HOW TO FILTER GOOD & BAD PRICE ACTION TRADING SIGNALS

How to Filter Good & Bad Price Action Trading Signals

Knowing what to look for and what the best signals look like is one of the main steps to increasing your chart-reading skills and confidence in your trading ability.

Tips for filtering trade signals

1. Look for a signal with a protruding tail that creates a false-break of a level

When we see a reversal / rejection signal like a pin bar with the tail or “rejection part” of the signal clearly protruding from a key level in the market, it’s a typically a very high-probability signal. When a pin bar signal has a tail that protrudes through a level, it also means that it created a false break trading strategy, and a false-break of a level adds a lot more weight to any signal.

           

2. A long-tailed pin bar is a high-probability pin bar

The tail on a pin bar is very important, it shows rejection of price. It’s safe to say, generally speaking, the longer the tail on a pin bar the more “forceful” the rejection of price.

should be a staple of any price action trader’s trading plan

The key here is movement; when price is moving then the pin bars or other signals are going to be much more effective than they will be in stagnate or consolidating market.

Note the 50% retrace entry of the pin bar, it works good on long-tailed pins, giving you a much better risk reward potential due to the tighter stop loss distance.

3. Don’t “bet” on a breakout…wait for confirmation instead

it’s high-risk trading right into a key resistance or support; the closer a market is to a key level, the less chance it has of continuing. you can always enter later after the breakout on a retrace. Inside bars cause a lot of false-break scenarios like these, especially when a market is range-bound and not trending or if the inside bar setup is implying a counter-trend breakout like we see below:

4. Long-tailed pin bars work very good as reversals after a sustained move

we can see that a long-tailed bullish pin bar occurred after a sustained downtrend, then the pin kicked off a large move higher…

5. Look for continuation signals after a pullback to support or resistance in the trend

6. Don’t trade signals in tight “chop”

Trading signals that form in the middle of thick consolidation, also known as “chop”, is usually a bad idea. For example, if you see consecutive bars of consolidation for a period of time, and then a pin bar signal forms inside that chop…the signal become less valid.  ALWAYS wait for momentum and a confirmed break of the choppy congestion area to validate your signal…a “confirmed” break would be a close outside of the chop

7. Look for “confluence”

A “confluent level” has at least two supporting factors behind it. Those factors might be an obvious support or resistance level, or 50% retrace and a key support and resistance level

8. Avoid signals that form in “no man’s land”

One of the best “filters” is actually the lack of any supporting factors or confluence. If you see a trade setup that is essentially just “floating” in “no man’s land” without anything to give “weight” to it, it’s probably a good setup to pass on. This is even more accurate for intra-day signals. A 4 hour or 1 hour signal without any type of confluence behind it is usually not a high-probability setup worth trading. See the example below:

You shouldn’t have to “think” too hard about whether or not a setup is valid

leave any sense of urgency at the door…if you’re not “sure” that your signal is there waiting for you to trade it, then walk away, there will be another signal tomorrow or the next day.

The “big boys” know how to filter their trades

The best and most logical explanation for why you should trade less is because there are inherently less good signals for any strategy or system; think about it…the reason a signal is high-probability is because it doesn’t happen extremely often, if it did then it wouldn’t be a high-probability event would it? If you force yourself to trade all the time you’re going to be taking a large quantity of useless and second-rate signals, this is simply a waste of your time and money.

Creating a filter checklist for you trades

Create a quick checklist with one to three sentences describing what the filter is and then an example image of the filter under it.

1. Look for a signal with a protruding tail that creates a false-break of a level

2. A long-tailed pin bar is a high-probability pin bar.

3. Don’t “bet” on a breakout…wait for confirmation instead.

4. Look for continuation signals after a pullback to support or resistance in the trend

5. Don’t trade signals in tight “chop”.

6. Look for “confluence”. Watch for obvious “hot points” in the market, or areas where two or three or more levels are intersecting…these are very high-probability levels to trade from.

7. Avoid signals that form in “no man’s land”.