If you have been into share trading you must have used a price action trading strategy pattern at some point in your trading journey. Price action trading strategy patterns are the patterns formed by the market movements of the stock. Traders often use these strategies to understand the Market movements.
However, they often find it difficult to understand whether the stock price will rise or fall. This is because there are certain limitations of price action trading strategy. But before understanding the limitations let's understand what various Price Action Trading Strategy Patterns depict. Here is a detailed guide about price Action strategy patterns, their limitations and a better strategy.
There are 10 major types of price action trading strategy patterns
This is the pattern formed by three swing lows. The middle low is the lowest. The line that connects the two swing highs is the neckline. The bearish pattern consists of 3 swing highs. The middle swing high is the highest. The line connecting the two swing lows is the neckline.
In the bullish pattern, the left should and the head highlight a downward trend. When the neckline breaks it conforms to the reversal of a trend. In case of a bearish pattern the vice versa of the same logic works.
Since Head and shoulders is a trend reversal pattern, an existing trend will reverse and traders make use of this trend reversal. If the trend is downward it will reverse and go upwards for sure.
A double-top pattern has two swing highs at around the same price level. the swing low between them acts as support.
A double bottom has two swing lows at around the same price level and the swing high between them projects a resistance line.
A pattern that has three swing lows at around the same price level, is a triple bottom. It is similar to the Head and shoulders pattern but in this, the middle swing is at the same price level.
A pattern that has three swings high around the same price level is called Triple Top Pattern.
The Triple Bottom represents two failed attempts to push below the support established by the first swing low. Naturally, it hints at a trend reversal. A break-out above the resistance line confirms the reversal.
When you observe minor price swings that rise and fall gradually, presenting a dome shape at the top of the chart, it is rounding the top pattern. And once the rounding top pattern is flipped vertically, the rounding bottom is formed. You will often find these charts in weekly patterns.
Island reversal is different from other chart price action strategy patterns because it is completely broken off from the rest of the chart. It has a gap before it (Exhaustion Gap) and a gap after it (breakaway Gap).
When there is a bullish island reversal, it starts with a down gap in the bear trend. After a period of sideways trading, you will notice that the market gaps upwards to reverse the bearish trend.
When there is a bearish island reversal then you will have an upward gap, followed by sideways trading before reversing the trend with a downward gap.
Always remember that in both cases the two gaps must have overlapping price ranges.
All the chart patterns from 1 to 5 are reversing chart patterns and they indicate a reversal in the market trend
If you notice that two horizontal lines surround a retracement, it is a rectangle price action pattern. Yes, both the bullish and bearish trend rectangle pattern looks the same but you will be able to understand it in the context of the trend.
When you spot a rectangle trend, understand that it is an indication of a sideways trend. It also means that when a market enters an overcrowding phase, it is likely to break out in the direction of the preceding trend. A rectangular chart pattern is likely to follow the previous trend itself.
To find out a clear wedge pattern you have to draw 2 converging lines. When there is an uptrend and the line slopes down it forms a bullish wedge which is also known as the falling wedge.
In case of a downtrend, you will find a bearish wedge chart pattern and here the slope of the lines is up. It is also known as a rising wedge. Whenever you notice a set of converging trend lines you must identify it as a wedge pattern.
This pattern is of 3 types namely
When you see a horizontal resistance and a rising support, it is an ascending triangle.
When you see a falling resistance and a horizontal support, it is a descending triangle.
In the case of a symmetrical triangle, it has rising support and a falling resistance line slope—the support line and resistance line slope at a similar angle to form symmetry.
As the name suggests a flag pattern has a flag pole and a flag. Yes, the flag pole is sharp thrust in the direction of the trend. One must be able to identify the flag pole as it is a crucial part of the flag pattern. You should look for strong and obvious price thrusts with consecutive bars, gaps, and strong volume in the same direction.
This chart pattern might be complicated to interpret but it is very easy once you understand it. The cup pattern looks like a rounding bottom and the handle looks like a replacement as in the case of a wedge or flag pattern.
It is usually a bullish pattern. The inverted cup and handle is a counterpart of the cup and handle pattern and it forms a bearish pattern.
The price action trading strategy pattern that a listed from 6 to 10 shows the continuation of a trend and is hence known as a continuous chart pattern.
Now you know the various types of price action chart patterns and you know what these patterns indicate, but if there is a question, “Are you sure that these patterns will help you make profits?”
The answer will be “NO” or “NOT SURE”. Yes, there is a limitation to price action trading strategy patterns. This is because these patterns will not tell you the exact date, direction, or Target. We have discussed all the limitations of the Price Action Trading Strategy Patterns here:-
To overcome the limitations of the price action trading strategy we must have a method that tells us the exact entry and exit date, direction of the stock, and accuracy of the Target in advance.
If you know all these, you will surely get profit. But the question arises how can I know it? GCD is the only method that can tell you the exact entry date, exit date, and the accuracy of the Target. The method is very simple and even a beginner can learn it. To learn more about this method you can join our free webinar.
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