Price Action and Some Essential price action patterns to know

Have you ever wondered why, despite knowing countless strategies and indicators, consistent trading success still feels out of reach? Do you also find yourself buried under a flood of technical tools, market news, and conflicting advice, only to realize you’re missing what truly drives the markets?

The truth is, trading isn’t about mastering everything. It’s about mastering what matters most—Well, to most of the experienced traders, price action.

What if I told you that understanding the raw movement of price can help you see through the chaos and focus on what the market is really telling you? By simplifying your approach and studying price action, you can gain clarity, confidence, and control over your trading decisions.

In this blog, we’ll explore why price action is the timeless key to trading success and how it can transform the way you see the market.

What is Price Action and Why Does It Matter?

Take a moment to ask yourself: What does the price on your screen really represent?

At its core, price action is the story of supply and demand—unfiltered and raw. It’s the market’s purest expression, free from the noise of indicators and overlays. Each price move reflects the decisions, fears, and ambitions of traders worldwide.

Think about it—behind every candlestick lies human emotion: fear of missing out, panic in the face of losses, or the greed that fuels overconfidence. Price action allows you to interpret these emotions and uncover the deeper psychology behind market behavior.

What if you could step into the crowd's shoes and predict their next move?

Emotions and Market Behavior Affecting Price Action

Have you noticed why markets sometimes behave irrationally, spiking up or down without any apparent reason?

The answer is in emotional imbalances. Market participants don’t always act logically—they react emotionally to news, events, and even simple price levels. Price action captures these reactions, creating patterns and trends that traders can study.

By understanding price action, you’re not just analyzing charts—you’re learning to read the market’s mind. You’re anticipating its next move based on what it has done before.

But, this raises an important question,

Technology has transformed trading today, why do human emotions still matter?

The truth is, despite the rise of automated trading and complex algorithms, human behavior remains the driving force behind the market. No algorithm can eliminate the emotions that drive decisions. Markets may evolve, but the core principle remains: price reflects supply, demand, and emotion.

Does it surprise you that the same principles that worked centuries ago still hold today?

Whether you’re trading stocks, commodities, or cryptocurrencies, price action is your constant. It cuts across time, tools, and trends to offer a clear, actionable framework.

Essential Price Action Patterns to Know

Now that you understand the psychological foundation of price action, the next step is to translate this knowledge into actionable strategies.

The thing is, if you're going to succeed with price action, it’s crucial to familiarize yourself with the key patterns that repeatedly appear in the markets. These patterns are the market’s way of trying to resolve the equation of how much liquidity is needed to trigger volatility and move prices to a new equilibrium.

Let’s break down some of the most essential price action patterns that can help you read the market.

1. Candlestick Patterns

Candlestick patterns form the foundation of price action analysis. They give you a visual representation of price movement over a given time frame, helping you to interpret the market sentiment at that moment. Below are a few key candlestick patterns you need to know:

a. Pin Bar

A pin bar is a candlestick with a long tail (wick) and a small body, signaling that the price has tested an extreme point and failed to hold. The long tail represents a battle between buyers and sellers, with one side ultimately losing control. A pin bar can be a powerful signal in trading, especially when it appears at key levels of support, resistance, or trendlines.

At Support or Resistance Levels

Bullish Pin Bar at Support: If a pin bar with a long lower wick forms at a support level, it indicates that sellers pushed the price lower, but buyers regained control, rejecting the lower price. Action: Traders generally consider a long (buy) position, with the entry near the close of the pin bar or a break above its high by placing a stop-loss below the low of the pin bar.

Bearish Pin Bar at Resistance: If a pin bar with a long upper wick forms at a resistance level, it suggests that buyers pushed the price higher, but sellers regained control, rejecting the higher price. Action: Traders generally consider a short (sell) position, with the entry near the close of the pin bar or a break below its low. By placing a stop-loss above the high of the pin bar.

In Trend Continuation

A pin bar can also act as a continuation signal in a strong trend:

In an uptrend, a bullish pin bar near an upward trendline can signal a potential continuation of the trend.In a downtrend, a bearish pin bar near a downward trendline can confirm continued bearish momentum.

Action: Traders enter in the direction of the trend when the pin bar confirms rejection of the trendline, with stop-loss and take-profit levels based on previous price action or risk management rules.

b. Engulfing Patterns

The engulfing pattern occurs when a small candlestick is engulfed by a larger one. This pattern indicates a shift in market sentiment, often signaling a trend reversal.

When experienced traders see a bullish engulfing pattern at a key support level during a downtrend, they interpret it as a strong signal that buyers are taking control.They enter a long (buy) position when the price breaks above the high of the engulfing candle & Set a stop-loss just below the low of the engulfing pattern to manage risk.

A bearish engulfing pattern at resistance tells traders that sellers are overpowering buyers, signaling a potential reversal. So, They open a short (sell) position once the price breaks below the low of the engulfing candle & place a stop-loss above the high of the engulfing pattern.

Traders use bullish engulfing patterns in an uptrend as confirmation that the trend is likely to continue. They Add to their existing long positions or enter a new one when the pattern forms near a trendline or moving average.

In a downtrend, traders see bearish engulfing patterns as validation that sellers remain in control. They continue holding or increasing their short positions after this pattern appears near a resistance zone.

c. Inside Bar

An inside bar is a candlestick pattern where the price action of the current bar is completely contained within the range of the previous bar.

Experienced traders often use inside bars as a signal for potential market consolidation, breakout opportunities, or trend continuation.

One common strategy is trading the breakout of an inside bar. Traders place a buy-stop order slightly above the high of the mother candle (the previous larger candle) to capture an upward breakout. Similarly, they place a sell-stop order slightly below the low of the mother candle to catch a potential downward breakout. Stop-loss orders are typically placed on the opposite side of the inside bar: below the low for a long position and above the high for a short position. For take-profit targets, traders aim for at least a 1:2 risk-to-reward ratio or use nearby support and resistance levels to set their exits.

Inside bars also serve as a trend continuation signal. During a strong uptrend, the formation of an inside bar signals a pause before the trend resumes. Traders often place a buy order above the high of the inside bar, expecting the price to continue upward. Similarly, in a downtrend, an inside bar suggests a continuation of bearish momentum, prompting traders to place a sell order below the low of the inside bar. In both cases, stop-loss orders are placed on the opposite side of the inside bar to manage risk effectively.

When inside bars appear at key support or resistance levels, they can signal potential reversals or breakouts. For instance, an inside bar forming at a support level may indicate accumulation, signaling that buyers are preparing to push the price higher. Conversely, an inside bar at resistance could suggest distribution, signaling that sellers are preparing to drive the price lower. In these scenarios, traders enter a position in the direction of the breakout, ensuring alignment with other indicators like RSI or volume spikes to confirm the setup.

To improve the reliability of inside bar setups, traders often combine them with additional technical signals.

2. Chart Patterns

Candlestick patterns are effective for understanding market sentiment, but chart patterns provide a broader view of price action. Let’s take a closer look at a few important chart patterns that can help guide your trades.

a. Head and Shoulders

The head and shoulders pattern is one of the most reliable reversal patterns. It consists of three peaks: the left shoulder, the head (the highest peak), and the right shoulder. This pattern typically signals a shift in market sentiment from bullish to bearish (head and shoulders) or bearish to bullish (inverse head and shoulders).

Trading the Breakdown or Breakout

Experienced traders look for the price to break below the neckline in a standard Head and Shoulders pattern or above the neckline in an inverse pattern. This breakout confirms the reversal.

When trading a bearish Head and Shoulders, traders often enter a short position once the price breaks below the neckline with strong momentum. For a bullish inverse pattern, they enter a long position when the price closes above the neckline. The stop-loss is typically placed just above the right shoulder in a bearish setup or below the right shoulder in a bullish setup. This minimizes risk in case of a failed breakout.

Trend Continuation After Retests

Experienced traders often watch for a retest of the neckline after the breakout. In a bearish setup, if the price breaks below the neckline and then retests it as resistance before continuing downward, it reinforces the validity of the pattern. Similarly, in a bullish setup, a retest of the neckline as support strengthens the breakout signal. Retests can offer a second chance to enter the trade with added confirmation.

b. Double Top and Bottom

A double top occurs after an uptrend and resembles the shape of an “M” on the chart. It forms when the price hits a resistance level twice, failing to break above it, and then reverses downward. This pattern suggests a bearish reversal as buyers lose momentum.

Conversely, a double bottom occurs after a downtrend and resembles a “W.” It forms when the price tests a support level twice but fails to break below it, signaling a bullish reversal as sellers lose control.

Trading the Breakout

Experienced traders focus on the "neckline," which connects the lows in a double top and the highs in a double bottom. The neckline acts as a key level, and the breakout below or above it confirms the pattern.

For a double top, traders typically enter a short position when the price breaks below the neckline. In a double bottom, they enter a long position when the price breaks above the neckline. The breakout candle’s close is often used as confirmation before initiating a trade.

c. Triangles

Triangles are common chart patterns that signal consolidation and potential breakouts. They form when the price moves within converging trendlines and can indicate trend continuation or reversal. The three main types are symmetrical, ascending, and descending triangles.

1. Symmetrical Triangles

Symmetrical triangles feature lower highs and higher lows, showing indecision in the market. Traders typically wait for a breakout in the direction of the prevailing trend. A breakout above the upper trendline suggests a long position, while a break below the lower trendline signals a short position. Stop-losses are placed outside the opposite trendline, with targets based on the triangle’s height.

2. Ascending Triangles

Ascending triangles occur when the price makes higher lows while encountering horizontal resistance. They are bullish patterns, with traders entering long positions upon a breakout above the resistance. Stop-losses are set below the recent higher low, and targets are calculated by projecting the triangle's height upward.

3. Descending Triangles

Descending triangles form with lower highs and horizontal support, signaling bearish pressure. Traders enter short positions after a breakout below the support level. The stop-loss is placed above the latest lower high, with profit targets based on the triangle’s height.

Volume often declines during triangle formation and spikes during breakouts, confirming the move. Retests of broken trendlines after a breakout provide additional entry opportunities.

3. Support and Resistance Levels

Support and resistance levels are some of the most important aspects of price action. These levels represent price points where the market has historically reversed. When price approaches these levels again, the balance of supply and demand is retested, and you can expect either a reversal or a breakout.

Support levels are points where the price tends to find buying interest, and resistance levels are points where selling interest tends to push price lower. By identifying these key levels on your chart, you can plan your trades more effectively and increase your chances of success.

Conclusion

Mastering price action is not an overnight achievement, but with time and dedication, it will become the backbone of your trading success. Understanding the market’s psychology through price action allows you to make informed decisions, manage risk, and stay patient in the face of volatility.

Remember, trading is about the process, not just the outcome. By practicing, reflecting on your trades, and sticking to your plan, you’ll develop the experience needed to consistently predict price movements. So, if you’re willing to commit to the journey, price action trading can be the key to unlocking your potential as a trader.

Disclaimer:

The information provided in this article, including the analysis of candlestick patterns, is for educational and informational purposes only. These patterns represent market interpretations and do not guarantee specific trading outcomes. Trading involves significant risk, and individuals should conduct their analysis or consult a financial advisor before making investment decisions.