The trading world presents very difficultly, tricky puzzles that traders are required to unravel. Now, traders who don’t have the skill to unravel those puzzles often lose their money. Conversely, the gurus and master puzzle solvers can accumulate a lot of money. So, how are you able to solve those puzzles? Price action patterns. Yes, price action patterns assist you in analysing the worth action and observing trading decisions.
Price action patterns are the lifeblood of successful trading in the stock market in the UAE. Whether you’re a Stock trader, forex trader, Crypto trader, etc., you can’t survive without learning these price action patterns because these specific patterns assist you in solving puzzles like trends, support and resistance levels, trend continuation, and trend reversal. In other words, you would like to understand these price action patterns to identify profitable trading opportunities, the best entry points, and take profit levels.
Price action patterns belong to the tool belt of technical analysis. However, it’s different from other technical analysis techniques because it doesn’t believe in technical indicators. Instead, technical analysis supported price action patterns is conducted by simply watching price charts.
Understanding price action patterns is, however, as complicated because it is vital for perfect trading decisions. Therefore, we decided to assist you in understanding price action patterns and how they develop. Our guide includes everything you would like to understand regarding the subject. So, let’s dive into it.
The basics of candlesticks
A candlestick is either a bullish candlestick or a bearish candlestick.
Price closing above where it started forms a bullish candle. A bullish candlestick is white by default or green.
Conversely, the price closing below where it started forms a bearish candle. A bearish candle is usually black by default or red.
On the opposite hand, if we mention the structure of a candlestick, it consists of:
The body – is a box formed by the movement of the costs.
Shadow, tails, or wicks – the very best or rock bottom point of the worth movement within a specific timeframe are called shadows, tails, or wicks.
The nose – a little a part of a candlestick.
Moreover, the structure of a candlestick always remains equivalent regardless of timeframes or financial instruments.
As we’ve highlighted the fundamentals of the candlesticks you would like to understand, let’s head back to our main topic.
What is a candlestick?
A candlestick is essentially the littlest unit you discover on a price chart. It’s a measurement unit that helps you understand different aspects of price movement. However, there are other different types of charts like bar, line, or Renko charts. However, the bulk of recent traders has chosen candlesticks. Meaning candlesticks are building blocks of a price chart and price action pattern.
So, what’s the rationale behind such popularity of candlesticks? It’s pretty obvious. Visual hints – candlesticks are popular for supplying visual hints to traders while learning stock markets. These visual hints help traders understand price action patterns and thus observe trading decisions. We should always be very grateful for Homma, the good rice trader from Japan because he’s credited with candlestick development. His trading rules were developed and refined. And eventually, the fashionable candlestick and candlestick charts evolved that we use today.
Candlesticks represent a flow of price-on-price charts and indicate timeframes. one candlestick, as we all know, is the basic unit of the larger picture we see on the worth chart. Thus, several candlesticks construct a bigger structure that traders use for price action pattern analysis. The phenomenon is extremely almost like languages. Words combine to form a sentence, and sentences combine to form a paragraph. In short, the subsequent are key aspects of price chart patterns.
Candlestick – the essential unit of price measures on a price chart
Candlestick patterns – similarly, groups of candlesticks, typically consisting of 1 to 3 candles, construct a selected pattern. That pattern represents the general direction of the chart.
Price swings – the candlestick patterns groups, typically three to 5 candlesticks. It shows a bigger price movement.
Price action patterns – a gaggle of swings combine to shape a price action pattern. This pattern then represents bearish, bullish, reversal, or continuation.
Trend channels and range – again, price action patterns eventually form a trend channel or a variety. The angles of the channels indicate whether the worth goes up, down, or sideways. A trend channel always moves up or down. Whereas a variety always moves sideways.
Price action patterns explained.
The following 7 price action patterns are considered the foremost reliable price action patterns.
1. Head and Shoulders Patterns
Head and Shoulder patterns are among the foremost reliable price action patterns. It will be both bullish and bearish. These patterns also are quite easy to identify. Additionally, Head and Shoulder patterns also enable traders to enter the market at the simplest point.
After a bullish trend, three consecutive rounding tops form a Head and Shoulders pattern. These rounding tops include the top and two shoulders. Shoulder tops flank above the top. Moreover, the costs of the rounded tops can also vary. Similar prices aren’t the prerequisite to the present pattern. However, the signal is stronger if the costs are on the brink of another. Similarly, prices at rock bottom points can also vary. Furthermore, rock bottom points might not necessarily form a horizontal line.
Conversely, an Inverted Head and Shoulder forms after a bearish trend within the market. However, this Inverted pattern consists of three rounded bottoms rather than rounded tops. Again, three rounded bottoms include two flanks and are ahead. Both of the bottoms flank less than the top. Moreover, prices at the rock bottom of the flanks may vary. However, the signal is more powerful if the costs remain on the brink of another. In contrast to going and Shoulder patterns, Inverted Head and Shoulder patterns’ flanks are typically slopped rather than horizontal.
2. Triangle Patterns
Triangle patterns also are important to cost action patterns. They’re continuation patterns. Triangle patterns are formed when upper and lower trendlines ultimately converge at the proper side to make a triangle. Moreover, there are also two sorts of these patterns Ascending Triangle patterns and Descending Triangle patterns.
Ascending Triangle patterns develop during a bullish trend. A series of upper lows follow an uptrend move. In these patterns, highs typically remain identical and form a horizontal upper trendline line. Conversely, the lower trendline remains ascending as rising lows make them do so. Moreover, if the worth breaks above the upper trendline, the Ascending Triangle pattern is successful.
Conversely, the Descending Triangle pattern develops during a bearish trend. A series of lower highs form this pattern. Moreover, the lower trend lines remain horizontal because the lows are almost identical. At the same time, the upper trendline descends due to falling highs. Eventually, both trend lines meet on the proper side to form a triangle. The pattern is successful if the worth breaks below Triangulum.
3. Rectangle Patterns
Another price action pattern that you got to know is Rectangle patterns. These patterns have horizontal trend lines with no slopes. Thus, Rectangle patterns are channel patterns. Moreover, these patterns also are of two types: Bullish Rectangle Patterns and Bearish Rectangle Patterns.
Bullish Rectangle patterns are formed, during an ongoing uptrend, by a series of two or more consecutive highs and lows. These highs and lows are nearly identical, also. Thus, identical highs and lows form two horizontal trendlines. Eventually, the worth breaks above the upper trendline. Bullish Rectangle patterns are successful when the space of the worth breakout is the same because of the rectangle’s width.
On the opposite hand, Bearish Rectangle patterns also are formed, during an ongoing downtrend, by a series of two or more consecutive highs and lows. Again, these highs and lows are near identical also. Therefore, identical highs and lows form two horizontally parallel trendlines. Finally, the worth breaks below the lower trendline. Bearish Rectangle patterns are successful when the space of the worth breakout is the same because of the rectangle’s width.
4. Channel Patterns
Channel patterns also are vital among price action patterns. These patterns also are among the highly reliable patterns due to longer timeframes. Again, Channel patterns also can develop during both uptrends and downtrends.
Ascending Channel patterns develop during an uptrend. These patterns also are formed by a series of upper highs and better lows during an extended consolidation period. Thus, both upper and lower trend lines run parallel to each other but on an upward slope. Ascending Channel patterns are successful when the worth breaks below the lower trendline. Moreover, the worth keeps moving below to hide the maximum amount of distance because of the distance of the initial bearish trend.
Descending Channel patterns develop during an uptrend. Conversely, These patterns are formed by a series of lower highs and lower lows during an extended consolidation period. Thus, both upper and lower trend lines run parallel to every other but during a downward slope. Descending Channel patterns are successful when the worth breaks above the upper trendline. Moreover, the worth keep moving above to hide the maximum amount of distance because of the distance of the initial bullish trend.
5. Double Top/Bottom Patterns
Double Top/Bottom Patterns also are crucial for price action analysis. These price action patterns are reversal patterns.
Firstly, there are Double Top patterns. These price action patterns start developing when a rounding top appears after an ongoing uptrend. After the primary rounding top, another rounding top also appears. Thus, the event forms a swing low between the 2 rounding tops. Moreover, the highs of the tops are also almost identical. The pattern appears a bit like the letter “M”. The signal is stronger when the space between is wider. The worth continuously keeps declining and eventually breaks below the swing low. Double Top patterns are successful when the autumn space in prices is almost adequate to the space between the tops and swing low.
Secondly, there are Double Bottom patterns. These price action patterns start developing when a rounding bottom appears after an ongoing downtrend. After the primary rounding bottom, another rounding bottom also appears. Thus, the event forms a swing high between the 2 rounding bottoms. Again, the lows of the bottoms are also almost identical. Thus, the pattern appears a bit like the letter “W” compared to M formed by Double Top patterns. The signal is stronger when the space in between is wider. The worth keeps increasing until it breaks above the swing high. Double Bottom patterns are successful when the space of the increase in prices is almost adequate to the space between the bottoms and swing high.
Bonus Pattern: Flag Patterns
Flag patterns also are worth mentioning among the foremost important price action patterns. These are continuation patterns and are almost like Channel price action patterns. However, there are a few differences. Firstly, Flag patterns have a pole. Secondly, these patterns develop during a shorter timeframe. Moreover, Flag patterns also can develop during both uptrends and downtrends.
Bullish Flag patterns develop during an ongoing uptrend. First of all, a robust upward price movement forms a flagpole. Then, a period of consolidation occurs during which the worth instantly moves against the uptrend. Thus, a series of lower highs appears typically consisting of 5 to twenty candlesticks. Moreover, the upper and lower trend lines run parallel to every other.
Additionally, the lower trendline must not be above the midpoint of the flagpole. Bullish Flag patterns are successful when the worth eventually breaks above the upper trendline. Moreover, the price increase must also cover the maximum distance because of the flagpole.
Price action patterns – the wrap-up
The price action patterns are vital to dealing with the precarious market. Traders can identify the simplest entry and exit points using these patterns. However, it’s also a fact these price action patterns aren’t always successful. Price action patterns don’t ensure that the market will behave expectedly. If we mention it in terms of percentage, several studies indicate that even the foremost reliable price action patterns are successful, only up to 60-70%. Still, using price action patterns is best than anticipation and baseless predictions.