Chart patterns form a key part of day trading. Candlestick and other charts produce frequent signals that cut through price action “noise”. The best patterns will be those that can form the backbone of a profitable day trading strategy, whether trading stocks, cryptocurrency or forex pairs.
Every day you have to choose between hundreds trading opportunities. This is a result of a wide range of factors influencing the market. Day trading patterns enable you to decipher the multitude of options and motivations – from hope of gain and fear of loss, to short-covering, stop-loss triggers, hedging, tax consequences and plenty more.
Candlestick patterns help by painting a clear picture, and flagging up trading signals and signs of future price movements. Whilst it’s said you’ll need to use technical analysis to succeed day trading with candlestick and other patterns, it’s important to note utilising them to your advantage is more of an art form than a rigid science.
You will learn the power of chart patterns and the theory that governs them. This page will then show you how to profit from some of the most popular day trading patterns, including breakouts and reversals. Your ultimate task will be to identify the best patterns to supplement your trading style and strategies.
Use In Day Trading
Used correctly trading patterns can add a powerful tool to your arsenal.
This is because history has a habit of repeating itself and the financial markets are no exception. This repetition can help you identify opportunities and anticipate potential pitfalls.
RSI, volume, plus support and resistance levels all aide your technical analysis when you’re trading. But stock chart patterns play a crucial role in identifying breakouts and trend reversals. Mastering the art of reading these patterns will help you make smarter trades and bolster your profits, as highlighted in the highly regarded, ‘stock patterns for day trading’, by Barry Rudd.
Breakouts & Reversals
In the patterns and charts below you’ll see two recurring themes, breakouts and reversals.
- Breakout – A breakout is simply when the price clears a specified critical level on your chart. This level could be any number of things, from a Fibonacci level, to support, resistance, or trend lines.
- Reversal – A reversal is a simply a change in direction of a price trend. That change could be either positive or negative against the prevailing trend. You may also hear it called a ‘rally’, ‘correction’, or ‘trend reversal’.
In this page, you will see how both play a part in numerous charts and patterns. You can also find specific reversal and breakout strategies.
Candlestick Charts
Candlestick charts are a technical tool at your disposal. They consolidate data within given time frames into single bars.
Not only are the patterns relatively straightforward to interpret, but trading with candle patterns can help you attain that competitive edge over the rest of the market.
They first originated in the 18th century where they were used by Japanese rice traders. Since Steve Nison introduced them to the West with his 1991 book ‘Japanese Candlestick Charting Techniques’, their popularity has surged.
Below is a break down of three of the most popular candlestick patterns used for day trading in India, the UK, and the rest of the world.
Shooting Star Candlestick
This is often one of the first you see when you open a PDF with candlestick patterns for trading. This bearish reversal candlestick suggests a peak. It is precisely the opposite of a hammer candle. It won’t form until at least three subsequent green candles have materialised. This will indicate an increase in price and demand. Usually buyers lose their cool and clamber for the price to increasing highs before they realise they’ve overpaid.
The upper shadow is usually twice the size of the body. This tells you the last frantic buyers have entered trading just as those that have turned a profit have off-loaded their positions. Short-sellers then usually force the price down to the close of the candle either near or below the open. This traps the late arrivals who pushed the price high. Panic often kicks in at this point as those late arrivals swiftly exit their positions.
Doji Candlestick
One of the most popular candlestick patterns for trading forex is the doji candlestick (doji signifies indecision).
This reversal pattern is either bearish or bullish depending on the previous candles. It will have nearly, or the same open and closing price with long shadows. It may look like a cross, but it can have an extremely small body. You will often get an indicator as to which way the reversal will head from the previous candles.
If you see previous candles are bullish, you can anticipate the next one near the underneath of the body low will trigger a short/sell signal when the doji lows break. You’ll then see trail stops above the doji highs.
Alternatively, if the previous candles are bearish then the doji will probably form a bullish reversal. Above the candlestick high, long triggers usually form with a trail stop directly under the doji low.
These candlestick patterns could be used for intraday trading with forex, stocks, cryptocurrencies and any number of other assets. But using candlestick patterns for trading interpretations requires experience, so practice on a demo account before you put real money on the line.
Hammer Candlestick
This is a bullish reversal candlestick. You can use this candlestick to establish capitulation bottoms. These are then normally followed by a price bump, allowing you to enter a long position.
The hammer candlestick forms at the end of a downtrend and suggests a near-term price bottom.
The lower shadow is created by a new low in the downtrend pattern that eventually closes back near the open. The tail (lower shadow) needs to be at least twice the size of the actual body.
The tail represents those who stopped out as shorts began to cover their positions and those looking for a bargain decided to buy in. Volume can also help confirm the hammer candlestick pattern. To be certain it is a hammer candle, check where the next candle closes. It must close above the hammer candle low.
Trading with Japanese candlestick patterns has become increasingly popular in recent decades due to the easy-to-understand and detailed information they provide. This makes them ideal for beginners to get familiar with charting.
More Popular Day Trading Patterns
Morning Consolidation Pattern
Many successful traders have pointed to this pattern as a significant contributor to their success. Look out for at least four bars moving in one compelling direction. After a high or low is reached, the stock will consolidate for one to four bars. The high or low is then exceeded by 10:10 am.
It’s easy to see why this pattern is popular for the active day trader. Firstly, the pattern can be easily identified on the chart. Secondly, the pattern comes to life in a relatively short amount of time, so you can quickly size things up. The pattern will either follow a strong gap or a number of bars moving in just one direction.
This means you’ll definitely be in a stock with volatility, an essential component for turning an intraday profit.
Late Consolidation Pattern
It’s often challenging to turn a profit as the day progresses, so it’s probably no surprise to learn that perfecting this trading pattern is no easy feat.In the late consolidation pattern the stock will carry on rising in the direction of the breakout into the market close.
Look out for: Traders entering after 13:00, followed by a substantial break in an already lengthy trend line.Check the trend line started earlier the same day, or the day before.Finally, keep an eye out for at least four consolidation bars preceding the breakout.
There are some obvious advantages to utilising this trading pattern.The stock has the entire afternoon to run.So instead of the hectic morning where you can’t miss a beat, you actually have the time to kick back and watch the play evolve.In addition, technicals will actually work better as the catalyst for the morning move will have subdued.
Stock Patterns
In few markets is there such fierce competition as the stock market.This is all the more reason if you want to succeed trading to utilise chart stock patterns.By viewing a series of stock price actions over a period of time (intraday), you’ll be in a better position to predict how they’re going to behave in future.
Visit our ‘Trading Stocks‘ page for detailed examples of stock trading patterns.
Using Price Action
Many strategies using simple price action patterns are mistakenly thought to be too basic to yield significant profits.
Despite their simplicity, price action strategies can be highly effective for traders of all levels, from beginners to experts.
Price action refers to the way that prices are likely to react at specific levels of support or resistance. By studying price action patterns in charts or PDFs, traders can identify both swing levels and trendlines.
These strategies can be applied across a range of markets, from day trading stocks to forex.
Zone Strategy
If you’re new to day trading with short-term price patterns, a popular strategy is the ‘zone strategy’. This approach helps traders create straightforward, distraction-free charts that are easy to follow.
Dead Zone
The ‘dead zone’ is an empty area that indicates there is no clear trend in the market. Traders should avoid this zone if they want to make significant profits.
The Red Zone
The ‘red zone’ is where traders should start paying attention. If the price hits this level and continues to rise, it may be a good time to make a buy trade and aim for a 100-pip profit.
It could be giving you higher highs and an indication that it will become an uptrend.
This will be likely when the sellers take hold. If the price hits the red zone and continues to the downside, a sell trade may be on the cards. You’d have new lower lows and a suggestion that it will become a down trend.
The End Zone
This is where the magic happens. With this strategy, you want to consistently get from the red zone to the end zone. Draw rectangles on your charts like the ones found in the example. Then only trade the zones. If you draw the red zones anywhere from 10-20 pips wide, you’ll have room for the price action to do its usual retracement before heading to the downside or upside.
Outside Bar At Resistance Or Support
You’ll see a bullish outside bar if today’s low exceeded yesterday’s, but the stock still rallies and closes above yesterday’s high. If the complete opposite price action took place, you’d have yourself the perfect bearish example.
Unfortunately, it isn’t as straightforward as identifying an outside candlestick and then just placing a trade. It’s prudent to find an outside day after a major break of a trend.
Spring At Support
The spring is when the stock tests the low of a range, but then swiftly comes back into trading zone and sets off a new trend.
One common mistake traders make is waiting for the last swing low to be reached. However, as you’ve probably realised already, trading setups don’t usually meet your precise requirements so don’t stress about a few pennies.
Little To No Price Retracement
Put simply, less retracement is proof the primary trend is robust and probably going to continue. Forget about coughing up on the numerous Fibonacci retracement levels. The main thing to remember is that you want the retracement to be less than 38.2%. This means even when today’s asset tests the previous swing, you’ll have a greater chance that the breakout will either hold or continue towards the direction of the primary trend.
Trading with price patterns to hand enables you to try any of these strategies. Find the one that fits in with your individual trading style. Remember, you’ll often find the best trading chart patterns aren’t overly complex, instead they paint a clear picture using minimal indicators, reducing the likelihood of mistakes and distraction.
Consider Time Frames
When you start trading with your short term price patterns pdf to hand, it’s essential you also consider time frames in your calculations.