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A High-Probability Chart Pattern to Consider for Successful Trading
First off, I want to say that I am back to my old trading schedule. Over the past couple weeks, I’ve been trading standard U.S. mornings, but I’m back to trading European mornings for now. I’ve spoken a bit on when to trade the markets in the past, and my general opinion is to simply do it at a time most convenient for you and ideally when your mental alertness is relatively high. There is something to be said about trading at a time most in accordance with your own personality. Some traders might simply prefer the slow-motion of the market during the Asian session, while some might prefer the higher volatility during the U.S. morning hours. But either way, if you can find the time to trade only at a specific hourly range, as would be the case for most I could imagine, then that would be the most viable option.
I usually trade the EUR/USD at Boss Capital, but if I look at the chart, and the price patterns and general chart make-up look rather monotonous, I will pull up alternative pairs. In this case I brought up the GBP/JPY. As you can see in the chart below, you don’t have much to go off of in terms of recent intraday support and resistance levels being the market is still relatively quiet. There is a little bit of volatility during the hours of the Asian session as you can observe, because obviously the Japanese Yen is going to be changing hands to some extent during Asian market hours.
As I began watching the markets around 2AM EST, the GBP/JPY was moving up to its daily pivot level of 172.612. In these quieter market hours, daily pivot points can actually be quite effective in helping you determine potential points of reversal. There isn’t a whole lot of substantive intraday price history that you might rely on if you were to trade U.S. mornings, so the pivots can certainly help as a guide, even perhaps more so than they might later in the trading day from my perspective.
On the 2:10(AM EST) candle, there was an eight-pip lunge up to pivot (a large range for that trading hour). The next candle became a doji. There was a buying surge initially before sellers brought it back down to the pivot. The same exact thing was reflected on the subsequent candle. This likely meant that the pivot would hold in the short-term given that there wasn’t enough gusto in the buying movement to actually cause a full break. But false breaks are often an indication that a full breach could be in store in the future. Consequently, I felt an uptrend in this pair would be most likely, although a put option could be a realistic possibility in the very short-term.
After the two dojis, price fell back down five pips from the pivot level. This was another indication that the pivot could hold in the short-term. Based on the textbook definition, this is often called a “bearish engulfing pattern.” In terms of basic price-action teaching, this is a common reversal signal. And it is often legitimate being that it can simply be interpreted that selling has come to overwhelm the buying in the market. It’s especially true when it occurs at a place in the market where there could be a concentration of buy/sell orders – e.g., major S/R from previous price history, a whole number, daily pivot level (like the case here), a major Fibonacci retracement level, things of that nature.
Now once I see a pattern like this, I never get into the trade at the end of a candle – that is, at the end of the bearish engulfing candle – especially not in short-term binary options trading. Getting into a good price is important because the difference between a winning and losing trade is often so slight. So getting a relatively precise entry is therefore important. Accordingly, I decided that I would get into a put option trade if price would get back up to the pivot level. And relatively soon, because the false breaks could turn into genuine breaks if price retraced weakly from the pivot level. That should then be interpreted that the sellers in this market aren’t quite as strong any longer at keeping price below the pivot and buyers are likely to overwhelm at the level and thrust it to new highs. I do realize this can seem kind of complicated, but once you become familiar with the markets through lots of screen time, all this will largely become second-nature as you begin to understand market dynamics – that is, how financial markets tend to operate.
So I was able to get into this put option trade at the touch of the pivot level on the 2:30 candle. This trade won just barely.
But as you can see, despite a couple breaks above pivot, the GBP/JPY did hover below 172.612 for the next several hours. It wasn’t until 7AM EST that this pair finally broke through pivot and made new highs up to resistance 1.
Chart Pattern Trading Strategy Step-by-Step Guide
Our team at Trading Strategy Guides is launching a new series of articles. They can be found in Chart Pattern Trading Strategy Step-by-Step Guide. These articles will enhance and elevate your trading to a new level. This technique will give you a framework to examine the fight between the bulls and the bears methodically.
By trading the most profitable chart patterns, you can deduce who is winning the fight between the bulls and the bears. This strategy can be used to identify a stock chart pattern. It is also used to identify any instrument that you are planning on using for day trading.
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We share this because it will greatly improve your ability to understand the price movements and price breaks. Ultimately, this will make you a much better trader. The key to this style of trading will be to identify how a pattern forms. You’ll also have a greater understanding of market analysis as a whole. This article will introduce several entry-level patterns and then dive into some special patterns.
These patterns are the symmetric triangle and double bottoms. We also believe that it is important to use these with pivot points as well. This type of training will set you apart from the average traders.
To start, I recommend getting some basic stock charting software with some very simple tools, such as moving average and other indicators. This can help you perform market analysis and also help you be in front of the charts when a pattern forms. The ascending triangle will be a valuable pattern in your trading arsenal.
The rounding bottom, head and shoulders patterns, inverse head and shoulders, reverse head and shoulders, triple bottom, cup and handle and the descending triangle, are also valuable. These patterns will help you find trade ideas faster than what the average trader will be able to find. It will help you make sure that you enter the trade at the right price levels.
These types of patterns will allow you to trade any currency pair. The trades are not dependent upon market trends or the economic calendar to find successful trades while day trading. This write up will not be like other blog articles you have read. This is because we are going to give you step by step instructions on how to place trades using the exact price pattern for the strategy.
There are thousands of traders around the world that trade these specific type of formations like the triangle pattern. Famous trader Dan Zenger has turned $10,000 into $42 million in under 23 months by using a chart pattern trading strategy.
To truly succeed in trading, you can simply start to mimic what professional traders do. Begin to test the strategy and then measure the results.
We have dedicated a lot of time to studying price action. You can see some evidence by studying some of the best pure common chart patterns strategies here:
Let’s move forward and define exactly what we are looking at. More importantly, we will define how we can profit from them.
What are Chart Patterns?
In technical analysis, chart patterns are simply price formations represented in a graphical way.
Without a doubt, this is one of the most useful tools when performing technical analysis of price charts. Chart patterns are a very popular way to trade any kind of market. The most profitable chart patterns give us a visual representation of the supply and demand forces. They also show the relative strength of the specific price levels.
If we’re on the supply and demand topic, we recommend studying more about this subject here: Supply and Demand Trading-Learn about Market Movement.
What makes chart patterns so appealing is that it also brings to light what happens behind the scene. This refers to the buying and selling pressure.
Note* A chart has its own language and it speaks through chart patterns and they leave footprints of the big money or the smart money. These footprints can lead us into highly profitable trades.
Why Are Chart Patterns So Important?
If you remove all your indicators and momentum indicators from the charts, and everything else that might make your chart less clear, and just look at the price action, whether it’s a 5-minute chart, daily chart or similar, it’s your preferred time frame. You’ll actually gain more insights into what happens in the market.
As long as the candlesticks have the variable open, high, low and close; you can use them just to confirm your position or enter a new trade. You can build a really successful chart pattern trading strategy without the need for any other technical indicator. Here is an example of a master candle setup.
There are bullish and bearish chart patterns. What makes them work is that they tend to reoccur over time, making it possible to backtest them and find their probability of success rate.
Types of Chart Patterns:
Throughout this article series, we’re going to discuss how to make money with the most profitable chart patterns. Some of the most profitable chart pattern trading strategies include:
Earlier, we posted a clear price chart of the EUR/USD. But if you look closer and read the chart patterns language, we can identify some of the most profitable chart patterns (see figure below).
It doesn’t matter what time frame or market you trade because chart patterns are present everywhere when there is a battle between buyers and sellers.
Let’s discuss how we can use the trading strategy and make money trading in any market. The key is to look at the lower trend line and try to find a triple bottom show up anywhere on your chart.
Chart Pattern Trading Strategy – Rules
We have developed five step-by-step guidelines that are important to take into consideration when trading any of the chart patterns:
Step 1: Always determine if the market is in trend mode or consolidating.
This step is important because, although some of these simple chart patterns often are forms of consolidation, they are actually continuation patterns of an underlying trend.
For example, a bullish flag pattern – read more about it HERE – is a pattern that forms after a larger move up. The pattern itself is just a brief form of relief, or consolidation, from the underlying trend, before breaking to new highs.
Basically, the bullish flag pattern is a continuation pattern.
We can distinguish mainly two types of chart patterns:
- Continuation Patterns: signals that the trend will continue.
- Reversal Patterns: signals the possible end of a trend and the start of a new trend.
An example of a reversal pattern is the double top pattern highlighted in the figure below:
It’s important to determine whether the market is trading or consolidating. This is because it will reveal what type of chart patterns work best for each trading environment.
Note** The reason why many price action traders fail is because they don’t follow this first rule. They try to trade every pattern regardless of the whole picture.
Step 2: Decide What Chart Patterns You Want to Use.
Do you like to trade reversal patterns or are you more comfortable trading continuation chart patterns?
Figure this out first! When you have decided which way to go, try to master the particular trade setup.
Repetition is the mother of all learning. The more you trade the most profitable chart patterns, the better you’ll become at spotting these chart patterns in real-time.
Our team at TSG is a huge fan of the triple top chart pattern. This is because of the potential profit available once a new trend has developed.
Step 3: Look for the Story in the Chart Patterns.
What you have to do here is to construct a story behind your favorite setups.
What do we mean by that?
Simply, look at the whole price picture, don’t just focus on the chart patterns. What you need is for this story to confirm your price action pattern. Everything else must point in the same direction. Finding the proper direction to place your trades will help you to increase your win rate.
For example, the narrative behind the bullish flag highlighted in Step #1 is easy to spot. We’re moving in an uptrend because we have developed a series of higher highs and higher lows.
Secondly, we broker and close above an old high; no resistance spotted above market price are all good ingredients. They speak volumes in favor of our bullish flag pattern.
Step 4: Trade Chart Pattern Trading Strategy in Confluence With Good Price Location.
Chart patterns work best in conjunction with a good price location which can add confluence to our trade.
What do we mean by price location?
In simple terms, a price location is just an important area on the chart where we normally expect a price reaction. That price location can either be a support/resistance level, swing high/low points or some pivot points. The location can even be technical indicators if you combine the two.
For example, the price channel pattern highlighted in figure 3 worked out because we had confluence with the higher time frame resistance level. The EUR/USD was simply trading in an upward channel, but heading right into a resistance level.
Step 5: Make Non-Subjective Trading Rules for Trading Chart Patterns.
The last step to build a chart pattern trading strategy is not just to have some non-subjective trading rules, but also writing them down and following your plan strictly.
There are many possible ways a trader can profit from these chart patterns.
For example, the bullish flag pattern can enter at the retest of the flag support or the breakout above the flag. You can also trade with the breakout triangle strategy.
Become a master of only one setup and one chart pattern trading strategy. Prove to yourself that you can be profitable trading one pattern before you move on. In simple terms, find a pattern that you like and become very good at that chart pattern trading strategy.
Conclusion – Trading Chart Patterns
We hope you enjoyed this article on trading chart patterns.
We can fast track your career by giving you the most profitable chart patterns, which is easy. But the one thing we can’t give you is screen time and experience. That’s something that you need to gain over a period of time. Below is another strategy called trading volume in forex.
When it comes to chart pattern trading strategy, there are no magic bullets. This is because you’re going to make mistakes. Secondly, you’ll still be having losing trades. The whole idea is to become selective on the chart patterns you trade.
Thank you for reading!
Please leave a comment below if you have any questions about our Chart Pattern Trading Strategy!
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The 7 Best Price Action Patterns Ranked by Reliability
In the world of technical analysis there are a lot of traders who talk about price action patterns but few actually discuss how accurate they are in the live market. There are a number of useful patterns we watch for here at Samurai Trading Academy and although we don’t trade these patterns directly, they are very useful to understand the current structure of the market and quickly assess our trading opportunities.
Testing Common Price Action Patterns
The statistics on the price action patterns below were accumulated through testing of 10 years of data and over 200,000 patterns. In all these cases the price action patterns were only included once they were considered to be complete, which usually means a full break of a support/resistance area or trendline. The requirements for a completed pattern are discussed below for each individual case.
7A. Bull Flag Pattern (67.13% Success)
7B. Bear Flag Pattern (67.72% Success)
The flag is a continuation pattern that can occur after a strong trending move. It consists of a strong bullish trending move followed by a rapid series of lower highs and lower lows for a bull flag, or a strong bearish trending move followed by a rapid series of higher lows and higher highs for a bear flag. These patterns are small hesitations in strong trends, so they are usually only composed of a small number of price bars (about 20). Longer and wider patterns are defined as channels (see below).
The flag pattern appears as a small rectangle that is usually tilted against the prevailing trend in price. The best flag patterns have two features: 1) a very strong run in price (near vertical) prior to the setting up of the flag and 2) a tight flag that occurs right on the upper (or lower) edge of that run. The higher and tighter (narrower) the pattern, the higher percentage that the pattern will break favourably in the prevailing trend direction.
This pattern is considered successful when it breaks the upper trendline in a bull flag (or the lower trendline in a bear flag) and then proceeds to cover the same distance as the prior trending move starting from the outer edge of the pattern. Note that most pattern projections are measured from the breakout point, but flags, pennants, and channel patterns are all measured from the outer edge of the pattern instead as shown by the red arrows in the chart examples.
6A. Ascending Triangle Pattern (72.77%)
6B. Descending Triangle Pattern (72.93%)
The triangle pattern usually occurs in trends and acts as a continuation pattern. It’s defined by a bullish trending move followed by two or more equal highs and a series of higher lows for an ascending triangle pattern, and a bearish trending move followed by two or more equal lows with a series of lower highs for a descending triangle pattern.
The pattern is complete when price breaks above the horizontal resistance area in an ascending triangle, or below the horizontal support area in a descending triangle. The pattern is considered successful if price extends beyond the breakout point for at least the same distance as the pattern width (see red arrows).
5A. Ascending Channel Pattern (73.03%)
5B. Descending Channel Pattern (72.88%)
The channel price pattern is a fairly common sight in trending moves that have good volume and acts as a delayed continuation pattern. Note that the channel pattern is similar to the flag in that they both have periods of consolidation between parallel trendlines, but the channel pattern is generally wider and consists of many more bars which increases its strength and success rate.
The ascending channel pattern is defined by a bullish trending move followed by a series of lower highs and lower lows, that form parallel trendlines containing price. The descending channel pattern is defined by a bearish trending move followed by a series of higher lows and higher highs, that form parallel trendlines that contain price.
This pattern is complete when price breaks through the upper trendline in an ascending channel or below the lower trendline in a descending channel pattern. The pattern is considered successful when price has achieved a movement from the outer edge of the pattern equal to the distance of the initial trending move that started the channel pattern.
4A. Double Top Pattern (75.01%)
4B. Double Bottom Pattern (78.55%)
The double top/bottom is one of the most common reversal price patterns. The double top is defined by two nearly equal highs with some space between the touches, while a double bottom is created from two nearly equal lows. Generally, the wider the gap between touches the more powerful the pattern becomes.
The pattern is complete when price breaks below the swing low point created after the first high in a double top, or when price breaks above the swing high point created by the first low in a double bottom. The pattern is considered a success when price covers the same distance following the breakout as the distance from the double high to the recent swing low point in a double top, or the distance from the double low to the recent swing high in a double bottom (see red arrows).
This is actually the first of our patterns with a statistically significant difference between the bullish (double bottom) and bearish (double top) version. As we can see, the double bottom is a slightly more effective breakout pattern than the double top, reaching its target 78.55% of the time compared to 75.01%.
3A. Triple Top Pattern (77.59%)
3B. Triple Bottom Pattern (79.33%)
The triple top/bottom is another variation of reversal price patterns. The triple top is defined by three nearly equal highs with some space between the touches, while a triple bottom is created from three nearly equal lows. Generally, the wider the gap between touches the more powerful the pattern becomes.
The pattern is complete when price breaks below the swing low points created between the highs in a triple top, or when price breaks above the swing high points created between the lows in a triple bottom. The pattern is considered a success when price covers the same distance after the breakout as the distance from the triple high to the furthest swing low point in a triple top, or the distance from the triple low to furthest swing high in a triple bottom (see red arrows).
2A. Bullish Rectangle Pattern (78.23%)
2B. Bearish Rectangle Pattern (79.51%)
The rectangle price pattern is a continuation pattern that follows a trending move. It is very similar to the channel pattern, except that the pattern does not have a slope against the preceding trend which gives it a higher chance of successful continuation.
The rectangle pattern is defined by a strong trending move followed by two or more nearly equal tops and bottoms that create two parallel horizontal trendlines (support and resistance). The only difference between the bullish and bearish variations is that the bullish rectangle pattern starts after a bullish trending move, and the bearish rectangle pattern starts after a bearish trending move.
It’s worth noting that these rectangle price patterns are essentially failed double and triple tops/bottoms. Because the swing points following the double and triple highs or lows don’t break to confirm the patterns, those reversals are not confirmed. This is why it can be very dangerous to try to anticipate double and triple tops/bottoms, because often they don’t fully complete and price will resume the prior trend.
The rectangle pattern is complete when price breaks the resistance line in a bullish rectangle, or when price breaks the support line in a bearish rectangle. The pattern is considered successful when price extends beyond the breakout point by the same distance as the width of the rectangle pattern.
1A. Head and Shoulders Pattern (83.04%)
1B. Inverted Head and Shoulders Pattern (83.44%)
The head and shoulders patterns are statistically the most accurate of the price action patterns, reaching their projected target almost 85% of the time. The regular head and shoulders pattern is defined by two swing highs (the shoulders) with a higher high (the head) between them. The inverted head and shoulders pattern has two swing lows with a lower low between them. The two outer swing highs/lows don’t have to be at the same price, but the closer they are to the same area the stronger the pattern generally becomes.
The pattern is complete when price breaks through the “neckline” created by the two swing low points in a head and shoulders, and the two swing high points in an inverted head and shoulders. In the chart examples above this line is horizontal, but it can also be sloped as the swing points do not have to be exactly the same to have a completed pattern. These patterns are considered complete when price breaks out from the neckline and moves a distance equal to the distance from the neckline to the head of the pattern.
Dishonorable Mention: Bullish Pennant Pattern ( 54.87% ) and Bearish Pennant Pattern ( 55.19% )
Although we’ve already covered the seven best price action patterns, I thought it would be useful to include one more pattern because of it’s comparatively poor performance despite being commonly used. The pennant pattern is one that you often see right next to the bull and bear flag pattern in the textbooks, but rarely does anyone talk about its low success rate. While the flag itself isn’t an exceptional pattern at just under a 70% success rate, the pennants come in well below that.
Like the flag, the pennant often occurs in high momentum markets after a strong trending move, but the tight price formation that occurs can lead to breakouts against the preceding trend almost as often as we get continuation. The slight difference in the price pattern formation between flags and pennants is an important distinction that can make a big difference in your trading results so it’s well worth being aware of while watching the market develop during your trading day.
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