The Best Price Action Patterns for Profitable Trading

The best price action patterns for profitable trading: To understand price movements in different market situations, traders use different strategies to consistently profit. Despite the numerous techniques available, one technical analysis tool to analyze price movements is price action trading.

In this article, we will discuss what price action trading is and understand the optimal price action patterns for profitable trading.

Optimal price action pattern

What is Price Action?

Price action refers to the study and analysis of historical price movements of securities over a period of time to help predict future price direction. Price action analysis focuses on patterns, trends and price levels derived directly from price charts rather than relying on indicators or external factors.

Understanding price action trading requires finding pattern formations with key support and resistance levels and analyzing price direction to make informed decisions.

price action pattern strategy

There are several price action methods that many traders use to predict price movements for profitable items.

trend trading

Trend lines are easy identification lines used to understand the direction of price movement. Trend line formation is verified by connecting at least two touchpoints. In an uptrend, a trendline is drawn by connecting higher lows over a period of time. In a downtrend, a trend line is drawn by connecting lower highs over a period of time.

When a security’s price is in an upward trend, a trend line formation predicts the price direction. If the price of a security moves back towards the trend line, you can take a long position as the trend line acts as support to push the price higher.

When a security’s price is trending downward, a trend line formation predicts the price direction. If the price of a security moves back towards the trend line, you can take a sell position as the trend line acts as resistance and pushes the price lower.

If a security’s price breaks through a trend line, a reversal in trend direction may be favored.

pin bar

A pin bar is a type of price action candlestick pattern that signals a price reversal in a security. The body is long and consists of a small core.

A pin bar candle indicates a sharp reversal at a specific price level, while the wick of the candle indicates a rejected price range.

When a pin bar forms at the bottom of a downtrend, it indicates a strong price reversal towards an uptrend. Here, a pin bar pattern with a long lower wick indicates that the downward price trend is being rejected and the price is likely to rise.

When a pin bar forms at the top of an uptrend, it indicates a strong price reversal towards a downtrend. Here, a pin bar pattern with a long upper wick means that the upward price trend is being rejected, which suggests that the price may reverse to the downside.

inside the bar

An inside bar is a two candle price action pattern where the inside bar is smaller than the outside bar and the inside bar is formed within the range of high and low points of the outside bar (also known as moder bar). The emergence of this pattern indicates consolidation in security prices.

When a red candle appears within the range of a green candle, it means that the bullish trend is moving sideways. Here, you can enter a buy position when the price closes above the high point of the green candle (mother bar).

The stop loss for this strategy is the low of the internal candle.

If a green candle appears within the range of the red candle, it means that the bearish trend is moving sideways. Here, you can enter a sell position when the price closes below the low point of the red candle (mother bar). The stop loss for this strategy is the high of the internal candle.

Trend after breakout

One of the most profitable setups is trading trends. A price breakout of a strong support or resistance zone indicates the formation of a strong trend. If the price of a security has consolidated in a certain range over a period of time and is repeatedly retested at the same support level, this indicates a narrower movement. Additionally, if the price breaks through and closes below the support line due to high trading volume, it indicates a strong downtrend.

Here, traders can take a short position to capture the downtrend.

When a security’s price consolidates and is repeatedly retested at the same resistance level, it indicates a tighter price range. When the price breaks through and closes below the resistance line due to high volume, it indicates a strong upward trend.

Here, traders can take a long position to capture the uptrend.

In tight range markets, breakouts can occur above or below support/resistance levels. To initiate a trade following each trend, a breakout with a valid confirmation is preferred.

head and shoulders pattern

A head and shoulders pattern is a type of price action pattern that consists of three highs, with the central high being higher than the highs on either side. The three peaks formed have a common neckline that helps form the pattern.

The head and shoulders pattern is a bearish reversal pattern. If the price falls below the support neckline, you can enter a sell position.

In case of a bullish reversal pattern, an inverted head and shoulders pattern is formed. It consists of three consecutive lows, the middle low is known as the head, and the two lows on either side form a higher low at the head, known as the shoulders.

When the price of a security breaks above the resistance neckline, you can capture a strong upward trend by entering a long position in the security.

conclusion

In this article, we discussed what price action trading is and understood the best price action patterns for profitable trading. Price action trading is a unique trading method that approaches various market conditions for valuable entry and exit opportunities. A good understanding of risk management based on knowledge of patterns is important for higher long-term profitability.

Written by Deepak M

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