When we are talking about technical analysis, we are using the historic price of the asset and analyzing it, to predict the possible future price move.
We often see traders using indicators to predict futures from the chart patterns. But there is also group of traders who ignores all these indicators and only look at the raw price charts to make trade decisions. These traders are called price action traders. the objective of price action traders is to profit from the chart patterns that occur on regular basis in all time frames.
For years traders have used this approach to successfully navigate through all types of markets. Deciding to be a price action trader can be a very rewarding decision of your trading career. In order to become a price action trader, it becomes very important for us to understand the chart patterns and become efficient in identifying them in real time. Firstly these chart patterns can be generally classified into two categories:
- Reversal Patterns
- Continuation Patterns
Reversal patterns are those chart pattern that generally occur at trend reversals.
Continuation patterns are those chart patterns that occurs as a form of pullbacks in a trend.
Under both these categories there are several chart patterns formed. Lets discuss them:
Pattern #1: Double Top Pattern:
This is a very common price pattern among price charts. It is a simple formation that occurs with two price peaks that occur around the same price with a valley in the middle.
- After retest there is usually sharp decline in the price.
- This is basically a bearish pattern
- It occurs after an uptrend and before a downtrend.
Entry below neck line.
- Entry sell trade at this point.
- Stop loss can be between point B and C.
- Target – distance between point B & C and extend same below point B
Pattern #2: Double Bottom Pattern:
It is inverse image of double top pattern.
Pattern #3: Head & Shoulders:
It is a bearish pattern that occurs at the end of an uptrend and the beginning of the down trend.
Pattern #4: Inverse Head & Shoulders:
It is mirror image of the head and shoulder pattern.