Within the multiple methods that traders have to get into trade positions, the price action represents the most widely implemented procedure to understand, analyze, and make decisions when traders strive to enter and exit trades.
Price action charts are based on patterns that take place recurrently along the market movements. Seizing these patterns requires charting techniques to identify them appropriately.
Traders can use identification resources such as the following:
- Trend lines.
- Support and resistance.
- Pattern formations.
Understanding Charts
For this guide, it is also essential to differentiate between chart and candle patterns.
- Chart patterns refer to an entire formation within an interval of time across several candles. These are useful to spot reversals or continuations of a price movement. For example, a pullback during a trend can result in a triangle or flag formation.
- Candle patterns refer to the price movements reflected in shorter formations that can be one single candle or a maximum of 3, for example, a morning star or three black soldiers. These are suitable for spot and entry or exit points.
By understanding these differences, we can now discuss 3 effective price actions that typically appear in the charts.
Source: Price Action Trading Strategy: Reading Price Charts!
Double Bottoms And Double Tops
Both formations anticipate a reversal within a broader market movement. They work as follows:
- When the market is on an uptrend, it will eventually find a strong resistance. The price retraces once and then attempts to break through again, failing and leaving two swing highs at almost the same level. It is a double top.
- Conversely, in a downtrend, it will eventually find strong support. The price retraces once and then attempts to break through again, failing and leaving two swing lows at almost equal levels. It is a double bottom.
It is crucial to mention that their abundance can lead to mistakenly reading the charts. To overcome this pitfall, identifying strong support and resistance areas is the best approach to seize them.
Also, traders can use RSI to confirm a trading decision, as these patterns typically come accompanied by divergences.
Triangles And Flags
These formations mostly appear at the beginning of a trend, following a sharp movement. Their difference relies on the line’s convergence, but both indicate a continuation of that price momentum.
They can be categorized as follows:
- Ascending Triangles: It has a horizontal upper line and an ascending lower trendline. It suggests an upside breakout.
- Descending Triangles: This formation is characterized by a descending upper trendline and a horizontal lower line. It anticipates a downside breakout.
Head And Shoulders
This formation indicates reversals and consists of the following:
- The primary swing (first shoulder).
- A second swing (Head) that goes a little further but retraces to the area of the first shoulder.
- The third swing (last shoulder). It reaches almost the same top of the first shoulder.
The technical analysis classifies them into:
- Typical Head And Shoulders, which appear in uptrends. It features swing highs for its formation.
- Inverted Head And Shoulders, which appear during downtrends. It features swing lows for its formation.
Check out more: Price Action Trading Strategy: Key Price Action Patterns!
Conclusion
Price action charts present opportunities for reversals and continuations of market movements. Chart patterns are distinct from candle patterns as they perform a broader formation.
