Do charts sometime confuse you? The missing ingredient could simply be price patterns.
This article explains all of the (hidden) benefits of analyzing and trading patterns.
We will also explain how patterns are an irreplaceable part of understanding the larger market structure. (See the video of this article at the very bottom)
What is the Market Structure?
The market structure consists of analyzing the charts with three elements in mind:
- Support and Resistance (S&R).
- Trend and momentum.
Using all 3 concepts is the best and fullest approach to understanding the markets. Above all, don’t cut corners by only using trend or S&R. Why?
The role of patterns is often misunderstood and underestimated. In fact, price patterns play a key role in explaining the market psychology behind the scenes. Basically, they provide valuable information about the balance between trend and S&R.
The balance between trend and S&R occurs on every chart and it determines whether the trend / momentum continues or whether S&R is strong enough to stop it. Simply said, this is what happens:
- If momentum or trend is stronger than S&R, then price will break.
- If S&R zone is stronger than the momentum or trend, then price will bounce.
Patterns help explain whether price will reverse, continue or move sideways. Let’s explain how…
Image 1: example of how price patterns can help, in this case wave patterns on a Gold chart.
Learn how Price Patterns Predict Movement
Patterns offer information about the expected price movement, also known as the path of least resistance.
There are probably dozens of patterns visible but here are the ones I use:
- Chart patterns → market psychology.
- Wave patterns → market psychology.
- Candlestick patterns → bounce and breakout.
- Trend line patterns → bounce and breakout.
- Fibonacci patterns → entry and exit.
- Fractal and time patterns → entry and exit.
- Divergence patterns –> end of trend / momentum.
Not everyone must use the exact same patterns I do, of course… But these are my favourite because they all provide me with a different angle:
- Chart and wave patterns are excellent for reading the market psychology.
- Fibonacci, Fractal and time patterns are useful as entry and exit tool.
- Candlestick and trend line patterns offer valuable information for breaks and bounces.
Image 2: examples of various patterns, like chart and Fibs.
Correction and Impulse
Price patterns are vital to understand the market structure. They also help with building my trading plan when tackling the markets. By analyzing price patterns, I am able to estimate the likelihood that one of the following patterns unfold:
- Corrective bullish.
- Corrective bearish.
- Impulsive bullish.
- Impulsive bearish.
Patterns provide great information about continuation, reversal, or range at the next S&R confluence zone. These patterns help explain how price behaves.
Can we combine patterns? Yes, the neat aspect of price patterns is that traders can combine multiple ones at the same time to search for chart confluence. We can also use multiple patterns on multiple time frames to see confirmation.
Our article is now ready to explain why patterns play such a key role in analyzing the charts. Let’s dive into more detail and provide some real examples…
Practical Examples of Pattern Trading
I will use the EUR/USD 1 hour chart at the beginning of August 2017 as the main example. Let’s examine the chart step by step, starting with market psychology.
Image 3: EUR/USD 1 hour chart showing waves, chart patterns, and trend lines.
Wave Patterns: the EUR/USD wave analysis indicated that a wave 5 of 5 of a larger wave 3 was probably completed. The next retracement would most likely become a large and choppy wave 4 and occur via an ABC correction.
Chart Patterns: the EUR/USD broke the rising wedge chart pattern which is a bearish reversal signal (purple lines). The bearish break also occurred on a NFP (Non-Farm Payroll) day with large momentum propelling price.
Trend Line Patterns: Price is now building a new bullish corrective chart pattern (green lines). A break below the support trend lines should indicate a bearish breakout and the start of bearish continuation.
Divergence Patterns: Price was showing divergence between the tops and indicating a likely retracement.
Image 4: EUR/USD 4 hour chart showing candlesticks, Fibs and Fractals.
Candlestick Patterns: the EUR/USD 4 hour chart is showing a massively bearish candle followed by weak and small candles. This formation is bearish.
Fibonacci Patterns: price is making a pullback to potential Fibonacci resistance levels like the 50% Fib. A break above the 61.8% would invalidate the wave 4 as price would be breaking into the territory of the wave 1. The main target is the -27.2% Fib target at 1.1684.
Fractal and Time Patterns: Fractals are showing a clear lower low in combination with a lower high as well. There is also more information connected the our ecs.SWAT Fractal indicator but it would be take too long to explain that here.
What happened next?
The EUR/USD broke the first support trend line and I entered the trade, also based on my ecs.SWAT trigger:
- Entry was at 1.1787.
- Stop loss was at 1.1828, just 3 pips above the invalidation level.
- Target was at 1.1692.
Image 5: EUR/USD 1 hour using ecs.SWAT method.
What was the Result?
It closed as a winning trade for the ecs.SWAT method at +95 pips!
The risk was only 41 pips so the reward to risk ratio +2.3 to 1.
Don’t get me wrong, my analysis is sometims wrong too, of course. But due to the price patterns, I did know where was my invalidation level, how I wanted to trade it and where my target was. All I needed to do was be patient and monitor the market for new information to see if my analysis was still valid.
Many green pips,
My twitter: @ChrisSvorcik
More info on our ecs.SWAT course and trading system
Elite CurrenSea Twitter: @EliteCurrenSea
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