This article will highlight some of the simple price action patterns. Of course, there are many more of them than what you can find in the article, but it is impossible to cover all of them in one publication. But before we go directly to patterns, let’s define some basic concepts.
Pattern – an English word, the meaning of which is conveyed in Russian by the words “template”, “system”, “structure”, “principle”, “model”.
Due to its application in various Western disciplines and technologies, it has penetrated into the Russian-speaking environment as a specific term in several areas of activity at once. Thus, we can say that Price Action is trading by templates.
Templates can be conventionally divided into complex and simple:
- Simple – templates consisting of 1-3 bars.
- Complex – templates consisting of 4 or more bars.
- Pin – bar.
Pin – bar: description and strategies of use
So let’s get started. The first and most famous pattern in the Price Action system is Pin bar, it is also called Pinocchio or Tail. The Pin Bar itself is an abbreviation for Pinocchio. In classic candlestick analysis, this pattern is known as Shooting Star.
A three-bar candlestick formation, the central candle of which has a very small body (the distance between the closing price and the opening price), while it should be located in the lower (for a down trend) or upper (for an up-trend) third of the candle.
The candles on the sides of the central one are called “eyes”. The right eye should be larger than the left.
Conservative entrance is carried out on the breakout by the price of the low (for the down trend) or high (for the up-trend) of the right eye. We place a stop at the top of the central candlestick. A breakout must necessarily take place at the maximum at the second or third candlestick from the central one. Otherwise, the order is canceled. This pattern has a pronounced counter-trend character. Below are examples for both ascending and downtrend…
There are two more entry options, which are more risky. Let’s look at them now.
a) Without waiting for the formation of the right eye, we place the order immediately after the formation of the nose at the minimum level, adding a filter (5-10 points). Place the stop at the maximum of the nose (see Fig. 3, left side).
b) Again, without waiting for the formation of the right eye, an entry order is placed at the level of 50% of the size of the nose in the expectation that the price, forming the right eye, will catch our order. Place the stop at the minimum (maximum for the up-trend) of the nose (see Fig. 3, right side).
There are certain rules governing the use of the Pin Bar as an entry signal:
- When down trend we use the signal from the “pin bar” located on the swing high for the entry, i.e. at the top of the market.
- When up-trend we use the signal from the “pin-bar” located at the swing-low for the entry, ie. at the bottom of the market.
- When up-trend we ignore the signal from the swing high (top) pin bar.
- When down trend we ignore the signal from the pin bar located at the swing low (low).
Examples of different situations with “Pin Bars”
The above examples show the safest methods of applying such a Price Action pattern as “Pin bar”… It should be noted that these were all examples of working along the main trend. However, there are a number of rules for applying Pin Bars against the trend, because, as I wrote above, the nature of this pattern is pronounced countertrend: firstly, the presence of a trend is obligatory, and secondly, a countertrend “Pin Bar” should be formed at a significant level support / resistance, or as confirmation of an emerging reversal formation.
As we can see from the example, the price, having bounced off the level for the first time, tries to pass it again. However, after the second unsuccessful attempt, a “pin bar” was formed, creating excellent conditions for entering a trade.
Finally, a final example. First “Pin bar” not only formed at a significant price level, but also confirmed the possibility of a small double bottom forming within the emerging large one. It was from this Pin-bar that the development of these technical analysis figures began. Further, as can be seen from the example, the price once again bounced off the presented level, forming another Pin bar.
And in conclusion, I would like to say that the technique of working with “Pin-bars” is a powerful weapon in the hands of a trader, however, it is necessary to follow the rules for working with them, presented in this article. And of course, strict adherence to the rules of Money Management and Risk Management…