Skip to main content

Price Action Framework (PAF) — Foundation

Overview​

The Price Action Framework (PAF) is a unified, rules-based trading system. It adapts to market conditions through a two-stage process: High Timeframe (HTF) analysis and Low Timeframe (LTF) execution.

The framework consists of two entry models. The HTF market state (Trending vs. Ranging) dictates which model to use. The trader's process is to:

  1. Identify the market state correctly on the HTF.
  2. Mark the appropriate Zones of Interest (ZOI) on the HTF.
  3. Wait for the complete entry sequence to form on the LTF.
  4. Manage risk consistently with non-negotiable rules.

Core Philosophy: The market state dictates the strategy. Do not force trades. When you read the HTF correctly, the appropriate entry model and rules become self-evident.

Strategy Environment​

Who This Is For​

  • Instruments: Optimized for EUR/USD and XAU/USD (Gold).
  • Trading Styles & Timeframes:
    • Swing Trading: HTF = 1-hour, LTF = 5-minute
    • Day Trading: HTF = 15-minute, LTF = 2-minute

These pairings are optimized for EUR/USD and XAU/USD liquidity and volatility. The HTF identifies market state and ZOI; the LTF is used to execute the entry model.

Note: Alternative Timeframes If 2-minute charts are unavailable on your platform, use 3-minute (preferred) or 1-minute for the LTF, but keep all LTF rules and thresholds the same.

Data Standards & Chart Consistency​

To ensure your zones, FVGs, and order blocks are consistent across analysis and execution:

  • Use New York close daily candles (5:00 PM ET) for marking weekly/daily zones.
  • Maintain a consistent broker/data feed for all analysis and execution.
  • Be aware of US/EU daylight-saving shifts. Anchor overlap windows to the exchange open times, such as London open (08:00 local time).
  • If you switch platforms or brokers, re-mark all HTF zones on the new feed before trading. Inconsistent data is a common cause of error.

The Three Core Pillars​

  1. Market State Identification (HTF): Are we Trending or Ranging?
  2. ZOI Marking (HTF): Where, within that market state, do we expect a high-probability trade?
  3. Entry Model Execution (LTF): Once price enters the ZOI, wait for the correct 2-3 step sequence.

Master these three pillars, and the rest becomes mechanical.

Pillar 1: Market State Identification (HTF)​

You must classify the HTF (1H for Swing, 15m for Day) as either Trending or Ranging.

A trend shows directional order flow and clear, imbalanced price movement.

Objective Criteria:

  • At least 2 recent external BOS (within the last 50 HTF bars) have occurred in the same direction.
  • The current pullback is holding above the 50% Fibonacci level of the most recent impulse leg that caused the BOS. This shows that participants are willing to buy at a "discount" in an uptrend (or sell at a "premium" in a downtrend).
  • A clear Higher High/Higher Low (HH/HL) or Lower High/Lower Low (LH/LL) sequence is visible.
  • Pullbacks tend to respect the structure, often stalling inside prior Order Blocks or Fair Value Gaps.

Your Objective in a Trend: Trade Continuation with the trend from HTF discount/premium zones.

Ranging Market (Objective Rules)​

A range shows balanced order flow contained within clear boundaries.

Objective Criteria:

  • No same-direction external BOS in the last 50 HTF bars.
  • At least 6 of the last 10 HTF candle closes fall within the 25-75% Fibonacci band of the current dealing range (the "chop zone").
  • Repeated rejections at a clear high and low (often forming equal highs/lows).
  • Price often fails to sustain breakouts; fakeouts are common.
  • The LTF reversal sequence (Fakeout -> Reversal FVG -> Engulfing) often appears at the extremes.

Your Objective in a Range: Trade Reversals at the top/bottom 25% boundaries back toward the interior. Never enter in the middle 50%.

The Golden Rule: If you cannot confidently determine the market state using the objective criteria, default to assuming it is Ranging. It is safer to wait for a high-probability reversal at an extreme than to chase a potential breakout that may fail.

Ranges eventually break. If price closes decisively beyond a boundary (not just a wick) and begins forming a new HH/HL or LH/LL sequence:

  1. Re-assess the market state immediately. The range is now invalid.
  2. Do not take reversal trades.
  3. Wait for the new trend structure to clarify (requiring at least 2 new BOS in the same direction), then switch to the Trending Continuation Model.

Note: This transition phase—where a range has broken but a new trend is not yet confirmed (lacks 2 BOS)—is a no-trade zone. Patience during this "limbo" state prevents trading low-probability setups.

Pillar 2: ZOI Marking (HTF)​

Once the market state is identified, mark your Zones of Interest (ZOI) using the most relevant dealing range.

Selecting the Dealing Range (Algorithmic Process)​

Follow this exact process to eliminate discretion:

  1. Identify external swing points using a 5-bar fractal rule:
    • Swing High: A candle's high is higher than the highs of the 2 bars to its left AND the 2 bars to its right.
    • Swing Low: A candle's low is lower than the lows of the 2 bars to its left AND the 2 bars to its right.
  2. Define the Range based on Market State:
    • If Trending: Anchor your Fibonacci from the swing point before the most recent BOS to the swing extreme after the BOS. This is your current dealing range.
    • If Ranging: Anchor your Fibonacci across the current validated range extremes (the equal highs and lows that have been respected at least twice).
  3. Reset the Dealing Range When:
    • A new external BOS occurs. (Re-draw the Fib on this new leg for a trending market).
    • A range boundary is decisively broken with two consecutive HTF candle closes beyond it. (The market is likely transitioning to a trend).

Rule: In trends with multiple BOS events, always use the most recent impulse leg. The ZOI must reflect the most current institutional intent.

  • Uptrend: Seek longs in the Discount zone (0-50% Fib level).
  • Downtrend: Seek shorts in the Premium zone (50-100% Fib level).

Marking ZOIs in a Ranging Market​

  • Short ZOI: Top 25% of the range (75-100% Fib level).
  • Long ZOI: Bottom 25% of the range (0-25% Fib level).

Never trade in the middle 50% (25-75% Fib). There is no statistical edge there.

Pillar 3: Entry Model Execution (LTF)​

Once price enters your HTF ZOI, drop to your LTF (5m for Swing, 2m for Day) and wait for the full entry sequence. Do not enter on partial signals.

  • If HTF is Trending → Use the Trending Continuation Model.
  • If HTF is Ranging → Use the Ranging Reversal Model.

For step-by-step details on the sequences and risk rules, see the PAF Entry Models document.

Risk Management & Execution Filters​

Consistency here is the backbone of performance. These rules are non-negotiable.

Position Sizing​

  • Risk a fixed fraction per trade (recommended 0.25%-0.5% of account).
  • Calculate position size based on SL distance and your chosen % risk.
  • Do not increase risk to "make up" for losses.

Stop Loss (SL) Placement​

  • Rationale: The SL is not an arbitrary number of pips; it is placed at the point where the trade idea is structurally invalidated.
  • Trending: Place SL beyond the extreme of the OB/FVG zone that price reacted from.
  • Ranging: Place SL beyond the extreme of the fakeout wick.
  • Volatility Buffer: Add a volatility-scaled buffer to your structural SL. Do not use arbitrary fixed pips.
    • EUR/USD: max(2x current spread, 0.10 * ATR(LTF, 14)), bounded between 0.5 and 5.0 pips.
    • XAU/USD: max(3x current spread, 0.05 * ATR(LTF, 14)), bounded between $0.20 and $1.00 per ounce.

Take Profit (TP) Placement​

  • Trending Model: The next opposing HTF swing extreme. Must provide min 1:2.2 R:R.
  • Ranging Model: Calculated via a fixed R:R of 1:2.2 to 1:2.5.

Breakeven Rule​

  • Move SL to entry when price reaches 1:1.5R.
  • Calculate exactly: SL distance * 1.5. Round to the nearest pip/cent.
  • Once at breakeven, do not interfere. Let the trade resolve (TP or BE). This rule protects your capital while giving the trade's hypothesis room to play out to its logical conclusion (TP).

Management Simplicity​

  • No partial profit-taking.
  • No trailing stops.
  • No discretionary exits (exceptions: end of session or imminent high-impact news).

Circuit Breakers & Daily Exposure Guardrails​

  • Max Daily Risk: 1.0% of account across all instruments.
  • Max Consecutive Stops: After 2 sequential losing trades on the same instrument, stop trading that instrument for the session.
  • Max Daily Stops: After 3 total losing trades across all instruments for the day, stop trading entirely.
  • Correlation Warning: Avoid simultaneous positions that represent the same directional bet (e.g., long XAU/USD and long EUR/USD) unless the combined risk is within your per-trade limit.

Execution Filters​

  • Trading Sessions (ET/New York):
    • Optimal: Asian/London Overlap (01:00-05:00) and London/New York Overlap (07:00-11:00).
    • Avoid: 12:00-13:00 (lunch hour), after 16:00 (session close), and late Friday afternoon.
  • News Blackouts:
    • Standard: Avoid new entries 60 minutes before and 30 minutes after standard high-impact releases (CPI, PPI, GDP, etc.).
    • Critical: For FOMC, NFP, and ECB rate decisions, extend the blackout to 180 minutes before and 30 minutes after. No new positions.
  • Quality Filters:
    • Spread: Only enter if the current spread is ≤ 20% of the planned SL distance.
    • Slippage: If slippage at entry reduces the projected R:R below 1:2.2, cancel the order or close the trade immediately for a minimal loss.

The Complete PAF Workflow (Daily Checklist)​

1) Pre-Market (HTF Prep)​

  • Mark HTF Zones:
    • Weekly (last 3-5): Mark major swing points, significant reversal OBs, and large FVGs.
    • Daily (last 10-15): Mark swing points in the current dealing range and recent respected OBs/FVGs.
  • Identify Market State: Classify HTF as Trending or Ranging using objective criteria.
  • Draw Dealing Range: Use the algorithmic process to draw the correct Fibonacci range.
  • Mark ZOI: Identify the valid ZOI(s) based on the market state.
  • Set Alerts: Place alerts for when price enters your ZOI(s).

2) Waiting Phase​

  • Do Nothing: Do not watch charts. Do not force trades. Wait for an alert to trigger.

3) Execution & Management (LTF)​

  • Wait for Full Sequence: When the alert fires, drop to the LTF and wait for the complete entry sequence to form.
  • Verify Rules: Check R:R minimums, spread/slippage gates, and news blackouts.
  • Execute: If all rules are met, enter the trade.
  • Set & Forget: Immediately place your SL and TP orders. Set an alert for the 1:1.5R breakeven level.
  • Journal: Log the trade details.

Glossary of Key Terms​

  • BOS (Break of Structure): A move where price closes beyond a previously established external swing high or low, confirming trend continuation.
  • CHOCH (Change of Character): The first meaningful break of structure against the prior trend, signaling a potential shift from trending to ranging or a full reversal.
  • Dealing Range: The current trading environment defined by a swing high and swing low on the HTF. It is the basis for marking all ZOIs.
  • FVG (Fair Value Gap): A three-candle pattern indicating a price imbalance. It is a gap between the high of the first candle and the low of the third candle (for a bearish FVG) or the low of the first candle and the high of the third candle (for a bullish FVG). Price often seeks to "fill" this inefficiency.
  • HTF / LTF: High Timeframe (analysis - 1H/15m) / Low Timeframe (execution - 5m/2m).
  • OB (Order Block): The last opposing candle before a strong, impulsive move that often breaks structure. It represents a zone of institutional accumulation (bullish OB) or distribution (bearish OB).
    • Bullish OB: The last down-candle before a strong up-move.
    • Bearish OB: The last up-candle before a strong down-move.
  • SMT (Smart Money Technique) Divergence: A confluence tool where two highly correlated assets (e.g., EUR/USD and GBP/USD) fail to confirm each other's price action. For example, if EUR/USD makes a new low but GBP/USD fails to make a new low, it signals weakness in the move and a potential reversal.
  • Swing Points: External swing highs/lows identified using a 5-bar fractal. These define the boundaries of a dealing range.
  • ZOI (Zone of Interest): The specific price area on the HTF where you have a statistical edge and are looking for an entry sequence.

Final Notes​

The framework's edge comes from three sources: Market-State Alignment + Strict Risk Management + Flawless Execution.

The process is intentionally simple. Read the HTF using objective rules, mark ZOIs algorithmically, wait for the complete LTF sequence, and manage risk mechanically. Success is found in the disciplined repetition of this process, not in discretionary decision-making.

Risk Disclaimer: Trading involves substantial risk. This framework is for educational purposes only and is not financial advice. Past performance does not guarantee future results. Never trade money you cannot afford to lose.