Price Action Pattern: Meaning, Structure & Breakouts | Finschool (2024)

Introduction

• Trading price movement examines a security’s, index’s, commodity’s, or currency’s performance to forecast what it could do in the future. You could wish to take a long position if your price action research indicates that the price is due to increase, or you can decide to short the asset if you think the price will decline.
• It’s important to search for patterns and recognize the major signs that might affect your investments if you want to understand price action trading. Many traders utilize a variety of different price action strategies to forecast market changes and generate short-term profits.
• Recognizing price action patterns is essential to your success if you day trade equities. Price action patterns may be used to pinpoint levels of support and resistance, trends, trend reversals, and likely trend continuance. Identifying trading chances, low-risk market entry points, and take profit price levels are, in essence, all that you need to know.
• The finest apps for stock charts provide a wide range of technical analysis capabilities like charts, pattern detection, and sketching tools. Price action patterns fall under the purview of technical analysis and technical trading. Because it doesn’t rely heavily on the use of one or more technical indicators, price action trading is different from the bulk of technical trading systems.
• Instead, it is typically accomplished by simply monitoring price activity on a straightforward price chart and searching for identifiable patterns of price movement. (although price action traders may employ a couple of simple technical indicators, such as trend lines).

Price action pattern: false break

• False breakouts are exactly what they seem like: a breakthrough that stopped short of reaching a higher level, leading to a “false” breakout of that level.
• False breakout patterns are among the most crucial price action trading patterns to understand because they typically serve as a reliable sign that a trend is about to continue or that price is ready to reverse direction.
• According to the UPL LTD. chart below, prices crossed back above the resistance level following the breakout from the level of resistance.
• When the price looks to breakout but then quickly reverses, deceiving everyone who grabbed the breakout’s “bait,” it can be said that there has been a fake breach of the level.
• Professionals typically push the market in the other direction after amateurs enter what seems to be a “obvious” breakout.

Price action pattern: break of structure

• When a breakthrough occurs from a chart pattern like Head and Shoulders, Wedges, Cup and Handle, etc., we may also take a long-short position. These breakout patterns are the most trustworthy, and when the pattern is finished and the breakout takes place, one may also establish a price goal.

Price action pattern: breakout without a build up

• Let’s first talk about what build-up is. A build-up is a condensed, small-volume region where we see the candles getting smaller.
• The traders can thus find high probability breakouts by looking for a breakout with build-up.
• The conflict between the bulls and bears close to the resistance area is the major cause of this. The bulls will thus attempt to drive prices higher in order to break through the resistance zone.
• The bears, however, will attempt to push prices lower from the resistance level. The prices then move towards a zone of consolidation.
• When prices break out following a constricting consolidation zone close to the resistance or support region, one can trade using this price action pattern.

Price action pattern: first pull back

• Price does not necessarily travel in a straight line, and price waves are widely used to describe price changes in any financial market. Additionally, market trend waves oscillate between bullish and negative.
• As shown in the graph below, the dominant trend waves increased in height during an upswing. The corrective waves are movements that go against the prevailing trend. Pullback traders look for the stages of the correction and place trades at those times.
• The idea is that in order to achieve a better entry price during a trend, you should wait for the price to “pull back.” If the market is rising and you think it will keep increasing, you want to enter a trade as cheaply as you can.

Price action pattern: break and retest

• When prices come around after a break and retrace their steps to the breakout level, this is known as a retest.
• Prices might remain unchanged, and short-term profit-taking selling could happen after a break to the upside, such as following the initial purchasing wave.
• Prices are projected to rise to the breakout level, which will serve as support and spark interest from buyers.

Price structure confluence: How to find low risk and high reward trading setups

Some of the confluence variables I look for on a chart include: • An upward or downward trend; in essence, a “trend” is a confluence component in and of itself.

Exponential moving averages (EMAs); I utilize the 8 and 21 day EMAs on the daily charts to aid with trend identification and the identification of dynamic support and resistance. A price action scenario can benefit from confluence at both the 8 and 21 EMAs.

• Levels of support and resistance that are static (horizontal). These are the “traditional” horizontal levels of support and resistance that frequently link highs to highs or lows to lows. A video on drawing support and resistance levels is available here.
• Sites of events. Market levels known as “event areas” are those where a substantial price action event took place. This might simply be a level being rejected followed by a strong directional movement, or it can be a strong directional movement that occurs after a price action signal arises. An region or level of the market must have experienced some important “event” before we can refer to it as an event area or level. Read more here about event spaces.
• Levels at 50% retrace. Personally, I keep an eye on the 50% to 61.8% retracement levels for another convergence element. I skip through all the other Fibonacci extension levels since I don’t think they’re useful because they’re too arbitrary and random.
• It is well known that most significant market movements eventually retrace around 50% of their initial course. All the other Fibonacci levels, however, are just an example of how “if you put enough levels on your charts some of them are bound to get hit…,” which means that they are more disorganized and perplexing than useful or meaningful.
• The five confluence elements mentioned above are only a few of the levels that can cross to create a confluent area in the market. We can also keep an eye out for intraday levels and additional confluence factors, which I cover in my price action trading course.

Conclusion

• You should now have a solid understanding of what trading price movement from confluent levels in the market entails from the aforementioned instances. You’ve gotten a small taste of my fundamental trading approach in this lesson—looking for market confluence levels from which to exploit clear price action signals.
• For stock market day traders, price action patterns offer crystal-clear buy and sell trading signals. They can determine excellent price levels to take gains and exit a trade as well as price levels where a buy or short sell order has a strong possibility of turning out to be lucrative.
• One of the key reasons you should only employ risk capital, or money you can afford to lose, in trading is to bear in mind that no price action pattern is a guaranteed thing.
• Only around 60–70% of the time do even the most dependable price action patterns function, which is to say that the market really performs what the pattern predicts it is likely to do. However, having a 60–70% probability of making money on your transaction is still far better than merely a 50–50 possibility. (or less).