Day Trading With Price Action Volume 2 - Galen Woods

2 ND EDITION


Day Trading with Price Action
Volume II: Market Bias
Galen Woods
Trading Setups Review
Copyright © 2014-2016. Galen Woods.
PDF eBook Edition
Cover Design by Beverley S.

www.tradingsetupsreview.com

i


Copyright © 2014-2016 by Galen Woods (Singapore Business
Registration No. 53269377M). All rights reserved.
First Edition, 1 September 2014.
Second Edition, 5 April 2016.
Published by Galen Woods (Singapore Business Registration No.
53269377M).
All charts were created with NinjaTrader™. NinjaTrader™ is a
Registered Trademark of NinjaTrader™, LLC. All rights reserved.
No part of this publication may be reproduced or transmitted in
any form or by any means, electronic or mechanical, without
written permission from the publisher, except as permitted by
Singapore Copyright Laws.

Affiliate Program
If you find this course to be valuable and wish to offer it for sale

to your own customers or readers, please contact Galen Woods
to be an affiliate and get a percentage of each sales as
commission.
Contact Information
Galen Woods can be reached at:



Website:
Email:

www.tradingsetupsreview.com

ii


Disclaimer
The information provided within the Day Trading with Price
Action Course and any supporting documents, software,
websites, and emails is only for the purposes of information and
education. We don't know you so any information we provide
does not take into account your individual circumstances, and
should NOT be considered advice. Before investing or trading on
the basis of this material, both the author and publisher
encourage you to first seek professional advice with regard to
whether or not it is appropriate to your own particular financial
circumstances, needs and objectives.
The author and publisher believe the information provided is
correct. However we are not liable for any loss, claims, or
damage incurred by any person, due to any errors or omissions,

or as a consequence of the use or reliance on any information
contained within the Day Trading with Price Action Course and
any supporting documents, software, websites, and emails.
Reference to any market, trading time frame, analysis style or
trading technique is for the purpose of information and
education only. They are not to be considered a
recommendation as being appropriate to your circumstances or
needs.
All charting platforms and chart layouts (including time frames,
indicators and parameters) used within this course are being
used to demonstrate and explain a trading concept, for the
purposes of information and education only. These charting
platforms and chart layouts are in no way recommended as
being suitable for your trading purposes.
Charts, setups and trade examples shown throughout this
product have been chosen in order to provide the best possible
www.tradingsetupsreview.com

iii


demonstration of concept, for information and education
purposes. They were not necessarily traded live by the author.
U.S. Government Required Disclaimer: Commodity Futures
Trading and Options trading has large potential rewards, but
also large potential risk. You must be aware of the risks and be
willing to accept them in order to invest in the futures and
options markets. Don't trade with money you can't afford to
lose. This is neither a solicitation nor an offer to Buy/Sell futures
or options. No representation is being made that any account

will or is likely to achieve profits or losses similar to those
discussed on this web site. The past performance of any trading
system or methodology is not necessarily indicative of future
results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED
PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE
AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO
NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES
HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDEROR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF
CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY.
SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO
SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE
BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE
THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT
OR LOSSES SIMILAR TO THOSE SHOWN.

www.tradingsetupsreview.com

iv


Contents
Chapter 1 - Introduction ...................................................... 1
Chapter 2 – Finding a Tradable Time Frame............................ 3
2.1 - Price Action Time Frame Index (PATI) ......................... 6
2.2 - Finding Tradable Time Frames with PATI ..................... 9
2.3 - Minimum Tradable Time Frame (MTTF)...................... 12
2.4 - Useful Notes for Finding the Optimal Trading Time Frame
and Market .................................................................... 14
2.4.1 - Optimal Trading Environment (OTE) Index ........... 14

2.4.2 - Insufficient Trading Opportunities ....................... 16
2.5 - Alternative Chart Types ........................................... 18
2.6 - Conclusion ............................................................. 21
Chapter 3 – Swings ........................................................... 23
3.1 - Defining Swings ..................................................... 24
3.1.1 - Exercises: Price Swings...................................... 34
3.1.2 - Solutions: Price Swings ...................................... 37
3.2 - Swing Pivots .......................................................... 39
3.3 - Pivot Types ............................................................ 43
3.3.1 - Basic Pivot ....................................................... 45
3.3.2 - Tested Pivot ..................................................... 46
3.3.3 - Valid Pivot ........................................................ 56
3.3.4 - Exercises: Pivot Types ....................................... 75
3.3.5 - Solutions: Pivot Types ....................................... 78
3.4 - Swinging It: Putting Them Together.......................... 80
3.5 - Conclusion ............................................................. 86
Chapter 4 – Trend Lines ..................................................... 88
www.tradingsetupsreview.com

v


4.1 - Drawing Trend Lines ............................................... 90
4.1.1 - New Trend Lines ............................................... 90
4.1.2 - New Valid Pivots ............................................... 93
4.1.3 - Contains All Price Action Before The Trend Extreme
................................................................................. 95
4.1.4 - When to Stop Adjusting a Trend Line ................... 98
4.1.5 - Not Too Many Trend Lines ................................ 101
4.2 - Interpreting Trend Lines ........................................ 102

4.2.1 - 6E 60-Minute .................................................. 103
4.2.2 - ES 5-Minute ................................................... 107
4.2.3 - 6J 30-Minute .................................................. 112
4.3 - Conclusion ........................................................... 115
Chapter 5 – Evaluating Market Bias ................................... 117
5.1 - Our Thought Process ............................................. 118
5.2 - Step-by-Step Guide .............................................. 122
5.2.1 - Trend Line Break............................................. 124
5.2.2 - Multiple Trend Lines ........................................ 132
5.2.3 - Large Gap Between Price And Trend Line ........... 141
5.2.4 - Almost Flat Trend Lines ................................... 146
5.2.5 - Short-Lived Trend Lines ................................... 148
5.2.6 - A Struggling Trend .......................................... 151
5.3 - Conclusion ........................................................... 154

www.tradingsetupsreview.com

vi


Chapter 1 - Introduction
In trading, the market bias is king.
The market bias is simply the tendency of a market to move in a
certain direction. Is the market more likely to move up or move
down?
Answering this question is the cornerstone of successful trading.
After you master the art of interpreting the price action context
and deciphering the market bias, you have a thousand and one
ways to trade profitably.
However, there is no easy answer to that question. This is

because the market is lying constantly. Don’t blame it. You are
part of it. Not to mention that the market has to lie. It has no
choice.
It has to deceive traders into thinking that it is moving down, in
order to move up. It has to convince traders that it is rising up,
in order to fall further.
The logic is simple. Price rises until there is no one interested to
buy at a higher price. Then, it falls. Price falls until nobody
wants to sell at a lower price. Then, it rises. This story repeats
and gives birth to the market swings we see on all trading time
frames.
It follows that for the market to trend either up or down, it must
do so through a series of rising and falling. In bull trends, the
total magnitude of the rising swings is larger than that of the
falling swings. The opposite is true for bear trends – the total
magnitude of downswings is larger than that of upswings.

www.tradingsetupsreview.com

1


Chapter 1 - Introduction

In a bull trend, each time it falls, it is tricking some poor bearish
traders into the market, before rising up again. In a bear trend,
each pullback upwards represents the same trickery in reverse.
Facing such a deceptive market, how do we determine its bias?
The key is to focus and stay relevant. This is also where the
difference between “market bias” and “trend” matters.

In this series, I will use these two terms interchangeably. But,
there is a subtle difference between them.
Trend exists on many levels. Major trend, intermediate trend,
minor trend, monthly trend, daily trend, hourly trend, and the
list goes on. Trying to figure out the trend of all degrees is not
only impossible, but impractical for trading. The secular trend
lasting several years is not relevant for the day trader. Similarly,
the 5-second trend is worthless to the pension fund investing
with a long-term horizon.
Think of market bias as the relevant trend. We need to figure
out the degree of trend that is useful for our trading time frame.
We must constantly try to interpret the trend that actually gives
us an edge in our trading. The trend in the appropriate trading
time frame dictates our market bias. Our job is to find the
relevant trend (i.e. the market bias), and focus on it.
In this volume, you will learn the essential tools for determining
the market bias. Our approach uses pure price action that
involves observing market swings and drawing trend lines. You
will learn how to implement these basic concepts to the market
objectively. Towards the end of this volume, you will integrate
them to form your assessment of the market bias.
(For clarification, the charts in this series are in the GMT +8
time zone.)
www.tradingsetupsreview.com

2


Chapter 2 – Finding a Tradable
Time Frame

Our main analysis tool is the price chart. It is a visual depiction
of market prices over time. Our choice of trading time frame
affects how many bars we have in our charts and how the bars
look. Hence, the trading time frame has an important influence
over our analysis context.
Thus, deciding our trading time frame is Step Zero.
An oft-repeated claim of price action traders is that price action
works in all time frames. This claim is largely true. However,
some trading time frames are not amenable to price action
analysis.
Price action involves pattern recognition. By claiming that price
action works in all time frames, we are assuming that charts of
all time frames are visually similar.
Compare Figure 2-1 to Figure 2-2. Both charts show 6A futures.
One chart shows 30-minute bars while the other shows 30second bars.
Do they look the same? If not, how are they different?

www.tradingsetupsreview.com

3


Chapter 2 – Finding a Tradable Time Frame

Figure 2-1 6A futures 30-minute chart

Figure 2-2 6A futures 30-second chart

www.tradingsetupsreview.com

4


Chapter 2 – Finding a Tradable Time Frame

The 30-second chart in Figure 2-2 consists of mainly two types
of bars:



Dojis (bars that open and close at the same price)
Marubozus (bars that open and close at opposite
extremes)

This fast chart makes you doubt if “bar” or “candlestick” is the
right label to use. Some “bars” are just dashes.
On the other hand, the 30-minute chart looks “normal”. In fact,
without the time and price axes, we cannot tell a 30-minute
chart (Figure 2-1) apart from a 1-hour chart (Figure 2-3).

Figure 2-3 6A futures 1-hour chart

This simple visual examination shows that not all charts are
created equal. When a chart consists of entirely Dojis and
Marubozus, many price action patterns disappear. Good luck
finding a decent pin bar from the 30-second chart.

www.tradingsetupsreview.com

5

Chapter 2 – Finding a Tradable Time Frame

In conclusion, very fast charts are different from their slower
counterparts. It is difficult to find meaningful price patterns on
very fast charts.
However, what do we mean by “very fast charts”? How do we
know if a time frame is too fast for price action analysis? How do
we know if a time frame is tradable?
Many trading strategies prescribe the exact time frame to trade.
The prescribed time frame might work for a certain market
within a certain time-period given a certain market volatility.
This is because the tradable time frame depends on the market
volatility, which differs across markets and over time. When the
market changes but the trading time frame stays constant, the
trading strategy might not work well.
To solve this issue, I have devised the Price Action Time Frame
Index (PATI). The PATI is a robust concept for finding suitable
trading time frames for price action trading.

2.1 - Price Action Time Frame Index (PATI)
We observed that time frames that are not tradable are made
up of mostly Dojis and Marubozus. Hence, the PATI seeks to find
a time frame that is not overwhelmed by Dojis and Marubozus.
In doing so, we verify that the time frame is tradable.
The PATI measures the number of Dojis and Marubozus in the
last 10 bars.

PATI

Percentage of Dojis and Marubozus in
the last 10 bars

www.tradingsetupsreview.com

6


Chapter 2 – Finding a Tradable Time Frame

If the PATI value is 0.2, it means that only two bars out of the
last 10 bars are Dojis or Marubozus. If the PATI value is 1, it
means that all of the last 10 bars are either Dojis or Marubozus.
The latter clearly describes a time frame that is not tradable.
Why are we using a look-back period of 10 bars?
Most price action patterns are two-bar patterns (inside bar, key
reversal bar) or three-bar patterns (three-bar reversal, threebar pullback). This means on average, 10 bars will encompass
around three price patterns which are adequate for ongoing
price action analysis. Hence, 10 bars is a reasonable look-back
period for ongoing analysis of recent price action.
The PATI crystallises the idea that excessive frequency of Dojis
and Marubozus in a time frame is not amenable for price action
analysis. With this concept in mind, you are already armed with
a perspective that alerts you to non-tradable time frames.
If you need a tool to find tradable time frames objectively, in
our Indicator Pack (available separately), you will find the PATI
indicator.
The PATI indicator value moves between 0 and 1. It represents
the percentage of bars within the look-back period that are Dojis
or Marubozus. If the value exceeds 0.5, it means that more than

half of the bars in the look-back period are Dojis or Marubozus.
It is a warning that the time frame is not tradable.

NOT TRADABLE
A time frame is not amenable to price
action analysis if the PATI exceeds 0.5

www.tradingsetupsreview.com

7


Chapter 2 – Finding a Tradable Time Frame

In Figure 2-4, we applied the PATI indicator on a 5-minute chart
of 6E futures (24-hour session). The parts highlighted in red are
areas when the PATI value is higher than 0.5. These areas are
warning us that this time frame is not great for price action
trading, at least not for a full 24-hour session.

Figure 2-4 6E 5-minute chart in 24-hour session with the PATI indicator

According to the PATI indicator in Figure 2-4, from
approximately 7:00 p.m. to 7:00 a.m. (GMT), the 5-minute
chart is not tradable. Unsurprisingly, this unfriendly period
contains the period when both the New York and London
markets are closed.
Like any other trading parameter, the look-back period of 10
bars is not set in stone. The PATI indicator allows you to choose
the look-back period.

Feel free to experiment with it. However, if you choose a lookback period that covers too few or too many bars, the PATI
value is no longer meaningful. If you want to tinker with the
setting, bear in mind that a good look-back period is more likely
www.tradingsetupsreview.com

8


Chapter 2 – Finding a Tradable Time Frame

to classify after-hours trading as non-tradable and the regular
session as tradable.

2.2 - Finding Tradable Time Frames with
PATI
To assess if a time frame is tradable using the PATI indicator,
follow these steps:
1. Load at least 30 days of recent market data in your
preferred trading time frame. This is your sample period.
2. Make sure that you load the data within your trading
session. (For instance, if you trade the New York session,
load only the price bars within the regular session and
exclude after hours data. On the other hand, if you trade
the forex market round the clock, you must load all the
price market data within your sample period.)
3. For a tradable time frame, the PATI value must be lower
than 0.5 at any point in the sample period.
4. If the PATI value exceeds 0.5 at any point within the
sample period, that time frame is deemed as nontradable. In that case, keep increasing your time frame
until the PATI value is below 0.5 for the entire sample

period.
There is an exception to the rule mentioned in Step 4. If the
PATI value exceeds 0.5 on (pre/post) holidays when market
movements are expected to be muted, the time frame is still
tradable. Of course, remember that you should not trade during
these exceptional periods.

www.tradingsetupsreview.com

9


Chapter 2 – Finding a Tradable Time Frame

You can check online for the trading holidays observed by
different exchanges.1 You can also get the information from your
broker.
According to the PATI criteria, the 5-minute 6E chart shown in
Figure 2-4 is not tradable as the PATI exceeded 0.5 for long
periods. Take note that we used the 24-hour session on the
chart. Hence, we were assessing the tradeability of the 5-minute
time frame with the assumption that you will be trading the
entire 24-hour session.
As the underlying market of 6E futures is the EUR/USD currency
pair, you might want to consider trading only during the
London/New York overlap when the volatility is usually higher.
In Figure 2-5, we constrained our trading session to that
particular 4-hour period each day and reapplied the PATI
indicator on the 5-minute time frame. The PATI indicator is
below 0.5 for the entire chart. This confirms that the 5-minute

time frame is tradable during the London/New York overlap.

1

Click here for more information.

www.tradingsetupsreview.com

10


Chapter 2 – Finding a Tradable Time Frame

Figure 2-5 6E 5-minute chart showing only the London/New York overlap

If you are really bent on trading the full 24-hour session, you
will need to increase your trading time frame. For instance, as
shown in Figure 2-6, the 45-minute 6E chart is tradable as the
maximum value of the PATI is 0.4.

www.tradingsetupsreview.com

11


Chapter 2 – Finding a Tradable Time Frame

Figure 2-6 45-minute 6E chart is tradable.

With the PATI indicator, we can easily find out if a time frame is

suited for price action analysis. Day traders have a knack of
descending into lower and lower time frames to find more
trading opportunities. However, as I have explained, some time
frames do not produce meaningful price action patterns. Hence,
applying the PATI indicator on your trading time frame is an
important step that will keep you out of trouble.

2.3 - Minimum Tradable Time Frame (MTTF)
If you are trading a new market, you probably do not have a
preferred trading time frame. In that case, the concept of the
Minimum Tradable Time Frame (MTTF) is useful.
The MTTF is the minimum time frame that is tradable for a given
market. Time frames that are higher than the MTTF are
tradable. Hence, the MTTF is a useful benchmark to remember.
With the PATI indicator, you can find the MTTF quickly and
easily by trial and error. Start with the 1-minute time frame and

www.tradingsetupsreview.com

12


Chapter 2 – Finding a Tradable Time Frame

see if it is tradable. If not, move up to the 5-minute time frame.
Keep increasing the time frame until you find a time frame that
is tradable according to the PATI.
For your reference, I have listed the MTTF for some of the
common futures contracts.








CL 2-minute (regular session)
ES 10-minute (regular session)
6E 20-minute (24-hour)
6A 25-minute (24-hour)
6J 45-minute (24-hour)
FDAX 2-minute (XETRA session)

These MTTF values are not definitive. They will certainly change
as the market volatility evolves.2 However, we do not need to
worry as the PATI indicator will warn us if there are changes to
the tradability of our time frames.
Hence, it is essential that you review the MTTF for the markets
you trade at regular intervals to make sure that your time frame
is still tradable (i.e. above the MTTF). I perform a check at least
once a month. This is especially important if your trading time
frame borders the MTTF.
Do not follow the MTTF blindly. Common sense should prevail. If
the MTTF is so fast that it’s impossible for you to conduct your
analysis. You should move your time frame up.
For instance, even if the MTTF for a particular market is 1
second, you should not trade with the 1-second chart because
it’s impossible to perform any meaningful analysis, at least not
without some help from automated trading systems.

2

In fact, the example MTTF values above have been updated to reflect changes since
the last edition of this book.

www.tradingsetupsreview.com

13


Chapter 2 – Finding a Tradable Time Frame

2.4 - Useful Notes for Finding the Optimal
Trading Time Frame and Market
These are some useful notes for finding the sweet spot in day
trading, in terms of your trading market and time frame.
At this point, especially if you are new to trading, you can skim
through this section.
You will appreciate the ideas here better after you’ve tried
trading with a variety of time frames and markets. Make a note
to return to this section after you’ve gained more price action
trading experience.

2.4.1 - Optimal Trading Environment (OTE) Index
Trading in an environment that offers high reward-to-risk ratio
is what most traders want. Hence, I’ve developed a useful index
to help you find the best day trading markets.
Traders profit from market movement. If the market does not
move, we cannot make money. We need the market to move.
In fact, we want the market to move as much as possible. We

want to see high market volatility. This is why the volatility of
the market is an indication of the potential reward size.
A useful measure of volatility for day traders is the average
daily range. The higher the daily range, the greater the
potential reward for your trades.
Now, let’s talk about risk. As a rule, smaller time frames give
you the ability to select finer entries. Finer entries mean smaller
trade risk. However, as discussed, the MTTF is the lower limit
for us. Going below the MTTF might jeopardise the validity of
our analysis. Hence, an indicator of potential trade risk is the
average bar range, given the MTTF.

www.tradingsetupsreview.com

14


Chapter 2 – Finding a Tradable Time Frame

Remember that we are looking for markets that offer high
potential reward-to-risk opportunities. It follows that we want
markets with a high average daily range and a low average bar
range given the MTTF. From this, we get the Optimal Trading
Environment (OTE) Index.
OTE Index Formula
Average Daily Range / Average Bar Range (given the MTTF)

OTE
The higher the OTE of a market, the
more ideal it is for day trading

Let’s apply this concept to the four futures markets below.3
Market 30-Period
Average Daily
Range
ES
21.18

Average Bar
Range of the
MTTF4
3.11

OTE
Index

CL

1.31

0.138

9.49

FDAX

214.12

8.59

24.93

FESX

70

7.68

9.11

6.81

Table 2-1 Optimal Trading Environment Index

According to the OTE Index, FDAX is more ideal for day trading
compared to ES despite its popularity. CL and FESX are
comparable.

3

Figures computed on 11 December 2015.
The period of the average bar range is the number of bars in five trading sessions,
given the MTTF. This is to account for any day of the week variations.
4

www.tradingsetupsreview.com

15

Chapter 2 – Finding a Tradable Time Frame

It is possible to further refine the OTE, by adjusting the OTE
inputs according to your actual trading parameters.
For instance, you plan to trade the first two hours of each
trading session. You can then find out the average range of the
first two hours of each session and use that as the input for the
OTE numerator. You can also work out a separate MTTF and the
corresponding average bar range for the first two hours of each
session. Then, use that number as your OTE denominator.
While the OTE Index is useful when choosing your day trading
market, do not use it as the sole criterion for choosing the
market to trade. Your specific entry and exit method, liquidity,
trading hours, trading costs, margin considerations and many
other factors are also in play. For instance, despite having a
scoring higher on the OTE Index, FDAX does not have the
liquidity of ES so its potential for slippage is greater.
I’ve tried to explain the inputs of OTE clearly so that you know
when you can use it. It is most relevant when your risk is a
function of the average bar range of your time frame. And that
is largely true if you set your stop-losses using price patterns,
as we will be doing.

2.4.2 - Insufficient Trading Opportunities
Have you encountered markets that are moving with increased
volatility? Prices running away from you as you struggle to find
an entry point.
When that happens, it might be wise to lower your time frame.
Lower time frames will show the finer price action from which
you can find more setups.

But you must have a plan for lowering your time frame, rather
than making it an ad-hoc decision.

www.tradingsetupsreview.com

16


Chapter 2 – Finding a Tradable Time Frame

First, while you may lower your trading time frame, you must
not go below the MTTF of the market you are trading.
Second, define the conditions that will cause you to lower your
trading time frame.
Why do you need to define such conditions?
This is to ensure that you are moving to a faster time frame
because of increased market volatility, and not because of
boredom and impatience.
How do we define such conditions? What’s our basis?
Bar range.5
When the market shows numerous consecutive narrow range
bars, it is a sign that the market is congesting. Setups are
unreliable under such conditions, and profit potential might be
limited.
When the market shows many consecutive wide range bars, it is
a sign that the market is running amok and that volatility is
growing. The market is running away without pausing for us to
join it. Hence, there might be difficulty finding trading setups.
These observations imply that in a healthy trading time frame,
you will find a good mix of price bars with varying ranges, both

wide range and narrow range.
Thus, we can use this idea as a rule of thumb for lowering our
trading time frame.

5

Bar Range = Bar high – Bar low

www.tradingsetupsreview.com

17


Chapter 2 – Finding a Tradable Time Frame

When you get ten consecutive wide range bars, adjust your time
frame lower. (Refer to Volume IV Chapter 2.2.3 for the
definition of a wide range bar.)
To avoid this problem of insufficient trades altogether, consider
trading as close to the MTTF as possible, provided that you are
confident of performing sound analysis within the time frame.

2.5 - Alternative Chart Types
Chart types that do not use a time base are common among day
traders. Some examples include:





Tick charts
Volume charts
Range charts
Renko charts

If you are not familiar with these chart types, you may skip this
section and stick with time charts.
However, for those wondering if our framework can be applied
to these alternative chart types, read on.
Any chart with price bars that look visually like a time chart
(above the MTTF) works for our trading method.
Both tick and volume charts fit the bill. They offer the same
level of price detail as time charts. A volume (or tick) chart and
a time chart are indistinguishable. The price bars in both charts
look like normal candlesticks. Hence, it is possible to use them
within our trading framework.

www.tradingsetupsreview.com

18