So many price action patterns in technical analysis, but which ones work in stock trading? Do you also wonder?
Don’t worry! In today’s blog will discuss the top 5 price action patterns that work in stock trading.
But first, let us discuss what price action trading is.
In trading, price action examines a security’s, indexes, commodities, or currencies’ behaviour in order to forecast what it will do in the future.
You may want to take a long position if your price action research indicates that the price is about to climb, or you may want to short the asset if you believe the price is due to fall.
Looking at patterns and finding crucial indications that may impact your investments are all part of understanding price action trading.
Many traders utilise various price action strategies to predict market moves and profit in the near term.
So, in today’s blog, let us discuss the Top 5 Price Action Patterns that work in Stock Trading:
Top 5 Price Action Patterns that work in Stock Trading
1. False Breakout
False-breakouts are exactly what they seem like: a breakout that didn’t extend beyond a certain level, resulting in a ‘false’ breakout of that level.
False breakout patterns are among the most important price action trading patterns to master since they are frequently a strong indicator that price is about to change direction or that a trend is about to resume.
From the below chart of UPL LTD., prices after the breakout from the resistance level returned and crossed back to the resistance level. This indicated a false breakout and trend reversed to downtrend:
A false break of a level can be regarded as a market ‘deception,’ when the price appears to breakout but then swiftly reverses, misleading all those who took the breakout’s ‘bait.’
Amateurs will frequently enter what appears to be an ‘obvious’ breakout, only for professionals to push the market back the other way.
2. Breakout with Build-Up
First, let us discuss what build-up is. A build-up is a tight consolidation area where we notice that the size of the candles gets smaller.
So, a breakout with build-up helps the traders identify high probability breakouts.
The main reason behind this is the bulls and bears at war near the resistance area. Therefore, the bulls will try to push the prices higher to break out from the resistance area.
Whereas the bears will try to make prices fall from the resistance area. Thus, the prices enter a consolidated zone.
One can trade with this price action pattern when the prices breakout after a tight consolidation zone near the resistance or support area.
Price does not always move straight, and price movements of any financial market are frequently characterised by price waves. Moreover, bullish and bearish trend waves alternate in the markets.
The dominating trend waves travelled higher during an uptrend, as indicated in the graph below. The correction waves are movements in the opposite direction of the current trend. Traders who trade pullbacks search for the correction stages and enter trades during those phases.
The concept is that you should wait for the price to “pull back” during a trend to get a better entry price. When the market is rising, and you believe it will continue to grow, you want to enter a trade at the lowest possible price.
Breakout pullbacks are very common, and probably most traders use this price action pattern in trading.
Breakout pullbacks commonly happen at market turning points, when the price breakout of a consolidation pattern. Wedges, triangles, or rectangles are the most popular consolidation patterns.
4. Breakout from Patterns
We can also place a long-short position when there is a breakout from chart patterns like Head and Shoulders, Wedges, Cup and Handle, etc.
These kinds of breakout patterns are most reliable, and one can also set a price objective after the pattern is completed and breakout occurs.
5. Breakout and then Re-test
A retest occurs when prices reverse direction following a break and return to the breakout level.
Prices may stagnate, and short-term profit-taking selling may occur following a break to the upside, for example, after the first wave of buying.
Prices are likely to recover to the breakout level, acting as support level and drawing buying interest.
You can also take our course on Certification in Online Technical Analysis to learn more about trading using these price action patterns
As discussed, the above price action patterns can really help us in stock trading if you use technical charts for the same. So, let us know if the above price action pattern helped you in trading by commenting below.
We hope you found this blog informative and use it to its maximum potential in the practical world. Also, show some love by sharing this blog with your family and friends and helping us in our mission of spreading financial literacy!
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