Your Trades With the Triad of Price Action’ that you can use as a reference guide or ‘cheat sheet’. The video is available on our YouTube channel and at the bottom of this article.
- The triad of price action for us is a negative filter, which means it isn’t something we use to find trades, but instead it’s something that helps us avoid certain situations or judge our position size. It’s helping us filter out the opportunities we find from the rest of our tools, to immediately see situations that are safer to avoid. This is all about the micro strategy, the smaller movements rather than the macro waves.
- It’s our last line of defence prior to entering a trade, which is important because the number one rule in trading is that you want to protect your capital. But you obviously need to put it at risk to make a return. So if you can have certain triggers that can help you avoid higher risk situations, the better your trading will be over the long term and the more consistent and sustainable you will be.
- The triad of price action is made up of three aspects: trend, momentum and volume. These are all sort of grey areas, as they are more like a continuum. If you want to measure momentum it is like saying “how long is a piece of string”, as you can only measure something like momentum in relation to something else, rather than on its own. And that’s the same for volume and trend too. So when you’re selecting a tool or indicator that will help you with these things, you need to keep that in mind.
- A good way to explain the overall concept is by using running in a park as an example. In the park there’s a running path on each side, so there are options of where you can run. This means, before starting you have to assess three factors and essentially these are the same as the triad of price action: trend, momentum and volume.
- Firstly, trend. What direction are the runners going in? If I run south on this path, am I going to be going with their general direction or against them?
- Next, momentum. How fast are the people running? Is it a light jog, or are they the intense people that train all the time, so I’ll be getting in the way.
- And finally, volume. How many people are running there? Is it like a stampede or just a few individuals?
- These are effectively the decisions we make when we’re about to enter a trade. Yes, our tools may have helped us identify a park and a good opportunity to run. But when we look at the conditions of the other runners using the triad of price action, we may decide to avoid the situation altogether, or to change how committed we are and be a bit more cautious.
- In other words, when we look at the market and gauge the triad of price action, there may be situations where we get failure at a significant level and still decide not to enter. Or decide to change our position size, either higher or lower based on whether the triad is favourable for us.
- This also counts for when we’re exiting trades too. If the triad of price action is all on our side, we may decide to stay in a bit longer when we reach our target, since along with the structure of the market, we have something else going for us.
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