Best Price Action Patterns For Profitable Trading: To understand the price movements under various market conditions, traders employ various strategies to earn profits consistently. Despite the numerous techniques available, mastering one technical analysis tool to analyze the price movements is price action trading.

In this article, we shall discuss what is price action trading and understand the Best Price Action Patterns for profitable trading.

Best Price Action Patterns

What is price action?

Price action refers to the study and analysis of historical price movements of securities over some time that helps to predict the future price direction. Price action analysis focuses on patterns, trends, and price levels that are derived directly from the price chart rather than relying on indicators or external factors.

Understanding price action trading involves spotting pattern formations with key support & resistance levels to analyze the price direction to make informed decisions.

Price Action Pattern Strategies 

There are several different price action methods that many traders rely upon to predict price movements for profitable entries.

Trend Trading

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

When the price of a security is trending in an uptrend, the trend line formation predicts the price direction. If the price of security retraces back to the trendline, then a long position can be placed as the trend line acts as a support to move the prices higher.

When the price of a security is trending in a downtrend, the trend line formation predicts the price direction. If the price of security retraces back to the trendline, then a short position can be placed, as the trend line acts as a resistance, and the price makes further lows.

If the price of security breaks the trendline then a reversal in the trend direction can be preferred.

Pinbar

A pin bar is a type of price action candlestick pattern that signals the price reversals in security. It is formed of a long and small wick with a body. 

The pin bar candle represents a sharp reversal at a particular price level, the wick of the candle indicates the range of price that was rejected. 

When the pin bar is formed at the bottom of a downtrend, it indicates a strong price reversal toward an uptrend. Here, the pin bar pattern with a long lower wick represents that the trend forming lower prices is being rejected, which signals the price could rise upwards. 

When the pin bar is formed at the top of an uptrend, it indicates a strong price reversal towards a downtrend. Here, the pin bar pattern with a long upper wick represents that the trend forming higher prices is being rejected, which signals the price could reverse in a downward direction.

Inside Bar

The inside bar is a two-candle price action pattern, where the inner bar is smaller than the outer bar, and the inner bar is formed within the high and low range of the outer bar(also called the mother bar). The appearance of this pattern indicates a consolidation in the price of the security.

When a red candle appears within the range of the green candle(mother bar), it indicates a consolidation in the bullish trend. Here, one can enter a long position when the price closes above the high of the green candle(mother bar). 

The stop loss in this strategy will be the low of the inside candle.

When a green candle appears within the range of the red candle(mother bar), it indicates a consolidation in the bearish trend. Here, one can enter a short position when the price closes below the low of the red candle(mother bar). The stop loss in this strategy will be the high of the inside candle.

Trend Following a breakout

One of the most profitable setups is trading the trends. Price breakout from a strong support or resistance zone indicates the formation of strong trends. When the price of a security consolidates in a range over some time and retests repeatedly at the same support level, it indicates a further narrow movement. Also, If the price breaks and closes below the support line with strong volumes, it indicates a strong downtrend movement. 

Here traders can enter a short position to capture the downtrend.

When the price of security consolidates and retests repeatedly at the same resistance level, it indicates a further narrow price movement. If the price breaks and closes below the resistance line with strong volumes indicates a strong uptrend movement. 

Here traders can enter a long position to capture the uptrend.

In a narrow-range market, a breakout can either happen above or below the support/resistance levels. A breakout with a valid confirmation is preferred to enter the trade in a respective trend.

Head and Shoulder pattern

The head and shoulders pattern is a type of price action pattern consisting of three peaks, in which the center peak is taller than the peaks on either side. The three peaks formed have a common neckline which acts as a support to the pattern formation.

The head and shoulders pattern is a bearish reversal pattern. when the price breaks below the support neckline, entry to a short position can be placed.

In the case of a bullish reversal pattern, the inverted head and shoulders pattern is formed. It consists of three consecutive troughs, with the middle trough known as the head, being the lowest, and the two troughs on either side are known as the shoulders forming higher lows from the head.

when the price of security breaks above the resistance neckline, an entry to a long position in the security can be placed to capture the strong uptrend.

Conclusion

In this article, we discussed what is price action trading and understood the best price action patterns for profitable trading. Price action trading is a unique method of trading to approach various market conditions for valuable entry and exit opportunities. With the knowledge of patterns, it is important to have a good understanding of risk management for higher profitable ratios in the long run.

Written By Deepak M

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