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The Best Price Action Patterns In Day Trading

what are price action patterns and how can you use them to become a profitabe trader?
In this post we simplify price action patterns as well as discuss the major advantages of price action trading.

What exactly is price action trading and are there price action patterns that are commonly used by pro traders that are consistently profitable? Keep reading and discover the best price action patterns in day trading that you can utilize in order to become a profitable trader.

In this post we simplify price action patterns as well as discuss the major advantages of price action trading and provide popular and useful price action patterns you should learn to identify and use in your trading.

And one of the biggest advantages of price action trading is that trading and analyzing the markets in this way helps to develop fundamental knowledge in trading principles and market movements. This foundation will be invaluable as you develop as a day trader.

Another distinct advantage of price action strategies is that they offer clarity and simplicity which will also give you the cleanest charts ever while also setting you up for a profitable trading career

And as price action trading strategies are based on price movement patterns, candlestick patterns, and volume, your charts will remain less cluttered with the need for a minimum of indicators to implement price action pattern strategies such as the EMA or the MACD.

What is Price Action Trading and Price Action Patterns?

Price action trading is a methodology used in financial markets, particularly in trading stocks, forex, commodities, and other instruments. It revolves around analyzing and making trading decisions based solely on the price movements of an asset, without relying on traditional technical indicators apart from volume and maybe 1 or 2 other indicators as mentioned earlier.

At its core, price action trading involves studying historical price movements, chart patterns, and candlestick formations to identify potential future price movements. Traders who employ this approach believe that all relevant information about an asset is reflected in its price and volume data.

Said simply, price action is the movement of the price of an asset or instrument made over time. And by looking at price action over time this can lead to identification of high probability trends and chart patterns or price action patterns.

Price action patterns refer to recurring formations or configurations of price movements observed on a price chart. These patterns can tell you a lot about the market, the investors and the current situation. These patterns can take various forms, including candlestick patterns, chart patterns, and formations based on price swings and trends. 

And below we will get into detail on the most widely used price action patterns that you can also utilize in order to become a profitable trader.

Related Read: Is Pattern Day Trading Illegal?

Candlestick Patterns

Candlestick patterns are key in price action trading and provide a good indication of market sentiment and potential price movements – if you can read them right. 

These patterns are formed by the open, high, low, and close prices of an asset within a specific time frame, typically represented on a chart in the form of candlesticks.

Understanding candlestick patterns can give you valuable insights into market dynamics and potential trading opportunities. By recognizing and interpreting these patterns accurately, you can make informed decisions and effectively capitalize on price movements in your trading.

A popular candlestick pattern and very useful price action pattern to be familiar with is the Engulfing pattern when a larger candlestick completely engulfs the body of the previous candle. These can either be bullish or bearish engulfing candlestick patterns and can signal either bullish or bearish momentum.

The Best Price Action Patterns In Day Trading
Candlestick patterns are key in price action trading and provide a good indication of market sentiment and potential price movements – if you can read them right. 

Support and Resistance Levels

Support, and resistance areas are critical concepts in price action trading, serving as key reference points on a price chart where buying and selling interest converge. Understanding these levels is essential as they provide valuable insights into potential market reversals, breakouts, and price consolidation.

By identifying and analyzing support and resistance levels, you can make informed trading decisions, including setting profit targets, placing stop-loss orders, and identifying potential entry and exit points. These levels act as valuable guideposts to navigate the financial markets and are an important part of any successful price action trading strategy.

A useful pattern to identify and include as part of your trading strategy are Breakouts and Pullbacks which are based on support and resistance levels.

Breakouts occur when the price surpasses a significant support or resistance level, signaling a potential trend continuation or reversal. Here you can look for confirmation of breakouts through increased volume or price momentum. 

Pullbacks, on the other hand, occur when the price retraces to test a broken support or resistance level from the opposite side before continuing its trend.

Trend Based Patterns

Trends are fundamental in price action trading. They will help you to identify the prevailing direction of price movement to make better and more profitable trading decisions. 

When you can understand and analyze trends, you can align your trades with the broader market momentum and increase probability of a successful trade.

Generally a trend is the general direction the price of an asset is moving over a certain period of time and can be categorized into three main types:

  • Uptrend: Characterized by higher highs and higher lows, indicating increasing buying pressure and bullish market sentiment.
  • Downtrend: Characterized by lower highs and lower lows, indicating increasing selling pressure and bearish market sentiment.
  • Sideways (or Range-bound) Trend: Occurs when the price fluctuates within a defined range, with no clear directional bias.

Trend analysis is a cornerstone of price action trading and can show you valuable insights into market dynamics and better inform your trading decisions.

Reversal price action patterns signal potential changes in market direction if you can identify them correctly. 
Reversal price action patterns signal potential changes in market direction if you can identify them correctly. 

Reversal Patterns

Reversal price action patterns signal potential changes in market direction if you can identify them correctly. 

One of the best price action patterns you should become familiar with is the head and shoulders pattern which is a reversal pattern made up of three peaks; the middle peak or ‘head’ with two smaller peaks on either side, ‘shoulders’. flanked by two smaller peaks (the shoulders). 

This pattern indicates a potential trend reversal from bullish to bearish when it forms at the peak of an uptrend. And an inverse head and shoulders pattern signals a potential reversal from bearish to bullish.

Continuation Patterns

Continuation patterns in price action trading suggest a temporary pause or consolidation in the market trend before resuming in the same direction and resulting in a breakout. These patterns typically occur within the context of an existing trend and feature by narrowing price ranges/consolidation periods. 

In your trading strategy you can use continuation price action patterns to identify potential entry points to join existing trends and capitalize on the resumption of price movement. 

A price action pattern that will be particularly useful is the flag pattern. This is a continuation pattern that forms after a strong directional price movement, known as the flagpole, followed by a period of consolidation. The consolidation phase resembles a rectangular flag which gives it the name of flag pattern. You can anticipate a breakout in the direction of the prevailing trend once the price exits the flag pattern.

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Price action and pattern trading strategy

So we have provided you with the concepts that make up the price action patterns that you can use to develop your trading strategy. And we have provided some of the most useful price action patterns you should become familiar with including:

  1. The candlestick engulfing pattern
  2. Breakout/Pullback patterns
  3. Trend based patterns
  4. Head and Shoulders Reversal pattern
  5. Flag continuation pattern

Of course there are many, many more patterns to learn to identify and become familiar with but it’s important to practice on the charts a lot and backtest in order to establish which patterns you best can identify and that suit your personal trading style.

Overall, price action trading requires patience, discipline, and a deep understanding of market dynamics. Often beginning by simplifying your trading approach is the best way to lay a foundation and build complexity later. 

Price action trading blends very well with a more simplified approach as it requires few indicators and much less drawing on your chart.

Again there are many price action chart patterns so focus on those you can easily recognize and that suit your trading style. Below is a useful image for keeping track of some useful patters you should learn to recognize.

price action patterns and chart patterns
This helpful image was found on Reditt

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