As a novice trader who’s just trying to figure out a decent trading plan, you might be having a hard time grasping the best techniques and strategies to put on your list. Especially if you’re planning to use technical analysis the tiniest bit, things can get a whole lot more confusing. You have to master the art of chart reading, learn about a gazillion price action patterns, and find which ones are actually helpful.
Oh, was that you wishing a comprehensive and, quite frankly, awesome price action pattern cheat sheet would magically fall into your lap? Well, guess who’s in luck today!
This guide covers all the bases you need to become a professional chart reader. We’ll go over 18 of the most important forex price action patterns that can actually help you in 2024 and tell you how to trade them. So stick around to learn more!
What Are Price Action Trading Patterns?
In the world of financial markets, the forces of supply and demand lead the prices to move in different directions. These prices tend to move in patterns, indicating specific possible outcomes after certain courses of action. At some point in time, traders noticed these patterns and what happens after each of them, so they began using them to better analyze the market, which created the concept of price action patterns.
Fast forward to today, technical analysts use these patterns to determine if the market is going to do a “180”, continue its existing movement, or do neither. Based on these outcomes, price action patterns mostly represent either potential trend continuations on reversals. They may also sometimes indicate that the market is going to enter a consolidation period in which there are no trends.
Price action trading patterns may form in the span of a couple of candlesticks or major market swings. We will cover some of each in this guide. But first, let’s get price action patterns’ meanings and definitions out of the way.
Price Action Chart Patterns
Chart patterns are repetitive formations that are created by the swinging of market in particular manners. They can be used in a variety of timeframes and are, therefore, great tools for different traders, i.e., day traders, swing traders, and position traders.
These patterns are easy to spot and can indicate a variety of potential outcomes. Continuation chart patterns suggest the pre-existing trend is still going in full force. Reversal price action chart patterns indicate, well, a potential trend reversal. And bilateral chart patterns stipulate the market could go either way. Some of the most widely used chart patterns include:
1- Double Top and Double Bottom
Double tops and double bottoms are the two halves of the same apple. They both signal a potential trend reversal, but one calls the death of a prolonged downtrend, and the other indicates the end of a well-established uptrend.
Starting with the double top, it forms at the end of long uptrends. The pattern looks like a capital M, with prices hitting a high, retreating back down, and then rallying to hit the same high level again. Notice that the second high shouldn’t be above the first one. In fact, if it’s slightly lower, offering the market couldn’t reach the first top’s high, it is a stronger indicator that buying pressure is getting weaker and weaker.
On the other hand, we have double bottoms, which are the upside-down version of double tops. They form at the end of long downtrends and offer a potential bullish reversal.
So, a double bottom looks like a capital W and forms when the pre-existing bearish trend hits a level it can’t break out of, rallies a little, and then drops to that same level or a slightly higher one. Like with double tops, the second bottom in a double bottom shouldn’t go lower than the first one.
To trade a double top, you should place your order entry a bit lower than the pattern’s neckline. As with the double bottom, you’re looking to put your entry point just above the neckline. Also, to determine your profit target, you can use the length of the pattern.
2- Head and Shoulders and Inverse Head and Shoulders
The head and shoulders price action pattern is another important name on our list. There are two variations to this pattern: head and shoulders and inverse head and shoulders.
Starting with head and shoulders itself, it forms at the end of uptrends and signals that a potential bearish reversal is near. So, the price moves up, creates a peak, dips down before going up again and creating a higher peak, and then drops down again before rallying once more and forming a third lower peak.
With this pattern, you’re looking for two lower peaks with an upper high in between them, resembling a head and two shoulders. You can find the neckline’s bias by connecting the lowest point of the two dips in the formation. If this neckline has a downward slope itself, your pattern is stronger.
Next is the inverse head and shoulder, which is the same pattern, only upside down. So, the price dips and creates a low, increases, then drops again to form the head, and then goes back up again, just to drop down and create the second shoulder. This pattern is a signal that the ongoing downtrend might have come to an end.
To trade the H&S pattern, you should place your order below the neckline and use the length of the pattern as an indicator for your take profit. For the inverted H&S, you do the same thing but upside down.
3- Bullish and Bearish Flag
The price action flag pattern can be a continuation signal to both bullish and bearish trends. The pattern gets its name from its appearance, which resembles a flag on a pole.
The bullish flag, or the bull flag for short, forms in, well, you guessed it, bullish trends. It all starts with a sharp uptrend, which is the flag’s pole. At some point, some traders decide to go short or close their positions, which causes the price to drop just the tiniest bit. Then the market rallies again, and is dragged down again.
So, there’s this phase where the price fluctuates between two parallel, almost horizontal lines with a slightly downward tilt to them. This resembles the flag part of the pattern.
Keep in mind that the price shouldn’t break out of these lines for it to be a flag pattern. But then at some point, the selling pressure wears off and the price manages to reach new highs, continuing the previous upward trend.
The bearish flag pattern is exactly the same thing but in a downtrend. So, the parallel lines of the flag are slightly tilted up, and the price fluctuates between them before breaking out of the lower line and continuing the downtrend. Keep in mind that the steeper the flag poles in either of the patterns are, the stronger they become.
4- Rectangle
The rectangle pattern in forex is one of those bilateral patterns we talked about. So, it can suggest either a trend continuation or reversal. It’s a relatively simpler formation, with prices fluctuating between two well-defined horizontal support and resistance lines.
When you’re trying to decide whether or not you’re seeing a rectangle pattern, make sure that there are at least two tops and bottoms next to each resistance and support level.
As mentioned before, this pattern could be a sign of trend reversal or a consolidation period before the previous trend continues in the same direction. While the classic rectangle is between two strictly flat horizontal lines, in the real world, they might be slightly tilted upward or downward.
5- Ascending, Descending, and Symmetrical Triangles
Next are triangle patterns, popular continuation signals in the market. Like most other chart patterns, triangle price action patterns get their name from their appearance, which resembles a triangle. Basically, during the formation of a triangle, the price trades in ranges that get gradually narrower.
There are 3 types of triangle patterns that require different courses of actions from traders. These 3 include: symmetrical triangles, ascending triangles, and descending triangles.
The symmetrical triangle forms between two trendlines that are sloped against each other. On the other hand, the ascending triangle forms between a flat and an upward-sloping trendline. The flat trendline above the ascending triangle represents resistance, and the lower trendline highlights the higher highs that form along the way.
Things are the other way around for the descending triangle, though, as it forms between a lower flat trendline and a downward sloping trendline on top. The lower flat trendline is actually the support level, which can either be broken out of or not.
While triangles are mostly considered continuation patterns, there are times when the price breaks out of the other side. So, to be able to fully take advantage of these patterns, you should place two entry orders for each triangle. If the price breaks out of one side, you quickly cancel your order on the other side and still exit with profits overall.
6- Rising and Falling Wedge
Forex wedge patterns also form between two trendlines that are sloped against one another. But instead of the flat lines we see in triangles, wedge patterns in forex form between two trendlines that go in the same direction, but have different slopes.
Wedges are also considered bilateral price action patterns, so they can either signal a trend continuation or reversal. Whatever signal they provide, though, they do lead the market to enter a short consolidation period first. Like many other price action trading patterns, wedges also have a bullish and bearish version.
The rising wedge is a bearish signal that forms between two upward-sloping trendlines. Let that sink in for a moment. The slope of the pattern’s lower trendline is usually steeper, leading to the rapid formation of higher lows compared to higher highs.
When a rising wedge forms after an uptrend, it signals a potential downward reversal, whereas when it forms in the middle of a downtrend, it indicates the price is going to continue going down.
On the other hand, there are falling wedges, which form between two downward-sloping trendlines and signal a bullish movement. Unlike the rising wedge, the lower trendline in the falling wedge is flatter than the upper one, suggesting that lower highs are forming quicker than lower lows.
When the falling wedge forms after a downtrend, it signals a potential bullish reversal. However, when you see the pattern in a pre-existing upward trend, you could say that the price might continue to go up after the consolidation period is over.
7- Bullish and Bearish Pennant
The pennant is another price action pattern that is very similar to a symmetrical triangle. It forms between two trendlines that go in different directions, which is the part that you might confuse with a symmetrical triangle.
However, where triangles signal both continuations and reversals, pennants are a strong continuation indicator. We’ll look at other differences between the two in a bit.
Pennants form at the end of super severe, almost vertical bullish and bearish movements, which is another distinguishing factor for them. It’s sort of like there’s a triangular flag mounted on a long pole.
When these intense trends cause the prices to spike or drop significantly, there’s usually a period where buyers and sellers take a pause. At that same time, new traders begin to enter the market.
Between the time when traders begin to exit their positions and when there are enough new traders to continue the trend, a pennant price action pattern can form, which makes the pattern a short-term one. This is contrary to the symmetrical triangle, which might take months or years to complete.
A bullish pennant price action pattern forms after a sharp spike in prices. It signals short-term consolidation before the prices start to rise again. So. you should find the apex of your pennant and place your long order above and your stop order below it. As for your profit target, the height of the pattern is usually a good indicator of that.
There are also bearish pennants, which form after super steep drops in the prices, creating an almost vertical line in the charts. The pattern itself suggests the market is entering a small consolidation period before buyers try to push it further down.
You should place a short order below and your stop order above the pennant’s apex. Use the pattern’s height to determine your profit target.
8- Cup and Handle
The cup and handle price action pattern is a simple yet important bullish continuation signal. It forms in two stages: first, the cup and then the handle!
The cup forms when there is first a downtrend and then an uptrend which together create a formation with a rounding bottom. Ideally, the cup’s high points should be equal on both sides, but in reality, small differences might exist.
After the cup has formed, the handle begins forming as a short-term consolidation period starts. Again, if you’re looking for the ideal picture, the handle should be small and dainty, remaining in the upper third of the cup. However, thinking more realistically, we suggest that you check the handle to see if it goes lower than the cup’s midpoint or not. If not, you’re good to go.
There is a resistance point above your cup and handle pattern. You should place your order entry right above that line. As for your stop-loss, it should be below that same resistance line. You can also use the length of the cup to determine your profit target.
Price Action Candlestick Patterns
There are two types of price action patterns in the world of financial markets: chart patterns, which we just overviewed, and candlestick patterns. Candlestick patterns can consist of a single candle or several candles that form a sequence.
For single-candle patterns, there usually are certain wick-to-body ratios. As for the multi-candle patterns, several factors can lead to their formation, including candles’ heights, directions, and placements in relation to one another.
Much like chart patterns, candlestick patterns could also signal a reversal, continuation, or consolidation period in the market. They can also represent the market’s possible bullish or bearish traits, which makes them important for technical traders.
So, without further ado, here are some of the most important forex candlestick price action patterns.
9- Hammer and Inverted Hammer
One of the strongest and most well-known candlestick patterns in the market is the hammer. Like many other patterns, the hammer also gets its name from its appearance, which resembles a hammer.
A hammer candlestick usually forms at the end of long downtrends and signals a bullish reversal. It has a long lower shadow, a small body, and a small or nonexistent upper shadow.
The candle’s lower shadow should be at least twice the candle’s body in length, signifying the gradual loss of power that takes place in the market’s selling party.
If the hammer candle is upside down, then it’s called an inverted hammer, which forms at the top of long uptrends, indicating the market might go down soon. Since inverted hammer candles are upside down versions of hammers, their long upper shadows are a great indicator of the bulls losing their power after a long period of ruling over the market.
10- Bullish and Bearish Engulfing
Bullish and bearish engulfing patterns flag consist of two candles each. They are usually considered signs of a trend reversal. However, when the circumstances are right, they can also indicate the continuation of a trend after a pullback.
An engulfing pattern has a small candle, the body of which is completely engulfed by the second candle.
The bullish engulfing price action pattern forms when there is first a small down candle and then a larger up candle with a longer body. The body of the bullish candle should thoroughly encompass the first candle’s body. So, it needs to open below the first candle’s close and close above its opening price.
There are also bearish engulfing patterns, which consist of first a small bullish candle and then a large bearish one. The body of the second candle should cover the body of the first candle completely, and there should preferably be no shadow overlaps between the candles’ upper shadows.
11- Bullish and Bearish Pin Bar
The pin bar is another reversal candlestick pattern that has bullish and bearish versions. It has a long tail, which can be on either side of the candle, depending on whether it’s a bullish pin bar or a bearish one. Regardless, this long tail is similar to Pinocchio’s nose, which is where the candle gets its name from.
For a bullish pin bar to form, you’d need a long lower shadow, a small body, and a small upper shadow. The length of the candle’s lower shadow should be at least two-thirds of the entire candle’s length.
The bullish pin bar provides the strongest signals when it forms near a support level. It’s at that point that sellers continue to try to push the prices down, but the support line prevents it. And this whole process is visible in the candle’s long lower shadow.
On the other hand, we have bearish pin bars, which are, again, the upside-down version of the bullish one. With this candle, you’d want it to form near a resistance line. That is when it provides the strongest bearish reversal signal.
12- Doji
The doji candle pattern is one of the easiest price action patterns to spot in any chart. It has a super distinguishable appearance, with an incredibly narrow body and shadows of various lengths on either side.
Doji candle signals market indecision, as apparent in its flat line of a body. It represents how the bulls and bears are fighting tooth and nail for dominance, yet none of them succeed and obtain power.
There are different types of doji candlesticks that you need to know of. First, there’s the classic doji, which has a super narrow body and upper and lower shadows on either side.
Then, there’s the dragonfly doji, with a long lower shadow, a linear body, and a small or absent upper shadow. Now, if you take the dragonfly doji and spin it until it’s upside down, you’ll be left with gravestone doji. There’s also a four-price doji, which is a simple flat line with no upper or lower shadows.
13- Bullish and Bearish Harami
Harami is a Japanese word that means “pregnant.” The pattern is a two-candle pattern that looks like a pregnant woman, hence the name. Like most of the candlestick patterns we’ve learned about so far, harami also comes in bullish and bearish versions.
A bullish harami forms when there is first a large down candle and then a small up one. The first candle should have a long body, representing the “pregnant woman.” As for the second candle, it should be bullish and have a small body that is fully engulfed by the first candle’s body.
To think of it, if you give the engulfing candlestick pattern a 180 and change the candle’s colors, you’ll be left with harami.
The bearish harami pattern starts forming with a large green candle. After this first candle, there’s a second bearish candle that has a body small enough to fit within the first candle’s body.
Harami patterns signify potential market reversals. So when there’s a bullish harami after a long downtrend, it’s time for the bears to buckle up, as their days of ruling are coming to an end. As for bearish haramis, they form at the end of uptrends and signal a potential bearish reversal.
14- Tweezer Top and Bottom
Tweezer tops and bottoms are also among the most important bearish price action patterns you should know of. They are really simple to learn yet extremely useful in your forex price action trading.
Starting with the tweezer top, it usually signals a bearish reversal is near. Just like the two legs of a real tweezer, this pattern consists of two candlesticks. The color and the direction of the candles are unimportant in this pattern.
What matters is the high points of each candle. More specifically, the equality of these high points. So, for a tweezer top, you should look for two candles that have the same highs or those that are extremely close to one another.
Tweezer bottoms are bullish reversal signals at the end of downtrends. Each pattern consists of two candles of either color (green or red), but they both have very close or the same low points.
15- Hanging Man and Shooting Star
The hanging man and the shooting star are the bearish equivalents of the hammer and inverted hammer candles. They look exactly the same, with the same features and everything, but are interpreted and situated differently.
Starting with the shooting star, it’s the bearish version of the inverted hammer candlestick pattern that forms at the end of long uptrends. It signifies the gradual rise of bears in the market as they gain more power and prepare the market for a big reversal.
The hanging man, or bearish hammer, also forms at the end of uptrends and signals a possible bearish reversal. This pattern is a great visual representation of how the bulls tried to keep pushing the prices up, but they declined anyway and created the candle’s low.
Although the prices do get back up to close the candle, the whole process gives the bears enough momentum to return to the market.
16- Morning Star and Evening Star
The morning star and evening star are 3-candle basic price action patterns that speak words of trend reversal. They might be trickier to pinpoint, but once you know the 3 golden rules, you can recognize them anywhere.
Starting with the morning star, this pattern forms at the end of downtrends. It starts forming when there’s a large bearish candle that continues the ongoing trend. After that, another small candle forms with a gap down from the first candle.
This second candle is usually a doji or a spinning top. Lastly, there is a bullish candle that opens with a gap up from the second candle and closes above the first candle’s midpoint.
Then there’s the evening star, which signals a potential bearish reversal. It has three candles: a long bullish one, a small middle one, and a larger bearish one. The second candle is usually a doji or spinning top that gaps up from the first one. The third candle should also gap down from the second candle and close above the bullish candle’s 50%.
17- Bullish and Bearish Marubozu
Finally, time for price action continuation patterns. Marubozu patterns signal the continuation of a pre-existing trend after a pullback is over. They are really easy to identify, with long bodies and no upper or lower shadows.
Since they don’t have any upper or lower shadows, they are a perfect representation of how one party has been in charge of the market the entire time the candle has been forming.
So, for example, with the bullish marubozu, the large, green body shows how the bulls have been driving the prices up from start to finish, whereas the bullish marubozu shows the control and power of the bears.
18- Three White Soldiers and Three Black Crows
Our last set of price action reversal patterns are the three white soldiers and the three black crows. The three white soldiers pattern forms after a long downtrend and signals a bullish reversal.
It contains three up candles that go progressively higher and higher. So, the second candle closes above the first candle’s close, and the third candle closes above the second candle’s close.
The three black crows form at the end of uptrends and indicate a potential decline in the prices. The pattern consists of three consecutive down candles that close below each other’s closing prices.
How to Trade Price Action Trading Patterns?
While there’s not enough space in this post to give a comprehensive guide on trading all the price action patterns we went over, because, let’s face it, there would be a LOT to cover, there are some general trading tips that you can consider to take the most advantage of forex price trends.
First things first, do not under any circumstances, rely on only these patterns to give you trading signals. While these patterns have proven themselves to be correct a decent amount of times, they’re still not a bulletproof strategy. Take other indicators, such as the market’s volume and momentum, in mind before you enter positions.
Second, and this is really important, take risk management seriously. Be calculated when you enter new trades, set stop loss orders, diversify your portfolio, and trade with discipline.
The best way to master these patterns is to actually trade them. You can try your strategies on demo accounts that don’t require any money, but offer you the benefits of real trading platforms such as MetaTrader 5 or TradingVIew.
Price Action Patterns Pros and Cons
Here are some of the advantages of trading with price action patterns:
- They’re considered reliable indicators.
- They provide entry and exit points.
- They suit a wide range of trading styles.
- They make it easy to set profit targets.
- They are useful and practical for risk management.
On the other hand, there are some disadvantages to using price action patterns for trading. Here’s a list:
- They don’t consider fundamental factors.
- Their results might be swayed by the trader’s analysis bias.
- They might lag in reacting to changes in the market.
- They may provide false signals.
- They are strictly reliant upon historical data.
Bottom Line
Price action patterns are an inseparable part of trading in all financial markets. They are a fundamental part of technical analysis (no pun intended) and can provide meaningful insights into market movements when they are used correctly.
In this blog post, we went over 18 basic price action patterns and their meanings. Although this was a brief overview of all these patterns, it was a good starting point for you to start learning about them. Of course, if you’re interested in becoming a technical trader, you should know way more about these patterns and technical analysis in general. You could always visit our blog for in-depth guides and tutorials on forex trading.
Price action patterns are formations in price charts that have historically suggested certain outcomes. Traders use these patterns to predict the market's future price movements based on historical data.
Price action patterns are divided into two major categories: chart patterns and candlestick patterns. They can be bullish and bearish and signal the reversal or continuation of the ongoing market trend.
Double top and double bottom, head and shoulder, triangles, rectangles, flags, hammers, doji, and engulfing patterns are some of the most important price action patterns you can use.
Submit Your Comments
(Replying)
Please keep in mind to avoid offensive keywords and also fake information.
Be the first one to comment.