Price action patterns are identifiable patterns we can see on the chart and can help us to determine if the market is likely to reverse, it can also help us to determine where to enter trades or where we should be exiting trades we are already in.
Price action patterns tend to be larger from 10 to 20 candles unlike candlestick patterns, for example shooting star one candle or an engulfing chart pattern is a combination of two candles.
So there is one price action pattern that stands alone in comparison with others and that is double bottom and double top price action.
The first question is how to identify these two patterns (they are opposite to each other, so we treat them as one)
Rules for Double Bottom Chart Pattern
- We need to see the first bottom and then the pullback, so we are going to place a box (area of support) from the lowest body to the lowest low of this first low.
- Next we want to see the market to retest this area, a candle can close inside of this area, a wick can also pass this area, and also the wick of a candle can touch the box, all of this would be considered a valid double bottom.
- If the candle closes and the wick doesn't touch the area, it wouldn’t be considered double bottom or if the candle passes the area and closes also wouldn’t be considered a valid double bottom.
- Next thing we want to see is the breaking of the neckline.
Now some traders prefer to place long trade just after the neckline breaks, but some prefer to wait until the price pullback to that neckline and then wait for the signal (buying pressure, which in this case can be a green candle) only then place a trade.
- Take profit would be placed on our next level of resistance
- Stop loss would be placed 1xATR below the low of the closed green candle
This second approach allows to place lower stop loss and higher take profits.
Note: to add a little more accuracy to this price action pattern some traders suggest using this pattern when it aligns with the levels of major structure.
So with these patterns, we had lower lows and lower highs coming, then the market created a double bottom, and next followed market reversal.
