If you are looking for an elegant way to trade with minimal noise on your charts, you cannot beat price action.
In this guide, we are going to introduce you to a number of candlestick patterns you can use in your trading. If you are not familiar with price action, you should get started by reading the introductory post, “What is Price Action?”
A few of the patterns we discuss below are also in that post, but this post includes additional patterns we did not go over in that one.
“Micro” and “Macro” Price Patterns
Before we jump into the patterns, we want to mention that they come in two different varieties. This is not something that we have seen a lot of people talk about, so we will call them “micro” and “macro” patterns.
What we call “micro” price action patterns involve just a few bars, where you are looking closely at the open, close, high, and low of each of those bars in relation to each other.
What we call “macro” patterns involve a much larger number of bars together. You are still looking at highs and lows, but collectively across the bars, rather than emphasizing individual bars.
Some well-known “micro” patterns include I4B, DHLC/DLHC, BUOB/BEOB, and pinbars.
But “macro” patterns such as head and shoulders that incorporate a larger number of bars are some of the best-known and most popular price action patterns out there.
Also, note that what you see depends on the timeframe you are looking at. Zooming in or out can change the way you look at things.
Hypothetically, for example, you could spot an ascending or descending triangle where each movement in the zigzag is comprised of many bars.
But then, if you zoom out to a longer timeframe, you could see a more “micro” formation like an I4B.
Our point here is just that whether we are talking about micro or macro patterns, they are both legitimate ways of trading price action—and in some cases different ways of describing the same phenomena. we will be sharing examples of both below.
Common Price Action Patterns to Look For
One popular pattern is the pinbar, also written “pin bar.” It is short for “Pinocchio bar.”
A pinbar is a pattern that forms across just one bar. It can take either of the following forms:
- A candle with a flat body and a protruding high at a swing high.
- A candle with a flat body and a protruding low at a swing low.
The reason this formation is called a “Pinocchio bar” is an allusion to Pinocchio’s nose, which grows longer when he lies.
At a swing high, the nose of the pinbar points upward, “lying” to you. It is telling you that price will keep rising. But instead, it drops. A pinbar like this with an upward-protruding nose is a sell signal.
At a swing low, the nose of the pinbar points downward, again lying. It is telling you price will continue to fall. But instead, it rises. This type of pinbar is a buy signal.
It is easy to explain what happens when a pinbar forms. The protruding nose is the visual evidence that a “test” occurred. Either buyer tried to drive price up at a swing high and failed, or sellers tried to drive price down at a swing low and failed.
So, this is a great formation to look for if you want to spot a reversal. That said, pinbars do sometimes form in the middle of continuations, so you must pay attention to context.
2. BUOB and BEOB
There are two types of outside bars.
- A bullish outside bar (BUOB) is a bullish candle that fully envelopes the previous candle.
- A bearish outside bar (BEOB) is a bearish candle that fully envelopes the previous candle.
If you see a BUOB, price may continue to rise, so you should buy.
If you spot a BEOB, price may continue to fall, so it is a sell signal.
3. DHLC and DLHC
These price patterns can be used to spot reversals. Each one is comprised of two bars.
- Double high lower close (DHLC): Look for this one at a swing high. You will see two bars with matching highs (more or less), with a lower close for the second bar.
- Double low higher close (DLHC): Look for this one at a swing low. You will see two bars with matching lows (more or less), with a higher close for the second bar.
When you see a DHLC at a swing high, it is a signal to sell. When you see a DLHC at a swing low, it is a signal to buy.
A variation on this pattern can occur that includes triple highs or lows. You can interpret this as an even stronger signal since price tested that level three times and failed rather than just two.
I4B is short for “Inside 4 Bar.”
An inside bar is the opposite of an outside bar. Instead of engulfing the previous bar, it is engulfed by the previous bar.
These bars usually form when the market is consolidating. You can have a series of inside bars in a row, where each envelopes the one after it.
When you get four of these consecutively, that is an I4B.
This is a breakout pattern. Since it is difficult to gauge whether price will rise or fall, the best approach usually is to set entries in both directions and wait to see which one triggers.
5. Bull Flags and Bear Flags
Moving on from these more “macro” patterns, let’s take a look at some more “macro” price patterns that encompass more bars. We will start with Bull and Bear Flags.
- Bull Flag: When price is rising, you may see price temporarily drop in a series of lower highs and lows. Then, price darts back up.
- Bear Flag: When price is falling, you may see it temporarily rise in a series of higher highs and lows. Then, price resumes its downward movement.
This is a continuation pattern. Ideally, you want the channel formed by the flag to be as narrow as possible, and preferably with a shallow rate of ascent or descent. If it is especially wide or steep, it is not well-formed.
That said, a wider pattern that continues for longer is sometimes termed an “ascending channel” or “descending channel.”
This is also a legitimate price pattern p for a continuation trade.
6. Bullish Rectangle and Bearish Rectangle
This pattern is similar to the one above, and also signals a continuation of a trend.
- Bullish rectangle: During an uptrend, the price may switch to a zigzag between matching highs and lows, moving sideways. You should be able to draw lines across the highs and lows and see that they are roughly horizontal. Price then breaks out of the channel and returns in its upward direction.
- Bearish rectangle: In the course of a downtrend, you might see price start moving sideways in the same fashion, bouncing between two horizontal trend lines. After that, it will resume falling.
You can think of this as a stronger variation on the Flag patterns. The reason it is stronger is that the price does not manage to push significantly in the opposite direction at all—it only manages to push sideways.
7. Ascending Triangle and Descending Triangle
Here is another continuation pattern to try:
- Ascending Triangle: During an uptrend, you may see prices start consolidating in a triangular fashion. The highs will be roughly matching, but the lows will climb. Then, the price will break out again upward.
- Descending Triangle: During a downtrend, you might see a similar pattern. Price will start consolidating with matching lows, but the highs will get lower and lower. Then, the price will break out downward.
With each of these patterns, buyers or sellers are exerting some pressure to try and change the direction of the trend, but each attempt is weaker and less successful than the last. Meanwhile, those trading in the direction of the trend are holding strong. So, the trend ends up reasserting itself.
8. Head and Shoulders and Inverted Head and Shoulders
The famous Head and Shoulders and its inverted version are reversal patterns.
- Head and shoulders: Price rises to a swing high, then dips briefly before rebounding to a higher swing high. It then dips again and makes a third swing high, this one lower than the central one. It then drops. You should enter short. The two lower swing highs are “shoulders,” and the central higher swing high is the “head.”
- Inverted head and shoulders: Price drops to a swing low, rises briefly, drops to a lower swing low, then rises again before dropping to a third swing low. It then rises. Enter long.
9. Rounding Top and Rounding Bottom
Here is another set of reversal patterns to know:
- Rounding Bottom: Price drops, then zigzags, then rises. If you draw a freehand line across the lows during the consolidation phase, you will notice they slope gradually downward, then upward in a “rounded” fashion.
- Rounding Top: Price rises, then zigzags, then falls. Similarly, drawing a freehand line across the highs during the consolidation phase shows a rounded upward arch.
10. Cup and Handle and Inverted Cup and Handle
This is basically a variation on the Rounded Top/Bottom, but with a brief retracement.
- Cup and Handle: A rounding bottom forms, which is the “cup.” But instead of the price continuing upward, it drops briefly, but not all the way down to the base of the rounding bottom. It then shoots up. The retracement is the cup’s “handle.”
- Inverted Cup and Handle: A rounding top forms, which is an upside-down “cup.” Price then rises again briefly, but not all the way to the base of the inverted cup. After this retracement, it then shoots downward.
Best Practices for Trading Price Action Patterns
Now that you know some price patterns, here are some recommendations to help you use them successfully.
1. Do not try to learn all of these at once.
As a beginner, you might feel a temptation to try and learn as many price patterns as possible and trade them all. After all, doing so would provide you with more potential trade setups than just several patterns.
But if you spread your focus out too much, it may be difficult for you to really become an expert at any of the patterns. So, just start with a few of them, and then add on more as you go.
2. Learn what a well-formed pattern looks like.
It is important to understand that patterns can be well-formed or poorly formed. A poorly-formed pattern may as well not be one in many cases, since you should only be trading well-formed patterns.
You may have seen impressive stats for price action patterns; for example, you might see someone say that using a particular pattern has resulted in a 70% win ratio.
But here’s the thing—that person is probably trading only the best setups. If they were to start trading malformed patterns, their win/loss ratio would probably drop quite a bit.
As you try to learn what “well-formed” looks like, it may feel somewhat subjective, and it can be more of a challenge than you might guess. That is why you will need plenty of practice.
Look at other people’s charts, and spend lots of time going through historical charts just searching for nice examples on your own.
3. Put price patterns in context.
The best setups for price action incorporate well-formed patterns and suitable contexts/locations.
Make sure you have a broader view of what is happening in the market. You can do this by marking pivot zones, using Fibonacci retracement levels, or putting in moving averages. Just do not clutter your charts unnecessarily.
4. Run your own tests to determine success rates.
You may see success rates listed for different price patterns. It is important to understand that these are individual statistics. Two different traders using the same patterns can easily get very different results. Even if they are hypothetically following the same trading method with the exact same rules, they could still get different outcomes based on individual factors affecting how they trade.
As that is the case, you should conduct your own testing to figure out which patterns work best for you.
5. Share charts if you need help.
Finally, if you are having a hard time with your price action trade setups, you do not have to go it alone. A lot of forex traders are generous and helpful individuals who will be happy to take a look at your charts if you post them on forums.
Plus, your charts will probably end up helping out other traders, not just you. You will be adding to a compendium of free public resources on price action.
These Price Patterns are Simple, Reliable, and Powerful
If you are ready to learn to trade price action, get started with any of the patterns in this post. Put in the time and practice to really become an expert in spotting well-formed patterns in the right contexts, and you will have a simple and robust trading technique you can rely on.
Do not forget to get your free $50 XM no deposit bonus to kick start your trading journey.