Price Action Signals

Filed under: Learn Forex Trading |

After determining relevant support/resistance zones, identifying the long term trend, and looking for any Fibonacci retracement levels, our last piece of the trading puzzle – the final verification, comes in the form of price action signals.

Figure 1.

When referring to price action signals, I am talking about certain patterns on the candlestick charts (not western patterns such as “head and shoulders”, “wedges”, etc.). These are merely my preference for a verification signal. I tend to favor three different price action patterns – these are the engulfing patterns, inside bars, and pin bars. I will now explain each of these patterns in turn.

Figure 2.

The engulfing pattern signals that the market sentiment is turning. In a bullish engulfing pattern, price has been moving down and has suddenly stopped (see Figure 1.). The bulls have taken over in one session and are likely to stay in control. Conversely, in a bearish engulfing pattern, the opposite happens. The market has been trending up and the bears take control in one session. This time, price is likely to keep moving down (see Figure 2.).

Figure 3.

Inside bars are my next favorite trading signal. It shows that the market has been consolidating, and we look for a breakout in the direction of the long term trend (see Figure 3.). In bullish markets, it is better if the inside bar is also bullish, and similarly in bearish markets, it is better if the inside bar is also bearish.

Figure 4.

My third most favorable price action signal is the pin bar. This shows that the market has moved one way and then reversed, all in the same session. The idea is very similar to the engulfing pattern, only it happens much quicker. I often look for a stage two verification, if you like, with pin bars, and wait for an engulfing pattern to wrap around the body. If this happens, I see it as a strong turning signal.

I should also note that you should not take trades with these patterns at any time. Rather, they should come at significant areas in the market, in the form of support/resistance levels. The patterns are merely the final verification that something is about to happen. So be warned!

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