There are many different day trading patterns used in intraday trading on Forex.
In this article, we will analyze popular patterns for stocks, which can also be applied to various financial instruments, for example, currency and cryptocurrency pairs. Day traders often use them when trading with leverage on the derivatives market. With knowledge about these tools, you will be able to identify market entry points and benefit from various situations that develop in price charts.
The article covers the following subjects:
What is day trading?
Day trading means trading financial instruments within the trading day. With day trading, open positions are not carried overnight, but rather closed within one trading day.
The analyzed time period depends primarily on the day trading strategy. Successful traders do not recommend using timeframes less than 15 minutes.
There are two types of day trading:
Scalping uses timeframes from 1 to 30 minutes.
- News trading is intraday trading, in which traders take into account news factors in addition to technical analysis. Experienced traders know how world events affect the market and take them into account. The timeframes suitable for this type of day trading are 15 minutes, 30 minutes and one hour.
Why Are Chart Patterns Important
Chart patterns are important in trading because they are closely intertwined with the psychology of price action. Price chart analysis first appeared in the 17th century.
It is more convenient to analyze price patterns in a candlestick type of chart, since Japanese candlesticks provide more information: price opening and closing, price movement high and low. It is important not to confuse price pattern analysis with candlestick analysis, which is based on assessing the appearance of one candlestick.
As a rule, chart patterns are cyclical and repeat the movement, forming patterns in the form of figures. Based on these patterns, a professional trader and a beginner can predict further price movement and open profitable trades, setting clear goals for this movement.
Examples of price charts are such stock patterns as double bottom, double top, head and shoulders, inverted head and shoulders, bullish and bearish wedge, flag, triangle, and others.
How Forex Chart Patterns Work
Forex graphic patterns are models that traders use to determine the direction of price dynamics based on its movement in the past. The main purpose of graphic patterns is to provide the trader with information for opening a short or long position. Based on statistical and graphical data, the trader aims to do profitable trading.
How to Read Chart Patterns
Graphic patterns are easy to identify with the help of Japanese candlestick, bar and line figures. There are two types of patterns in graphical analysis:
1. Reversal bearish and bullish patterns:
head and shoulders, inverted head and shoulders;
double top and double bottom;
rising wedge in an uptrend and others.
2. Trend continuation patterns:
rising wedge in a downtrend;
falling wedge in an uptrend;
bearish and bullish rectangle”;
bearish and bullish pennant;
symmetrical, ascending, descending triangle and others.
10 Common Day Trading Patterns
In this section, we will analyze the top 10 day trading patterns that appear most often in the chart when trading intraday.
Cup and Handle
This chart pattern occurs on various timeframes and is suitable for intraday trading. The pattern can be found in almost all financial instruments.
The cup and handle pattern is a continuation of an uptrend, however, it can also be a bearish reversal pattern.
In this fifteen-minute EURUSD chart you can see an example of the developing cup and handle pattern. In the current situation, it was possible to open a trade after the pattern was completely formed and the broken resistance level was retested. The picture shows that the resistance level became a support level, and a bullish hammer candlestick pattern has formed above it. Exiting the handle was a buy signal. The price movement is calculated from the bottom of the cup to the resistance level or higher. The stop loss should be placed below the newly formed support line.
The appearance of triangle patterns in the chart makes it difficult to predict the price movement, since there are three types of this pattern.
The formation of a symmetrical triangle looks like the narrowing of price highs and lows. In the current case, it is difficult to predict the movement of the quotes. There is a risk of bearish and bullish traps, which is why it is important to wait for the triangle to be confirmed up or down and the price to consolidate higher. It is advisable to wait until the price tests the broken level.
Price movement implies a symmetrical increase or decrease in quotes.
In the 30-minute UKBRENT price chart, there is a formation of a symmetrical triangle. You can see that there were attempts to trap both bears and bulls. In the current situation, before making a decision, wait for the breakdown of the triangle up or down. Stop loss should be placed in the middle of the narrowing channel. For a more accurate picture, candlestick analysis should be used.
The bears made an attempt to break through the lower border of the triangle, however, the bulls repelled the attack, thus forming a bearish trap of candle squeeze.
In this case, you need to wait for the final consolidation of the price, and then open a trade.
The ascending triangle pattern has a clear horizontal resistance line. Upon reaching it the quotes reverse, forming rising lows. After consolidation, the asset breaks through this resistance level, and the price continues to rise by the height of the triangle.
This 30-minute BTCUSD chart is an example of the formation of an ascending triangle.
The picture below shows the formation of a resistance level and rising lows, after which there was an impulse breakout of quotes and price consolidation above the resistance. After retesting the level, there was an opportunity to open a buy position with the target at the height of the formed triangle. Stop loss in this case is placed below the broken resistance level at the distance of the low of the impulse candle.
The descending triangle pattern is the opposite of the ascending triangle pattern. In this figure, there is a clear support level and a smooth decrease in highs. As a result, the lower trend line is broken, and the price continues to rapidly decline by the height of the triangle.
Below, you can see the descending triangle pattern in the 15-minute chart of the XAUUSD. Here, the formation of the pattern is clearly visible. Quotes were prevented from moving below the support level several times. At the same time, there is a decrease in the highs of the instrument. After the consolidation of the asset, the support level was broken, and the price went down. A short sale can be made only after the price consolidates below the support line. Take profit should be placed by measuring the height of the triangle, as in other types of this pattern. Stop loss in this case is placed above the support level.
The flag is a trend continuation pattern. There are two types: bullish and bearish flag.
The price constructs a flagpole, then comes the flag and impulse breakdown of quotes when the price leaves the “flag by the height of the flagpole.
This pattern is suitable for intraday trading on 5, 15 or 30-minute timeframes and is one of the best figures for day trading.
The 30 minute USDJPY chart below shows a clear formation of bullish and bearish flags. After active growth in the bullish flag and decline in the bearish flag, quotes are consolidated in a descending or ascending rectangle, which forms the pattern. Buy or sell only after the price has exited the pattern. The stop loss order should be placed just below or above the flag itself, depending on whether it is bullish or bearish. The target for this pattern is equal to the height of the flagpole.
The falling wedge pattern resembles the triangle pattern, so novice traders often make mistakes when opening trades. The main difference between a falling wedge and an ascending or descending triangle is the downward movement of support and resistance lines, while a triangle has a clear horizontal line of support or resistance. As part of risk management, price movement must be defined as the height of the wedge itself. However, with a massive increase in trading volumes, quotes may go even higher.
You can see an example of the falling wedge below in the 15-minute Apple Inc stock chart.
The picture shows that the price was gradually decreasing after the main bullish trend, while the lows and highs of the price were declining. After the narrowing of the trading channel, there was an impulse breakdown of quotes upwards. After waiting for the re-testing of the broken resistance level, we could open a buy trade with the target higher by the level of the falling wedge height. Stop loss in this case should be set at the lower border of the trading channel.
This pattern is similar to the cup and handle pattern. The difference is the absence of a handle.
The formation of this pattern occurs in a downtrend, when the forces of the bears run out, and the price has reached a local bottom in the chart and the bulls have become more active. After the consolidation of the asset in the side channel, the quotes break through the neckline level upwards and move in a corrective upward dynamics to the height of the formed pattern.
The formation of a rounded bottom pattern is demonstrated below in the 30 minute XAGUSD chart. After the quotes moved down, the asset found a local bottom, followed by the consolidation of the instrument. Then there is an impulse breakout of the price upwards and the closing of the candle above the neckline level.
We could open a buy trade with the opening of the second candle.
The target of the movement is indicated as the height from the support level to the resistance level. Stop loss in this case should be set below the neckline level.
The double top pattern is often seen in lower and higher time frame price charts.
The asset is forming a double top while trading in a channel between the support and resistance levels. After an unsuccessful attempt to break through the resistance level for the second time, the quotes turn back and overcome the neckline – the top support level. After a successful breakthrough down and retesting of the newly formed resistance, the price moves further, completing the formation of the pattern.
You can see a great example of this pattern in the 30-minute USCRUDE chart below.
The picture shows the formation of two peaks and an impulse breakout of their support level. Further, there is a consolidation of the instrument below and re-testing of the new resistance. The entry point is below the support level. Next, a conservative target is calculated according to money management rules.
The target size is equal to the height from the top support level to the resistance level. Stop loss in this case should be set above the support level according to risk management.
The double bottom pattern is the opposite of the double top pattern signaling the beginning of a new trend. As a rule, it occurs in the local base of the asset and tests the support level twice. The development of this pattern involves a breakdown of the resistance level, after which the quotes test the broken resistance. After that, the price bounces higher to the level of the side channel height, which formed between the support and resistance levels.
You can see an example of this pattern in the 30 minute ETHUSD chart.
The picture below shows the formation of the pattern. After the formation of the second bottom, the asset rushed towards the resistance, which it overcame and tested again, consolidating higher.
We could make a buy trade after the instrument consolidated above the resistance level. The price move is equal to the height of the side channel between the support and resistance levels.
The trade could be closed at two points. Stop loss in this case should be placed lower, in accordance with the risk management rules.
The hammer pattern belongs to candlestick analysis and is characterized as a bullish reversal signal. Hammer is one of the best patterns for intraday trading. This pattern forms at a local bottom and signals buyer dominance in the market. When trading this pattern, a trader needs to focus on the market situation as a whole.
If before the appearance of the hammer the downward movement was strong, there’s a high probability that after the pattern, the upward movement will be just as strong. In addition, when trading this pattern, you need to start from support and resistance levels in order to determine the price dynamics more accurately.
The color of the hammer is not important, but the very structure of the bar is. However, a green candle indicates stronger buying power. The name of this pattern comes from its shape – a small body and a long wick down that looks like a hammer.
In the 15-minute CADJPY chart, we see a signal within the day.
The appearance of a hammer means that at this mark there is a support level for the asset, below which bears cannot go. The resistance level is where the decline started. The downward movement was strong, therefore, the recovery implied a strong upward movement.
In the picture below, a series of bullish hammers formed, after which the quotes reversed. A buy trade could’ve been made after the formation of the second hammer. Stop loss should be placed just below the low of the pattern.
Head and Shoulders
The head and shoulders pattern appears in the charts less frequently than other patterns. It forms three vertices, one of which is located in the middle above the other two. At the base of these peaks is the neckline – the support level. Sell trades should be opened only after the formation of the right shoulder, the breakout of the neckline level by quotes from the top down and the consolidation of the price lower. In addition, the right shoulder should be slightly higher than the left one, but not always.
In the event of a breakout, a short-term upward correction is possible to test the newly emerged resistance.
The price movement is calculated as the distance from the neckline level to the head.
In the 15-minute BTCUSD chart below, there is a fully formed classic head and shoulders pattern.
We could sell the instrument after the price fell below the neckline and the quotes consolidated below this level. Take-profit could be set by measuring the distance from the level of the neck to the level of the head. Stop loss in this case should be placed just above the broken support level.
The wedge pattern has several varieties. This pattern can form in both uptrends and downtrends.
Rising wedge in uptrends and downtrends signals an imminent reversal of the quotes down. The falling wedge in both cases indicates an imminent breakout of the upper trend line. When opening trades based on this pattern, you need to focus on the formation height.
You can see an example of the formation of this pattern in the 30-minute GBPAUD chart. The picture below shows that when the trading channel narrowed and the wedge pattern formed, there was an impulse breakdown of the price to the level of the formation height of this pattern.
Only enter after a confident consolidation of the price and an increase in volumes. Stop loss in this case should be set above or below the broken level, depending on the type of formation.
The pennant pattern is similar to the flag pattern. The difference between the pennant and the flag is that the former forms a symmetrical triangle. In the case of the flag, the price range of movement is calculated as the length of the entire flagpole. In the case of the pennant, the price movement is equal to the length from the bottom to the beginning of the formation of the symmetrical triangle.
In the 15 minute XRPUSD chart below, you can see an illustration of a bullish and bearish pennant.
In both cases, the price range of the movement is equal to the height from the support or resistance level to the beginning of the formation of a symmetrical triangle.
The entry points in both cases are at the exit of the price from the triangle. Stop loss should be placed above or below the formed pattern, depending on the movement.
Pattern-based trading strategies for short-term and intraday trading
For day trading strategies, you can use all of the above patterns. Recommended time periods for analysis are 5, 15 and 30 minute timeframes. In a short-term trading strategy for 1-2 days, you can use the hourly chart.
Below is a 5-minute EURUSD chart showing a bull flag formation. After determining the price movement based on the flagpole and waiting for the price to exit the pattern, I opened a minimum buy trade of 0.01 lots with a specific target for the instrument. I set a stop loss inside the flag at the point where the growth started. Half an hour later, my trade closed with a profit of $1.62.
After analyzing the 15-minute GBPUSD chart, I identified the formation of the falling wedge, from which a breakout of quotes was expected.
After the price broke through and tested the level, I opened a buy trade of 0.01 lots.
As part of the trading strategy, the target for the instrument was at the distance from the beginning of the downtrend to the beginning of the first upward correction. The stop loss was set as part of the risk management just below the broken level.
Some time later, the trade closed intraday with a profit of 6.52 dollars.
In parallel with two other trades, there was also a buy situation in the 30-minute EURUSD chart. A symmetrical triangle has formed in the instrument. Let me remind you that within the framework of the trading strategy for the symmetrical triangle, the price can go both up and down. Therefore, you must first wait for a confirmation of the breakdown.
In addition, a bullish hammer formed at the base of the triangle before the start of growth, which was additional confirmation of the strength of buyers. The impulse breakout of the triangle formed another confirming pattern – the bullish flag. After waiting for the exit from the flag, I opened a buy trade of 0.01 lots, setting a target equal to the height of the flagpole. The stop loss was placed below the formed flag.
The target was reached 1.5 hours after the trade was opened, and the profit was $3.14.
Best tips for beginner to use patterns in day trading
Day trading is a fairly risky type of income, so before you start trading, try to follow the following tips:
Before you start trading, determine the mood of the market on various timeframes, ranging from 5 minutes to daily charts.
It is recommended to use classic technical indicators such as the RSI, Stoch or MACD in the chart in conjunction with the price action technical analysis method.
After identifying the pattern in the chart, wait for it to fully form and a profitable entry point to appear.
To preserve your capital, it is important to set stop losses and stick to your risk management.
When trading intraday, it is important to monitor the price movement, since a particular instrument is also affected by the news background. Any factor in the world can radically change the direction of the price.
Beware of bull and bear traps. They often appear on lower timeframes, encouraging traders to open losing trades.
Keep calm when trading and refrain from impulsive decisions, otherwise you will lose the deposit.
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This article provides a detailed analysis of intraday trading. It discussed the key points that every trader needs to pay attention to. We have established that it is best to analyze day trading patterns on lower timeframes up to one hour. In addition, the article reviews in detail the technical analysis patterns that can be used for successful trading by closing trades during the day.
In addition, the article discussed trading strategies for some patterns, which were tried in practice.
Price pattern analysis is applicable to various instruments, including currencies, cryptocurrencies, and securities.
You can try your hand at trading on the financial market without risking any money by opening a demo account with LiteFinance for free.
Day Trading Patterns FAQs
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.