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Showing posts with label Price Action Strategy. Show all posts
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Thursday, 11 March 2021

A List Of The Most Important Price Action Patterns

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To be a price action trader means having a deep understanding of the various different price action patterns that form in the market. The problem with these patterns, is that because there are so many of them that form in the market, knowing which ones you should take the time out to learn and which you should leave can be quite challenging. To solve this problem, I thought that today I would give you a list of what I believe to be the most important price action patterns you need to learn as a Forex trader.

As some of you reading this will probably already know, there are three basic types of pattern that can form in the market:

  • Price Action Reversal Patterns
  • Price Action Continuation Patterns
  • Price Action Candlestick Pattern

I’ll begin today’s article by first showing you what the most important price action reversal patterns are, followed by which continuation patterns you need to have knowledge on. Finally I’ll show you the two most important price action candlestick patterns you need to watch out for in the market.

I’ve also reformatted this article of important price action patterns into a PDF document, so if you would like to download it and read it at a later date you have the possibility to do so.

Price Action Reversal Patterns

  1. The Head And Shoulders Pattern
  2. The Double Bottom And Double Top Pattern
  3. The Rising And Falling Wedge Pattern

Reversal patterns are probably the most important set of price action patterns you need to really have a deep understanding of, as they can give you early clues about if a movement in the market is coming to an end. The six patterns I’m going to be showing you in this section are all multi-swing shape patterns, which means that each one of the patterns forms from more than one upswing and downswing taking place in the market, and they all look similar to common shapes upon their completion.

The Head And Shoulders Pattern

The first price action reversal pattern we’re going to look at is the head and shoulders pattern. Without doubt one of the most popular and well known price action patterns in the market, the head and shoulders formation is one which all price action traders need to memorize and understand if they want to become good at spotting reversals using price action. As you’ve probably already guessed, the head and shoulders pattern is a reversal pattern which has a swing structure very similar to that of person’s head and shoulders.

image of bearish head and shoulders patternHere’s an image of a bearish head and shoulders pattern which formed on the 1hour chart of EUR/USD.

You can see from the image the structure of the pattern does bear a striking resemblance to somebody standing up with their head straight and their shoulders level with one another. Most head and shoulders patterns are supposed to look like the one you can see in the image above, but a large percentage of them will actually have features which are a little different from one another. For example, you might see a pattern form with one of the shoulders being a little bit higher than the other, or the distance of two shoulders from the head will be smaller or bigger than what you can see in the pattern above.

These small differences do not alter the pattern in any meaningful way. So long as the head is always found in the middle and the two shoulders are found to be either side, it’s a head and shoulder pattern. If the high of the right shoulder is found to be below the swing low of the move up which created the head, then it’s not a head and shoulders pattern and should not be treated as such.

The pattern itself comes in two variations. The one we just looked at in the image above is referred to as being a bearish head and shoulders pattern, which is a signal the market may reverse to the downside, whilst the one seen in the image below is a bullish head and shoulders pattern, but is often refereed to as being an inverse head and shoulders pattern due to the way the pattern is basically an upside down version of the bearish pattern.

image of bullish head and shoulders pattern Here’s what an inverted head and shoulders pattern looks like on a chart.

You can see that all the features of the pattern are the same as the bearish version, only the opposite way around. Instead of the head pointing upwards like it does with the bearish pattern it points down, as do the left and right shoulders. The only real difference between the two patterns is in what needs to happen in order for the pattern to become invalidated. With the bullish head and shoulders pattern if the right shoulder forms below the swing low of the move up which created the head, the pattern is not a head and shoulders and is instead some other formation. The bearish head and shoulders follows the same rule, only the right shoulder cannot form above the swing high of the move down which created the head, if it does it’s not a bearish head and shoulders pattern.

All in all the head and shoulders formation is usually quite a reliable signal the current movement is going to reverse. If you want to learn the best way to trade the head and shoulders pattern and get a more in-depth look at the way it should form on your charts, check out the article I’ve left below.

The Double Bottom And Double Top Patterns

The double bottom and double top formations are another couple of really important reversal patterns you need to be aware of forming in the market. They’re two  patterns which get their name from the way the market will make two downswings with swing lows at similar prices to one another before reversing, (in the case of the double bottom pattern) or two upswings with swing highs forming at similar prices to one another before reversing, in the case of the double top pattern.

image of double bottom pattern forming on usd/jpyThe image above shows an example of a double bottom pattern which formed on the 1hour chart of USD/JPY.

You can see the first part of the pattern forms after the market makes a downswing followed by an up-swing. The swing low that forms at the bottom of the swing higher is one of the two bottoms that forms during the pattern. The next swing low and bottom will always end up forming at a similar point to where this first swing low has formed, and the overall swing structure will usually resemble that of the letter W once the pattern has fully formed.

In this image we are looking at an example of the double top pattern.

The double top is of course the opposite to the double bottom, which means that it’s formation involves two upswings taking place with swing highs forming at similar prices to one another instead of two swing lows. Both patterns become invalidated if the second top or bottom in each respective pattern forms at a price which is far away from the price at which the first top or bottom has formed at. There isn’t any exact guidelines on how far away this should be, but I’d say that if you see two or three large candlesticks close below the first bottom or above the first top, then it’s probably not a double bottom or double top pattern.

Overall the double bottom and double top patterns are two decent reversal formations, although they can be quite difficult patterns to trade effectively, due to the way the swing seen after the second bottom or top has formed can easily turn into a retracement or consolidation soon after you would have entered a trade.

The Rising And Falling Wedge Pattern

The final two price action reversal patterns we’re going to look at, are the rising wedge and the falling wedge. The rising and falling wedges are two patterns which get their name from the way the market sometimes contracts before the end of an up-move or down-move. The contraction of the swings is what creates the wedge and gives the patterns their name.

image of rising wedge patternHere’s an image of a large rising wedge pattern which occurred on the daily chart of EUR/USD.

You can see that at the beginning of the wedge the distance between the market hitting the upper wedge line and lower wedge line is quite large. As the pattern progresses though, the distance between the two lines becomes smaller and smaller until eventually the two lines are really close to one another, almost as if they were about to form the tip on an arrow head.

image of falling wedge pattern In this image we’re looking at an example of a falling wedge pattern.

The falling wedge is the bullish version of the wedge pattern and is always a signal the market may be about to reverse to the upside. It forms in much the same way as the rising wedge pattern, with the only difference being that the swings contract to the downside rather than the upside like they do during the formation of the rising wedge.

In closing, the rising and falling wedges are two patterns which are important for you to be able to recognize 0n a chart, but are not patterns which you should use to look for entries into trades, due to the way many false signals will appear as the swings contract and the pattern nears completion.

Saturday, 29 June 2019

4 Crazy Price Action Strategy Tips That Will Give Immediate Results!

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forex price action tips article coverDo you want to be able to open up any price chart, and forecast near term price action with confidence on your own?
Every trader aspires to be an awesome technical analyst. It’s one of the core skills needed to be able to trade the Forex market like a boss.
Price Action Trading is the methodology you will eventually fall in love with.
Let’s face it, it’s a very seductive and addictive form of analysis, and when done right – very lucrative!
At it’s core, price action is something trading systems need, and many have been derived from its principles.
Once you master the charts, you can come up with your own flavor of trading system that works for you and be proud of its results.
But first, you need to master the charts, and become your own king of technical analysis.
In this guide, I’ve got some awesome tips that will make the charts just pop out at you, instilling a huge boost in clarity in your analysis next time you open your trading software!
Are you ready? Let’s begin…

perform.
Since this is my first candlestick pattern strategy evaluation, I wanted to focus on something really really simple – the candle body.

1. Get Context  – Read The Story Of Price Action

getting context with the price actionWhat’s the number 1 issue with price action noobs?
Easy, trading candlestick patterns in isolation!
This has got to be the trap that every new trader trips over when they first open the door to trade price action, and continue to be stuck with this toxic mindset!
I really can’t stress this enough – a candlestick pattern on it’s own is a very weak signal!
Actually, I have some fun fact data to share from some recent testing.
I wrote a program to evaluate a scenario that would trade every single candlestick reversal, specifically the pin bar / rejection candle.
The program only looks exclusively for the pattern as a trade signal, that’s it!  It doesn’t care about the size of the candle, the market conditions, nothing! If the Forex price action pattern appears, it starts recording data.
Can you guess what the success rate was?
Taking ever single pin bar candlestick signal (across various pairs and time frames), averages out have about a 20% expected success rate – which in real life trading terms, is like jumping on the bankruptcy bus.
every single rejection pin bar candle taken result
Candlestick patterns are awesome to use, but they should not be the first, or only factor in your trade decision making process.
This is where I drive home the point to look beyond the candlestick patterns, and get market context BEFORE you make a trade decision.
When analyzing the price action context, some things you need to consider are:
  • Current price structure
  • What’s happening on the higher time frames
  • Forex price action to the left
  • Relative location of price to other important technical factors
  • Presence of price action reacting with support, resistance, trend line structures etc
If I could illustrate my point here, I would show two charts. The bad way, and the professional way to approach candlestick signals.
bad approach to candlestick patterns
Look at the flow chart above, is this level of decision making you take when putting your money on the line?
Now look at the chart below, this is how I recommend you approach a trade decision that involves a candlestick pattern. Give this a try…
candlestick patterns decision making process table - the right way
The success rate is much harder to achieve with a quantitative simulation, due to the discretionary (human decision) factors –  so I can’t put a % against this, but I will continue with my work here.
If you’re guilty of the first flow chart, try switch to the ‘get context’ flow chart, and watch how quickly you start filtering out bad signals.
Check out this example…
candlestick signal with no price action context
Above: Very hard to build value to a ‘sell trade’ here, based off the pin bar candlestick alone.
If you look beyond the candlestick, you can see the market is very bullish. That’s evident by the higher highs, and higher lows being printed, which is the footprint of a bullish trending market
If you want to sell against that, you need to have really strong technical evidence that a reversal is likely to occur (I’ll cover that later in the tutorial).
out of context signal fails as expected
Above: The ‘what happened after’ shot. As expected the bullish moment continued, because that’s what the market structure was screaming after. Market structure analysis through reading price action takes priority over candlestick signals (remember the flow chart above).
Any price action based signal is going to dramatically change in value depending what kind of market environment the trade setup forms in.
Lets take a look at a signal that fits within the market context…
good price action signal in context with the technicals
Above: A candlestick signal that fits well within the ‘story’ price action is communicating here.
A similar structure to the previous example. This market is making higher highs, and higher lows – a bullish market, where we should be looking to buy only.A bullish rejection candle formed here, and off a trend swing level. The trade idea is within context and has a lot of technical value.
good price action analysis wins as the signal reaches into higher highs
Above: The bullish rejection candlestick signal had good follow through, which is expected, because it was backed by many technical factors – aligning it with the market context.
Checkpoint
Start looking beyond the candlestick patterns. Take a step (or two) back, look at the market structure, and other technical factors like support and resistance (especially weekly S/R) to help build value into a buy or sell trade idea. Then see if the candlestick signal has synergy with your price action analysis.

2. Top Down Analysis is A Critical Step For Price Action Traders

top down analysis concept artYou might have heard the term ‘top down analysis’ being passed around the Forex communities from time to time. This nicely complements the ‘getting context’ tip above.
Top-down analysis is the idea of aligning what’s going on in the market from a higher time frame perspective (top), and then stacking it with your trading time frame analysis(down) – to create strong synergy with your trade idea.
This is a critical, and an overlooked step when evaluating a trade idea by many traders who are trying to learn price action trading.
To begin, start your analysis from the top time frame – I recommend using the weekly chart for your entry point.
The weekly chart offers a lot of value, big technical details that you might otherwise miss on your trading time frame. I mostly use the top time frame (weekly chart) for gathering information.
I am looking for information such as:
  • Critical support and resistance levels: Levels which have proven to act as a major turning point in the market before.
  • Dominant technical features: Major trend line structures or price squeezing structures.
  • The market structure:  Which way are we moving/trending? Where are we within a range? Is this a choppy consolidation period?
  • Previous weekly candle anatomy: Provides good insight to where price is likely to try move.
Then we move down to the trading time frame…
Because I am dominantly a swing trader, that’s anything between the “4 hour” to “Daily” charts. Occasionally I will use the 1 hour chart for an aggressive swing trade entry, but only when I can build very strong top down analysis.
When you’re on your primary trading time frame, it is business as usual – looking for details such as:
  • Market structures: trending, ranging, etc.
  • Turning points: trend lines, swing levels, support/resistance or whatever your trading system dictates is a technical feature.
  • A clear trade signal: usually a candlestick pattern, or some kind of price action event.
To illustrate why this is important, lets walk through an example where we disregard top down analysis and focus only on the trading time frame.
This example is a ‘what can happen’ if you ignore the bigger picture, so we will just check in to see what the higher time frame chart is communicating  so I can make my point…
As per usual, I begin on the weekly time frame.
top down analysis starting at weekly time frame
From the weekly time frame we gather the key information I would normally bring down to the trading time frame.
We can see price is testing a major weekly resistance level here. This is something we do not want to attempt to buy through.
It is a risky practice to try trade ‘through’ weekly turning points.
If anything, we could consider looking for sell signals off that level on our trading time frame.
Now we have the information in hand, keep it in mind. We will go to the trading time frame – in this case, the daily chart, and disregard what we’ve learned from the weekly chart.
price action buy signal occurs under weekly level
So we see a bullish candlestick signal on the daily chart.
If you were stuck in the mind-set of ‘trading a candlestick signal just because it’s there’, then you might take taken this.
This is what happened next…
the weekly time frame dominates the price action on the lower time frames
Above: A classic scenario where the higher time frame analysis overpowers the single value of a candlestick trade signal on the trading time frame.
In this case, it is bad practice to try and challenge the market by buying or selling through proven major turning points.
Without the top down analysis element here, we could have easily overlooked the major level, not even knowing the danger was there in the first place.
This is the kind of ‘tunnel vision’ a lot of faster paced, lower time frame traders suffer from.
Top down analysis is extremely important when you’re thinking about trading counter trend. I am speaking from a swing trading point of view, where you’re looking to catch a really big move.
Higher time frame analysis actually becomes paramount in a counter trend trade decision!
price testing major level on weekly chart
Above: Starting our top down analysis, we can see the price is testing a major level.
We look to the left and see this level is a proven turning point, so we can only logically anticipate one thing – a good chance of a reversal occurring.
Next step: look for signals to fit that analysis on the trading time frame.
bearish counter trend reversal signal
Above: We step down onto our trading time frame and see a bearish candlestick sell signal.
This signal fits the context of the market, and aligns with our higher time frame analysis. An authoritative counter trend signal which builds a very strong case to position against the existing market trend.
If the signal follows through with this bearish pattern, it’s like to be a very extended move, as weekly levels tend to be the starting point for complete trend reversals.
counter trend signal follows through with strong bearish price action
Above: A powerful example of counter trend trading done right.
You’ve heard the sayings over and over: ‘trade with the trend only‘, ‘the trend is your friend‘.
Well, those catch phrases are only true while the trending context is relevant.
You need to use top down analysis to make sure you’re not going to trade into any serious trouble spots, or even better – use the technique to spot lucrative counter trend signals, like the one shown above.
A lot of traders are very reluctant to move into lower time frames, due to a lot of misconceptions about trading on charts like the daily and weekly.
Let me extinguish all your fires right here: Busting myths about trading Forex price action on the daily charts.
Checkpoint
Top down analysis is the discipline of aligning technical analysis from a higher time frame, with your trading time frame. The weekly chart works best for swing trading top down analysis. It will give you a clear picture of what you should be doing in the market, help you build value into your trading signals, and help you spot the best counter trend opportunities.

3. Focus on Charts With Clear Price Action to the Left

look left analogy for technical analysisOne of the quickest ‘spot checks’ you can do on your chart is have a look to the left.
What do you see? Clear trending price action, or a highly congested traffic jam?
When the market seizes up, and the flow of price action stops – we can get these horrible, hostile, churned up periods of consolidation that create ‘minefield’ like signals.
Candlestick signals, and other trades will often form within these conditions, and may be tempting to trade – but are just too unreliable in an unstable market.
There are times you would have had an experience where a trade ‘dragged you through the mud’, because you took the position in choppy market conditions.
A simple check to the left rule can be a good reminder to move on to the next chart, or wait for the next position.
Sometimes no position is a good position – especially when you’re trade is drowning in draw down.
bad price action to the left of signals
Above: A series of bullish candlestick buy signals form in rough conditions.
We take one quick look to the left, and we see the market very cluttered and congested – just like a peak hour traffic jam.
This immediately tags the signals as very risky. The unstable price action, and no clear market structure makes these types of charts very difficult to make money with.
3 out of 4 of the signals in the example above have had their low’s broken – which means they would have highly likely been stopped out.
Trades will often float between profit and draw down for days, and give you unwanted anxiety.
I just recently experienced this myself. My trade got caught in congestion for weeks, and the swap rate (interest rate) charges started to build up quite a bit.
Lets take a look at a cleaner example.
looking left to a clear trending structure
Above: Looking to the left of a bullish price action signal, we see a nice clear trending structure.
The higher highs and higher lows give a nice clear picture to the left, which builds value into the bullish trade idea.
Remember this line:
Muddy waters are best cleared when left alone.
Simply meaning, if you see bad conditions – leave the chart alone and come back when things have cleared up.
If you want to dive deeper into this topic, check out my tutorial: Learn how to trade price action in Forex without using indicators.
Checkpoint
A simple and effective way to ‘spot check’ market conditions is to look to left. If you see a readable price structure, like a trend or range  – you’re good to go. However, if you see congested, difficult to understand price action – it’s best to leave that market alone until it becomes organized again.

4. Time Your Breakout Trading Decisions Carefully

a money trap suggesting breakout traps are there to trick youOne element to a trading decision, is the timing.
I really don’t think many traders consider this, and just pull the trigger ‘in the moment’.
Depending on what time you evaluate, or make a decision to execute on a trade order – can be a ‘make or break’ factor if the trade succeeds or not.
There are many time-based nuances in trading price action, however in this segment, I am mostly focusing on breakout decisions.
Here is my industry secret…
Breakouts that occur in the Asia session are deceptive, very risky, and continue to have a high failure rate!
I speak from my swing trading experience, but this phenomenon would definitely seep into other trading strategies also.
What usually happens is this:
  • A breakout event occurs in the Asia session
  • When London opens, the breakout event has failed – then market then explodes in the opposite direction
The fix is simple. Wait until London opens before you make any breakout decisions!
If we know it’s prone to failure, then we can actually use this fakeout as a signal itself. In my opinion, this one should be left to experienced traders – but here is some food for though.
I call this kind of price event the Asia session breakout trap.
asia session breakout
Above: A price action breakout event occurs – the current daily candle breaks below the previous day candle.
In many cases, this could be a trigger for a breakout structured trade. But look what happens when we allow it to be triggered during the Asia session…
asia session fakeout
Above: The key moment for this concept. Asia session is coming to an end, and London is about to open. The Asia breakout has faded, and is building strength going into the money sessions!
This is the point of failure. This is the reason right here why I avoid the Asia breakout triggers.
If you frequently check your charts at the London open, you will see this price action event unfold many times. The London open is one of the best times to do your technical analysis, and to make your breakout trade decisions.
asia breakout fails and acts as a buy signal
Above: The initial bearish breakout is completely wiped out, and the market actually rallied in the opposite direction for days later.
That’s why we can exploit the fakeout event, and use it as a trade signal.
My theory to why this method is so powerful…
With stops being triggered, there is now less resistance for the market to move in the opposite direction due to an influx of closing trades.
This produces a very powerful ‘aftershock effect’, where price can move great distances on the chart during that session, and beyond.
The event creates an excellent opportunity for us to catch a nice explosive trade – it’s one of my favorite breakout strategies.
If you want you can trade the Asia fakeout directly, or utilize an extension of this setup – which I call the breakout trap and reverse Forex setup.
The breakout trap and reverse system is built off more confirmation:
  • First we wait for a an Asia fakeout to occur, especially around key technical areas on the chart
  • We can enter on the ‘aftershock move’ using breakout orders (buy & sell stop orders), at the opposite end of the previous candle’s range.
breakout trap and reverse trade
Breakout trap and reverse moves can be violently explosive and give you very high return on investment. But you will need to hold onto them to milk them for what they are worth.
Next time you see an Asia breakout occur, watch the price action at the London open to see what happens.
  • Is the breakout showing sustainability, and continuing to produce a nice powerful move going into London as well?
  • Or, does it collapse and cause price to charge in the opposite direction?
Checkpoint
A lot of breakouts look like fantastic trading opportunities ‘in the moment’, but [highlight]if your timing is off – you could be entering a dangerous unfulfilled move[/highlight]. These Asia breakouts collapse and trigger an ‘aftershock’ effect that fuels intense movement in the opposite direction when the money sessions open. We can capitalize on these powerful reversal moves.

Want To Learn More Secrets?

I hope today’s Forex price action tips was a good knowledge injection for you. You should be able to go to the chart now and apply these concepts immediately.
If you really enjoyed the strategies and concepts shown in the article today and are hungry for more – then you are invited to check out all the other price action articles, lessons, and video trade tutorials on my site. I am sure you will find them just as insightful.
I recommend my big price action strategy guide.
Going beyond that, I do have a price action war room that I offer for serious traders only. Without giving a sales pitch, it consists of:
  • A very comprehensive Forex price action course
  • My ‘Chart of the day‘ and weekend video market walk through
  • My custom built MT4 software
    • Price Action Battle Station (A candlestick pattern, and breakout detector + a lot more)
    • Custom Chart Builder (Build custom time frames, custom candle open/close times, Renko & Heiken Ashi charts)
    • Trade Management Panel (Quickly open trades, auto calculates risk, OCO orders, straddle trades, trailing stops + a lot more)
  • 24 hour Private Chat Room for the War Room group (share charts, ask questions etc)
If you would like to learn more about that – check out my War Room Information Page.
Again I hope you walk away from the lesson today, feeling empowered to master Forex price action. If so, please don’t forget to leave a comment below and let me know your thoughts.
Best of luck on the charts!