Introduction

In the world of forex trading, price action patterns play a crucial role in analyzing and predicting market movements. Price action patterns are reliable indicators that provide valuable insights into market sentiment and help traders make informed decisions. In this blog post, we will provide a comprehensive cheat sheet for forex traders on price action patterns, covering both basic and advanced patterns.

Basic Price Action Patterns

Inside Bar Pattern

The inside bar pattern is a commonly occurring price action pattern that can signal a potential trend reversal or continuation. It is characterized by a smaller range bar being engulfed by the previous bar’s high and low.

To identify and trade the inside bar pattern, traders should look for a bar that has a smaller range compared to the previous bar and wait for a breakout. A bullish breakout suggests a potential uptrend, while a bearish breakout indicates a possible downtrend.

Here’s an example:

Pin Bar Pattern

The pin bar pattern is another popular price action pattern that traders frequently rely on. It is characterized by a long candlewick and a small body, resembling a pin. The long wick indicates market rejection at that level.

To identify and trade the pin bar pattern, traders should look for a formation where the candlewick extends significantly beyond the body. A bullish pin bar suggests a potential reversal to an uptrend, while a bearish pin bar indicates a possible reversal to a downtrend.

Here’s an example:

Engulfing Pattern

The engulfing pattern is a powerful price action pattern that can signal a reversal in the current trend. It occurs when the body of a candle completely engulfs the body of the previous candle.

To identify and trade the engulfing pattern, traders should look for a candle that engulfs the previous candle, either bullish or bearish. A bullish engulfing pattern suggests a potential reversal to an uptrend, while a bearish engulfing pattern indicates a possible reversal to a downtrend.

Here’s an example:

Advanced Price Action Patterns

Double Top and Double Bottom Patterns

The double top and double bottom patterns are reversal patterns that indicate a potential end to the current trend. The double top pattern occurs when the price reaches a resistance level twice but fails to break through. The double bottom pattern is the opposite, with the price bouncing off a support level twice without breaking lower.

To identify and trade the double top and double bottom patterns, traders should watch for a price level that acts as a resistance or support and wait for a confirmation of the reversal. Once confirmed, traders can enter a trade in the direction of the reversal.

Here’s an example:

Head and Shoulders Pattern

The head and shoulders pattern is a reliable reversal pattern consisting of three peaks, with the middle peak (the head) being higher than the other two (the shoulders). This pattern signifies a potential trend reversal from bullish to bearish.

To identify and trade the head and shoulders pattern, traders should look for a high peak (head) surrounded by two lower peaks (shoulders). Once the neckline support is broken, traders can anticipate a downtrend and enter a short trade.

Here’s an example:

Symmetrical Triangle Pattern

The symmetrical triangle pattern is a continuation pattern that typically occurs during a trend. It is characterized by converging trendlines, with higher lows and lower highs.

To identify and trade the symmetrical triangle pattern, traders should draw trendlines connecting the lower highs and higher lows. As the price approaches the apex of the triangle, a breakout is expected. A bullish breakout suggests a continuation of the previous uptrend, while a bearish breakout indicates a continuation of the previous downtrend.

Here’s an example:

Additional Price Action Patterns

Morning Star and Evening Star Patterns

The morning star and evening star patterns are reversal patterns that occur at the end of a downtrend or uptrend, respectively. The morning star pattern consists of a large bearish candle, followed by a small-bodied candle (the star), and a third bullish candle. The evening star pattern is the opposite, with a large bullish candle, a small-bodied star, and a subsequent bearish candle.

To identify and trade the morning star and evening star patterns, traders should watch for these specific three-candle formations. The confirmation comes when the third candle exceeds the high or low of the star candle, indicating a potential trend reversal.

Here’s an example:

Shooting Star and Hammer Patterns

The shooting star and hammer patterns are reversal patterns characterized by a small body and a long upper (shooting star) or lower (hammer) wick.

To identify and trade the shooting star and hammer patterns, traders should look for these candlestick formations at the end of an uptrend (shooting star) or downtrend (hammer). A bearish shooting star indicates a potential reversal to a downtrend, while a bullish hammer suggests a potential reversal to an uptrend.

Here’s an example:

Tips for Trading Price Action Patterns

While understanding and recognizing price action patterns is essential, here are some additional tips to enhance your trading:

Understanding market context

Price action patterns should always be analyzed in the context of the overall market sentiment, trend, and key support and resistance levels. Taking into account the broader market context can provide valuable insights.

Setting appropriate stop-loss and take-profit levels

Always define your risk and reward levels before entering a trade. Use price action patterns to determine suitable stop-loss and take-profit levels that align with your trading strategy and risk tolerance.

Managing risk and position sizing

Proper risk management is crucial in forex trading. Determine your position size based on your account size, risk tolerance, and the specific price action pattern being traded.

Multiple time frame analysis

Consider analyzing price action patterns on different timeframes to gain a better understanding of the prevailing trend and to validate potential trade setups.

Using price action patterns in conjunction with other indicators

While price action patterns are effective standalone indicators, combining them with other technical indicators like moving averages or oscillators can provide additional confirmation for trade entries or exits.

Conclusion

Mastering price action patterns is an essential skill for forex traders. In this blog post, we covered various basic, advanced, and additional price action patterns, along with tips for successful trading. Remember to practice and refine your trading skills through demo accounts and continuous learning. By understanding and effectively utilizing price action patterns, you can enhance your forex trading success.