Candlestick Pattern Analysis - Trading Recurring Patterns
The best Forex strategy based on price action - we already covered multiple time frame analysis and what trend and retracements are. Now it's time we look at the patterns price creates while moving towards a target level.
Example trade based on price patterns - EURUSD Let's look at a trade I took just today, minutes after opening MetaTrader 4 and then we will talk about how I could've estimated where price was going and what patterns I discovered that indicated I should enter that trade.
So this is the EURUSD M15 chart.
Remember, in this case, multiple time frame analysis and trend analysis show that EURUSD is heavily bullish, weekly and daily candlesticks are all blue for three consecutive weeks. So it's safe to go with the major trend and trade up only.
Candlestick Patterns provide trade opportunities This is why we can safely get down to lower time frames and look for patterns to trade up with the bulls. In our case, we have triangles forming right before a breakout. The patterns currently seems to be happening over and over again. Once we've seen it a couple times or more, we can keep anticipating that more of them will form. That is exactly what I did this morning - surely, I was a bit late because when I opened my charts the breakout had already occurred but at least I managed to get a piece of it, just below 9 pips. Yeah, it won't by you a yacht but that's not the point, the point is learning to trade patterns. Some will give you only 10 or 20 pips, others may give you 100s of pips!
My trade below, target was 1.10940 but I got out before, it's always safer to get our just before the target because you can never be sure if it will actually exactly hit it or not. As you can see, price dropped just before hitting the 1.10940 but then a second wave surpassed that level. Why 1.10940? That's a daily support/resistance level.
Summary of the Price Action Strategy
To summarize this strategy, let's role back to step 1: start with the highest time frame and look at how price is trending. Are the higher time frames pointing up or down? Then that means we want to find trades in the identified direction even on lower time frames. Next step is to figure out which is the trend and which is just a retracement on lower time frames. So in our example above, weekly an daily time frames are both heavily trading bullish so we were looking for bullish trades too, even on the M15 time frame. And finally, the last step is to find reoccurring patterns. These can be happening inside channels, triangle breakouts or other types of price movements that keep repeating. Take advantage of these but always have a target in mind. Targets should be a "strong" resistance or support either via horizontal lines or drawn using a trendline. Still confused? Then check out all the examples on our YouTube channel here.