Mastering Price Action: How to Read Price Charts and Recognize Key Patterns
Price action presents a conceptual group of techniques that analyze price charts relying solely on the market formations that
Price action presents a conceptual group of techniques that analyze price charts relying solely on the market formations that the different asset quotations influence throughout their movements.
These formations end up being repetitive patterns that traders can recognize in the meantime as they give sense through market structures. The market structure is the total of movements and patterns that took place in the chart during a specific period, like a trading session.
These structures help traders identify the type of market, if it is a trend or a range, and spot the most significant zones for the price to react decisively to a direction. For instance:
- If the type of market is a trend, swing highs and lows can zone for the most relevant price action and where key patterns can appear.
- If the type of market is a range, the top and bottom can be support and resistance areas influenced by strong supply and demand.
Recognizing Patterns: Head And Shoulders
Head and Shoulders is a reversal chart pattern recognized for accuracy and broader price action. It extends along a price area, forming a structure where concepts like support, resistance, and candle patterns are essential for traders to time entry and exit points.
This chart pattern solely offers a meaningful view of the market, and we will use it to understand how the price action analysis can help traders find a trade setup.
The pattern is composed of elements such as:
- First shoulder: A swing high following an uptrend that then retraces a little.
- Head: A second swing high formation following the retracement of the first shoulder and beyond it but then retraces to the same level reached by the first shoulder.
- Last shoulder: A third swing high following the retracement of the head, but it does not extend beyond and reaches price levels similar to the first shoulder.
- Every swing high represents a resistance level, and every retracement represents a support.
- The support area is known as the neck, and traders expect a break out of this support line for the price to start the reversal movement.
Check out key price action patterns at Altrady!
How To Trade The Price Action
By recognizing the pattern of the head and shoulders, traders can look for positions around the last shoulder, understanding that the first shoulder and the head form a strong resistance area that can push the price beyond the neck support area.
After the price breaks the support area, it typically reverses later to the same support area of the neck that will now act as a resistance. At that level, traders can spot the following price action:
- The price reaches the neck trying to go after it, but the price slows down in that area.
- The price forms a candlestick pattern like a shooting star or evening star, suggesting a continuation of the reversal movement.
Conclusion
By identifying the right market type, spotting meaningful zones, and recognizing patterns, price action readings of the charts will give insights into the behaviors of the other participants and help anticipate future movements as such patterns repeat over time.
We used Head And Shoulder chart patterns as an example of how price action works in front of swing highs and support and resistance.
