9 Best Price Action Trading Patterns

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Day traders primarily identify the best short-term day trading opportunities relying on technical analysis. Price action trading patterns belong to the most powerful buy and sell indicators that can be identified by analyzing charts. Recognizing chart patterns once they occur is crucial for profitable day trading.

This post focuses on the 9 best action trading patterns successful day traders use. If you prefer automated pattern recognition, consider using stock charting apps or stock scanners with pattern recognition.

Price Action Trading Patterns

There are bullish and bearish day trading patterns, which can be used to time the entry for long trades and sell-signals or shorting.

1. Bullish Flag Pattern

The bull flag pattern is an easy-to-identify pattern frequently used by day traders due to its simplicity. The pattern consists of a flagpole, which comes from the initial up move on a high momentum, causing a stock to make new highs on high volume. Then, the consolidation begins, and it remains in the upper one-third of the flagpole size, consisting of multiple up and down moves with lower highs and lower lows.

Then, after 2 or 3 consolidation waves, enormous trading volume kicks in and causes the stock to move sharply to the upside, breaking the flag resistance and the highest point of the previously built flag pole.

What makes the bullish flag pattern that powerful? It is a fact that the consolidation after the initial move attracted many short sellers who speculated the prices to go significantly lower. But the consolidation movement never even hit the 50% Fibonacci retracement, nor did it consolidate even further. Instead, the final move goes straight to all previous highs without ever consolidating back.

The length of the flagpole can be used to determine the price target of the breakout.

2. Bearish Flag Pattern

The bear flag pattern is the counterpart of the bull flag pattern and is primarily used by short sellers. The initial movement is a sharp price drop that happens in a short time, with prices falling straight to new lows. Then, a slight upside movement in multiple waves occurs, where prices stay in the lower third of the initial flagpole.

Once the short continuation triggers, the highest price of the consolidation can be used as a stop-loss level, while the length of the flagpole of the initial downside movement can be projected from the highest point of the consolidation to evaluate the target of the final downside movement after breakdown through all support levels.

3. Ascending Triangle Pattern

The ascending triangle pattern is basically similar to the bull flag pattern, and there is just a minor difference. In both cases, we have an initial movement on high momentum and high relative volume making new highs, and then a consolidation begins that stays in the upper third of the flagpole.

But while the bull flag pattern consolidates in slowly lowering lower highs, the ascending triangle pattern consolidation highs remain relatively at the same highs as the flagpole. In addition, the lows of the sideways consolidations are not lower than the low before and not relatively on the same level, but instead, they are higher lows in the sideway movement.

This way, the range of the price zig-zag within the triangle gets tighter until the final movement triggers a breakout to the upside, confirmed by high trading volume to make news highs. The price target can be evaluated by projecting the flagpole size from the last low in the triangle.

4. Cup and Handle Pattern

Cup and Handle is a popular chart pattern that day traders use to identify potential buy or sell opportunities. It is formed when the price of a stock or other asset moves in an upward direction, then pauses at a certain level before continuing its uptrend. The pause forms two distinct parts, the cup and the handle.

The cup part of this pattern occurs when the price begins to move up but eventually reaches a point where it stalls out for some time before continuing its trend upwards. This can be seen as a “cup” shape on the chart, with the bottom being where the stall occurred and the sides representing how long it took for prices to move back up after that stall.

After forming what looks like a cup, there will usually be another short-term pullback or consolidation period, which creates a handle extending from one side of the cup downwards towards slightly lower prices.

This handle should form over several periods (when day trading over various intraday candles, when investing over various daily candles) and provides an opportunity for traders to enter into positions if they believe that prices will continue their previous trend once this handle has been completed.

5. Head and Shoulders Pattern

The head and shoulders pattern is a reversal pattern and part of various technical analysis pattern scanners. The head and shoulders patterns indicate the reversal from a bullish trend to a bearish trend.

The head and shoulders pattern consists of two shoulders and one head. The left shoulder is formed first and is simply a recent high. Following the left shoulder, a minor consolidation follows with a higher low, then prices move to a new higher high, forming the head.

Once the head is formed, prices decline again near the latest higher low (the one built before the head was formed) and mark a new equal low near the latest one. From here, prices try to reach new highs but never reach the last high.

Therefore, here the right shoulder gets formed. Compared to the previous high, a new lower high gets formed, which then is the right shoulder and completes the head and shoulders pattern.

The pattern is confirmed once the lows of the head and shoulders pattern are broken to the downside. Often, the market breaks down and retests the previous support, and then the price level becomes resistant.

6. Pin Bar Pattern

Another commonly seen trend change signal pattern is a simple candlestick pattern referred to as a pin bar or a hammer candlestick. The key characteristics of a pin bar candlestick, which make it very easy to identify, are a very short candlestick body and a very long candlestick tail (at least 2-3 times longer than the body).

The image below shows what a bullish pin bar (signaling market change to an uptrend) and bearish pin bar, or hammer, candlestick (signaling market change to a downtrend) look like.

Many traders use the pin bar pattern as a signal to exit an existing profitable trade, but it can also be used as a market entry point to try to get in very near the beginning of a new trend.

7. Double Tops and Double Bottoms

Another of the easiest to spot and most reliable market reversal patterns is the double top or double bottom pattern. This pattern’s name makes it pretty much self-explanatory:

• A bearish pattern that signals the end of an uptrend forms when the price makes a new high and then slightly retraces to the downside. After that, it moves back up to the trend high level but without breaking significantly above it, and then turns back to the downside and continues well below the low of the previous retracement from the trend high price.
• A double bottom is just the double top in reverse: a downtrend low, small upside retracement, a re-test of the trend low, followed by price turning back to the upside and moving higher than the previous upward retracement from the trend low.

8. Separating Line Pattern

The separating line pattern is a continuation pattern created by two successive candlesticks. Here’s what it looks like occurring in an uptrend, signaling a likely continuation of the trend:

• Candlestick number one opens at a price higher than the previous candlestick’s close (in other words, gaps higher at its open) but then forms a long candlestick body that closes near its low and at a price below the previous candlestick’s close.
• Candlestick number two also features a gap higher at its opening price. A gap which is usually around or even a bit above the previous candlestick’s opening price, but instead of retracing downward as the first candlestick did, it moves significantly higher, forms a long candlestick body, and closes near its high

As with other price action patterns, the bearish version of the pattern, signaling the continuation of a downtrend, is just a reverse of the bullish version of the pattern.

9. Gap Up and Gap Down Patterns

Gaps are a candlestick price action trading pattern that can either signal a trend reversal when the gap that forms moves price in the opposite direction of the current trend or trend continuation if the gap advances price further in the same direction as that of the existing trend.

The gap price action pattern is just what it sounds like: A candlestick gaps above or below the previous candlestick’s price action at its open, the gap remains in place (price doesn’t retrace back into the area of the previous candlestick’s price action), and price continues moving in the direction of the gap, typically forming a long candlestick body with a close near the high (with a gap up) or the low (with a gap down) of the candlestick.

The gap and go strategy is often used by traders to make profits within the first 15 minutes of trading.

Types Of Chart Patterns

Prices can rise, fall or go sideways, and so do chart patterns.

Trend Continuation Pattern

Trend continuation patterns are a synonym for bullish patterns, where an established price trend consistently develops to the upside making one new high by the other. While the uptrend continues, stock consolidations appear in between since a trend always consists of movements that happen in waves.

The higher time frame always defines the primary trend direction, while in the lower time frame, a trend reversal might already happen. It is important to focus on one time frame when determining a trend and work from the higher time frame to the lower when analyzing trends.

So, if you are a swing trader, your main time frame could be the 60-minute chart. To determine your main trend, you always stay on the 60-minute chart for trade entry and exit signals, but you can use a lower time frame to optimize the timing if you want to include multi-time-frame analysis in your trading style.

The more complicated you plan your trades, the more mistakes can be made since different time frames can indicate different trend signals and consist of different chart patterns with sometimes opposite meanings.

Nothing speaks against staying in one chart time frame and sticking to it. As an investor, you can use the daily time frame and only use this one for all trade analysis and management.

Trend Reversal Pattern

Trend reversal patterns mark the end of an established trend and reverse it in the opposite direction. For example, if higher lows and higher highs formed the price of an asset for a long time at an accelerated pace, the trend becomes likely to change in the opposite direction.

However, a trend change needs confirmation. Otherwise, the investor would trade against the herd. To confirm a trend change, lower lows and lower highs must be formed after a long sequence of higher highs and higher lows. The more lower highs and lower lows are formed, the more likely it is that the pattern confirms. Otherwise, it could be a consolidation before the primary trend continues.

Trend reversals in day trading are more difficult to spot since the trends are short-dated. Still, they are part of technical analysis when day traders look at charts trying to catch the bottom to go long or the high to go short. Trading trend reversals is typically more complicated than trend continuations.

Price Action Patterns Summary

Price action patterns are integral to technical analysis platforms and can be detected automatically if needed. For day trading, small time frames are used to identify patterns, while investors focus on daily time frames or even the weekly or monthly chart.

Other popular price action trading patterns are the 3 bar play pattern, ABCD pattern and short squeeze.

Trendlines help visualize bullish and bearish patterns (basically all price patterns.) Bullish and bearish flags, for example, are easier to identify when the pole and flag get highlighted with trendlines.

Many different patterns indicate an upward trend or a downward trend. When looking for the best day trading patterns, the trend continuation patterns are the clear favorites since day traders only have to identify the lower high or breakout zone and know where to set the stop loss and profit target.

A bearish reversal pattern or other patterns like triangle patterns with a symmetrical triangle, the wedge pattern, or descending triangle pattern are harder to spot in short time frames.

It typically helps day traders to visualize prices by using candlesticks. A candlestick patterns cheat sheet helps to identify trading patterns easier. Trading volume should always be applied to the chart, and technical indicators such as VWAP can also help find the right entry point and profit target.