Strategies With Patterns3 Winning Strategies With Price Patterns


  • In order to be profitable with trading you absolutely need to know 3 patterns that have a high probability of success. Patterns are special price action formations generated with a certain frequency on financial markets used as a form of market sentiment. To identify them you have to use price charts showing Japanese candles, as they allow you to read the market with relative ease.

    These 3 patterns are of the reversal type, i.e. they appear at the end of a trend or counter trend. These patterns are known as: Long white/black candle, Shooting star/Hammer, Three candle breaks.

     

    • Long white/black candle

    This first price setup is made up of 2 long bullish and bearish candles or vice versa, without smaller candles in between them. It is sometimes called a (Rail way track setup). The length needs to be at least double that of previous candles and the second candle has to at least be longer than 50% of the first candle in the formation. This type of formation often occurs in highly volatile situations. In operational terms, it is a counter trend strategy, so we can buy or sell at the end of the formation. If the second long candle in the formation is a bullish candle, a long position will be placed.  On the other hand if the second long candle in the formation is a bearish candle, a short position will be entered.

     

    • Shooting star/Hammer

    The shooting star or Hammer has the highest probability of success. They are visually recognized with a long candle wick or shadow and a tiny candle body. The Shooting star pattern is a short signal having the shadow/wick of the candle at the top of the pattern while the body is directed towards the bottom. Vice versa is the Hammer pattern in a downtrend, which is a long setup.

    These patterns usually occur within support and resistance zones or in contact with Bollinger bands. The entry signal starts at the close of the candle. When at the end of a trend it overpasses the support/resistance and then it closes above or below it, indicating a trend reversal. Another example is when price wicks/shadows exceed the lower Bollinger band and then it closes inside of the bands. A very important aspect to be clarified, is that the color of the body of the candle is not important, but only the length of the wick/shadow.

    Bearish scenario

     

    • Three candle breaks

    Similar to the previous two patterns is the "three candle breaks” which is also a trend reversal pattern, formed at the end of a trend. Its configuration is three candles all in the same direction of the trend and the fourth candle closes below the low of the third candle in the case of consecutive bullish candles, or above the high of the third candle in the opposite direction. The entry in the market shall be made at the close of the fourth candle as shown in the diagram below.

Interviews

  • the Analyst's answer

    Jean Grossett - Financial analyst

    These three patterns occur quite frequently in a trading session. The setups in most cases may not be ideal; hence some level of subjectivity may be required. For example in the case of a hammer or spinning top, you may observe a small candle wick/shadow in the opposite direction of the longer wick/shadow. However this subjectivity should be minimal in order not to have a huge difference in opinion when viewing these patterns on the same price chart of same broker.

  • the Manager's answer

    Robert Danvil - Investment Manager

    When comparing or analyzing price patterns from a choice security or currency pair with a friend, traders should ensure they are viewing these patterns from the same broker to avoid confusion. This is because different brokers operate from different time zones and open at different times. Some brokers provide Sunday data, while others do not. I often do a search on brokers that their opening times signals more reliable patterns in history in Forex.  I also look out for brokers that provide weekend data when trading Cryptocurrencies.

    Traders are therefore advised not to force the patterns. Another useful tip is to avoid the use of these setups at the release of macroeconomic news.

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