Chart patterns form an important part of day trading. Candlesticks and other charts produce frequent signals that cut through the “noise” of price action. The best patterns are those that can form the backbone of a profitable day trading strategy, be it trading stocks, cryptocurrencies, forex pairs. Every day you have to choose between hundreds of trading opportunities.
This is the result of various factors affecting the market. Day trading patterns allow you to decipher various options and motivations – from the hope of profit and fear of loss, to short-term, stop triggers, hedging, tax consequences and more. Candlestick patterns help with painting a clear picture, and mark trading signals and signs of future price movements.
While it is said that you need to use technical analysis to successfully day trade with candlesticks and other patterns, it is important to note that using it to your advantage is more of an art form than a hard science. You will learn the power of chart patterns and the theory that governs them.
This page will then show you how to profit from some of the most popular day trading patterns, including trailing and reversals. Your main task is to identify the best patterns to complement your trading style and strategy.
Use In Day Trading
Using the right trading patterns can add a powerful tool to your arsenal. This is because history has a habit of repeating itself and financial markets are no exception. This repetition can help you identify opportunities and anticipate potential problems.
RSI, volume, and support and resistance levels all help your technical analysis when you trade. But stock chart patterns play an important role in identifying trend reversals and reversals. Mastering the art of reading these patterns will help you make smarter trades and increase your profits, as highlighted in ‘stocks for day trading’, by Barry Rudd.
Breakouts & Reversals
In the patterns and charts below, you will see two recurring themes, retracements and reversals.
- Breakout – A breakout is only when the price clears a critical level set on your chart. These levels can be any number of things, from Fibonacci levels, to support, resistance or trend lines.
- Reversal – A reversal is the only change in the direction of a price trend. The change can be positive or negative to the current trend. You may also hear it called a ‘rally’, ‘correction’ or ‘trend reversal’.
On this page you will see how both play a role in various charts and patterns. You can also find specific reversal and breakout strategies.
Candlestick chart
Candlestick charts are a technical tool at your disposal. They combine data over a period of time into a single bar. Not only are the patterns relatively easy to interpret, but trading candlestick patterns can help you achieve a competitive edge throughout the market.
They date from the 18th century where they were used by Japanese rice traders. Since Steve Nison introduced them to the West with his 1991 book ‘Candlestick Charting Tech’, their popularity has skyrocketed. Here is a breakdown of three of the most popular candlestick patterns used for day trading in India, the UK, and the rest of the world.
Shooting Candlestick Stars
This if often one of the first things you see when you open a pdf with candlestick patterns for trading. This bearish reversal candlestick suggests a peak. This is the exact opposite of a hammer candle. It will not form until at least three subsequent green candles have materialized. This will indicate an increase in prices and demand.
Usually buyers lose their cool and their coffins to the rising prices before they realize they have paid more. The upper shadow is usually twice the size of the body. This tells you the last panic buyer has entered the trade just as the profit takers have unloaded their positions. Short sellers then usually force the price down to close the candle either near or below the open. This traps late arrivals that drive prices high.
Panic often kicks in at this point as late arrivals are quickly out of their posts.
Doji Candlesticks
One of the most popular candlestick patterns for forex trading is the doji candlestick (doji indicates anxiety). This reversal pattern is either bearish or bullish depending on the previous candle. It will have close to, or the same open and close price with a long shadow. It may look like a cross, but it can have a very small body.
You will often get an indicator of how a reversal will lead from the previous candle. If you see the previous candle is bullish, you can expect the next one near the bottom of the low body to trigger a short/sell signal when the doji low is broken.
You will then see the trail stop above the doji high. Alternatively, if the candle was previously bearish, then a doji may form a bullish reversal. Above the candle high, an old trigger usually forms with a trailing stop directly below the doji low. This candlestick pattern can be used for intraday trading with forex, stocks, cryptocurrencies and a number of other assets.
But using candlestick patterns for trade interpretation requires experience, so practice in a demo account before you put real money on the line.
Hammer Candlestick
This is a bullish reversal candlestick. You can use this candlestick to establish a capitulation bottom.
This is then usually followed by an increase in price, allowing you to enter a long position. The hammer candle is at the end of a downtrend and suggests a near-term bottom price. A low shadow is created by a new low in a downtrend pattern that then closes back near the open. The tail (bottom shadow), must be at least twice the size of the actual body.
Tails are the ones to stop as shorts start to close their positions and bargain hunters have decided to party. Volumes can also help shoot candles at home. To make sure it is a hammer candle, check where the next candle closes. It must cover the low hammer candle. Trading with Japanese candlestick patterns has become increasingly popular in recent decades, as a result of the ease of gathering and detailed information they provide. This makes them ideal for charts for beginners to get to know.
More Popular Day Trading Patterns
Morning Consolidation Pattern
Many successful traders point to this pattern as a major contributor to their success. Note: At least four bars are moving in an interesting direction. After the high or low is reached from number one, the stock will consolidate one to four bars. The high or low is then exceeded at 10:10 am. It’s easy to see why this pattern is popular for active day traders.
First, patterns can be easily identified on charts. Second, this pattern comes to life in a relatively short space, so you can quickly measure things. The pattern will follow a strong gap, or several bars moving in only one direction. This means you are sure to be in the stock with volatility, an important component of making intraday profits.
Late Consolidation Patterns
It’s often challenging to turn a profit into a running day, so it may come as no surprise to learn that perfecting this trading pattern is no easy feat. In the final consolidation pattern the stock will continue to rise towards the breakout to the market. Note: Traders entered after 13:00, followed by a large break in the long trend line. Check trend lines that started on the same day, or the day before.
Finally, look for at least four consolidation bars before the breakout. There are some clear advantages to using this trading pattern. Stock has all afternoon to run.
So instead of a busy morning where you can’t miss a shot, you actually have time to kick back and watch the progress. In addition, technicals will work better since the catalyst for morning moves will be weak.
Stock pattern
In some markets there is fierce competition such as the stock market. This is another reason if you want to encourage trading using chart stock patterns. By looking at a series of stock price actions over a period of time (intraday), you will be in a better position to predict how they will act in the future. Visit our ‘ Stocks ‘ page for detailed examples of stock trading patterns.
Using Price Action
Many strategies that use price action patterns are mistakenly considered too fundamental to produce large profits. Yet price action strategies are often easy to use and effective, making them suitable for both beginners and experienced traders.
Simply put, price action is how the price is likely to react to a certain level of resistance or support. Using price action patterns from pdfs and charts will help you identify both swings and trendlines. Whether you day trade stocks or forex with price patterns, the easy-to-follow strategy can be used across the board.
Zone Strategy
So, how do you start day trading with short-term price patterns? Downloading the pdf will likely tell you to use a ‘zone strategy’. An obvious bonus to this system is that it creates live charts, free from complex indicators and distractions.
Dead zone
This empty zone tells you that the price action is not headed anywhere. There is no clear up or down trend, the market is in an uncertain state. If you want big profits, avoid the dead zone entirely. No hint will help you make thousands of pips here.
Red Zone
This is where things start to get a little interesting. Once you’re in the red zone, the end goal is in sight, and a hundred pip winners are within reach. For example, if the price hits the red zone and continues to reverse, you may want to place a buy trade. It can give you a higher level and an indication that it will be an uptrend. This will happen when the seller takes over. If the price hits the red zone and continues to decline, a sell trade may be on the cards. You will have a new low and a suggestion that it will be a downtrend.
The End Zone
This is where the magic happens. With this strategy you want to consistently get from the red zone to the end zone. Draw a rectangle on your chart as found in the example. Then just zone trading. If you draw a red zone anywhere from 10-20 pips wide, you will have room for price action to make a normal pullback before heading to the downside or reversal.
Outside Bars At Resistance Or Support
You’ll see the outside bar rise if today’s low is above the midday, but the stock is still rallying and closing above yesterday’s high. If a complete opposite price action occurs, you will have a perfect bearish example. Unfortunately, it’s not always like identifying candlesticks outside and then placing trades. It is prudent to find an off day after the big holiday trend.
Spring At Support
Spring is when stocks test lows, but then return to trading zones and set new trends. One of the common mistakes traders make is waiting for the last swing low to reach. However, as you probably realize already, trading setups don’t usually meet your exact needs so don’t press some money.
Less Than Price Return
In short, lack of displacement is evidence that the main trend is strong and likely to continue. Forget coughing at various Fibonacci retracement levels. The main thing to remember is that you want the drawdown to be less than 38.2%. This means that even if today’s asset tests the previous swing, you will have a greater chance that the breakout will either hold or continue in the direction of the main trend. Trading the price-to-hand pattern allows you to try any of these strategies. Find one that suits your individual trading style. Remember, you’ll often find the best trading chart patterns aren’t overly complicated, instead they paint a clear picture using minimal clues, reducing the chance of mistakes and distractions.
Consider the Time Frame
When you start trading short term price patterns pdf to hand, it is important that you also consider the time frame in your calculations. In your market, you will find several time frames simultaneously together. This means that you can find contradictory trends in certain assets of your trade. Your stock can be in a primary downtrend while also being in an intermediate short-term secondary trend.
Many traders make the mistake of focusing on a specific time period and ignoring the major trends that are influential. Usually, a longer time frame is a more reliable signal. When you reduce your time frame, you will be distracted by spurious motion and noise.
Many traders download short-term price pattern examples but ignore the underlying major trends, don’t make this mistake. You should trade the 15-minute chart, but use the 60-minute chart to determine major trends and the 5-minute chart to establish short-term trends.
Concluding
Our understanding of chart patterns has come from the early 1932 work of Richard Schabacker in ‘Technical Analysis and Stock Market Profitability’. Schabacker points out, ‘any common stock chart is a combination of many patterns and its accurate analysis depends on continuous study, long experience and knowledge of all the fine points, both technical and fundamental…’ So while there are many patterns out there, remember that analysis accurate and sustainable practices are required to reap the full benefits.