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Price Action Trading Strategy: Key Price Action Patterns
Intro
Getting into the crypto markets can seem like a hard task nowadays, but with the right set of concepts and tools, novices and experienced traders can enhance their performance. Price action trading strategies offer the basis to reach the safest and riskier goals pursued by traders and investors.
Through the application of the key price action patterns considered in this guide, traders are able to sort out confusing scenarios and hopefully make a profit, under the basis of a simple but also advanced analysis method.
Understanding Price Action Strategies
Based on top information obtained from the price movements and overall market structure, the price action strategy focuses on analyzing and deciphering the fundamental and technical causes behind the crypto market behaviors.
The price action analysis assumes that price movements tend to be similar over time, establishing a correlation with the behavior and psychology behind the rest of the traders and investors in a market. This way, a strategy built on top of this concept will look for key patterns that guarantee specific types of movements according to historical chart data.
In this sense, price action strategies can do without technical indicators. The core focus is to analyze the price only, with a sense of prediction assuming the viewpoints of other traders trying to answer questions for specific scenarios, dispersing doubts like:
- Where would I make an entry in this scenario?
- Where would I place a stop-loss?
- How much is the risk-reward ratio in this market offering?
On the other hand, price action traders can also look for common concepts like support and resistance, apply techniques like evaluating different time frames and volume, and spot candlestick patterns.
Cryptocurrency Markets Context
In the context of crypto markets, analyzing price action can be an easy but confusing task because of the natural tendency of these markets to volatile seasons. However, the high-liquidity phenomenon plays an attractive role for some riskier traders like scalpers and day traders.
Unlike traditional securities, for crypto assets it might be difficult to establish a sustained forecast in the middle-term, and while for the long-term approach, fundamental analysis can be more suitable, for the short-term analysis, price action gains acceptance being one the best ways to trade on a daily and high-frequency basis.
In the crypto market, traders can identify common patterns like
- Head and Shoulders.
- Double tops or double bottoms.
- Ascendant or descendant triangles.
- Engulfing bars.
- The Shooting Star and The Morning Star
Key Price Action Patterns
In this section, we classify and discuss the price action patterns mentioned previously.
Reversal Patterns
These patterns emerge in established trends and signal potential transitions from one direction to another. Common examples include:
- Head and Shoulders: This pattern is highly effective and it appears after a significant uptrend. It is a high peak in the middle followed by two lower peaks on the sides, forming a neckline acting as support that when broken, a trend reversal from bullish to bearish is likely to start.
- Double Tops: This pattern consists of two consecutive highs and a support line, approximately at the same price zone. A break below the support line will signal a reversal in favor of the bearish side.
- Double Bottoms: This pattern consists of two consecutive lows and a resistance line, approximately at the same price zone. A break above the resistance line will signal a potential price reversal towards the bullish side.
Continuation Patterns
These patterns emerge in established trends and signal potential continuations of trending markets. Common examples include:
- Flags and Pennants: Flags or pennants emerge implying a short consolidation period within a larger trend. After converging trendlines through the top and bottom, a breakout above this pattern in the direction of the prior trend suggests continuation.
- Ascending/Descending Triangles: Similar but not equal to flags, these patterns are formed by converging trendlines, pointing upwards for ascending triangles and downwards for descending triangles. A breakout above the trendline in the ascending situations or below the trendline in descending scenarios, suggests a continuation of the established trend.
Candlestick Patterns
Candlesticks can offer valuable information based on the relationship between the open, high, low, and closing prices within a specified period. Popular examples include:
- Engulfing Bars: The bullish engulfing pattern consists of one larger green candle body that totally engulfs the previous red bar. indicating strong buying pressure. The bearish engulfing pattern consists of one larger red body that engulfs the body of the previous green bar, meaning strong selling pressure.
- The Morning Star: The Morning Star is a three-candle pattern displaying a red candle in the first place, followed by a smaller candle in the middle, and finally a large green candle closing above the midpoint of the first red one. A morning star indicates a sign of a major reversal from a downtrend to an uptrend
- The Shooting Star: The Shooting Star appears at the end of an uptrend and signals a potential reversal. It is formed by a single-candlestick pattern that looks like an inverted hammer, with a long shadow at the top and a small body. During this pattern, the buyers drove the price up, but the sellers arrived and drove the price back down.
The Morning Star Price Action Pattern
Trading The Patterns
| Pattern | Signal | Potential Entry |
|---|---|---|
| Head And Shoulders | Trend reversal from bullish to bearish is likely to start. | After price breaks the neckline (support), and it then returns but now the neckline acts a resistance. |
| Ascending/Descending Triangles | Continuation of a trend. | During the breakout, when it is notably strong. |
| The Morning Star | Reversal from a downtrend to an uptrend. | After the last candle has closed above the first candle of the pattern. |
| The Bearish Engulfing | Strong selling pressure. | In the next candle after the pattern emerges. |
Confirmation Techniques Examples | ||
| Tool | Context | Confirmation |
| Market Volume | Triangle Breakout | During the breakout, measure the force of the movement with Ticks Volume indicator. |
| Time Frames | The Shooting Star | Look for key resistances in a distinct time frame off where the pattern appears, confirming the supply zone and potential presence of sellers. |
Price Action Patterns: Common Pitfalls
Confirming a price action pattern is just as important as identifying them. Traders can apply some methods like the ones presented in the previous table. However, it is still crucial to avoid some behaviors like the following:
- Overtrading when patterns do not work.
- Missing fundamental factors like news releases.
- Entering trades during the pattern formations and not after they have been confirmed.
Conclusion
Price action trading strategies offer a broader viewpoint for the analysis and identification of key chart patterns that can be highly reliable when they are confirmed properly. In the context of crypto markets, these patterns can enjoy high liquid conditions, reinforcing their application. In Altrady you can find all types of charting tools for the development of price action analysis, sign up now for a free trial account with paper trading features.