Price Action patterns are a powerful technical analysis tool used to help us anticipate how the price of a security will move. We use price action when trading stocks, options, and futures.
The black lines in the patterns below are the price lines, created by common price points over a period of time (i.e. highs, lows, or closing). These, therefore, represent the price movement of a security.
The red or green lines are trendlines. Trendlines are drawn by connecting multiple lows or multiple highs with one line (see below). These trendlines help us identify patterns in previous price movements, signaling price movement.
Price action patterns are most accurate at key points of support & resistance defined by Fibonacci lines and volume peaks.
There are three types of patterns below.
Reversal patterns signify that the price trend direction is changing.
Continuation patterns signify that the price trend direction will stay the same, following a brief pause.
Bilateral patterns signify that the price trend direction may move either with or against the the current trend.
We encourage you to memorize the price action patterns included in our free PDF and practice identifying them in the securities you trade. Some trading platforms allow you to draw trendlines on your charts. Programs such as stockcharts.com and tradingview.com are also great tools for utilizing trendlines. Download these, print them out, and keep them handy for referencing.
Technical analysis takes your trading to the next level. Utilizing price action patterns is a key tool. Keep an eye out for Part 2 where we will breakdown each pattern in more depth.
If you have questions or you'd like more in depth help, book a one-on-one lesson with Guillermo or John!
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