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Lesson 7: Forex Falling Wedge Pattern

14 minutes
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Miguel A. Rodriguez
Miguel A. Rodriguez
14 tháng 6 2023
Price action trading is a strategy for predicting market movements by recognizing patterns or 'signals' in an underlying market's price fluctuations.

The price of a share, currency pair, cryptocurrency, or commodity, is essential to trading, as ultimately, it is the shift in price that produces profit or loss. Traders who choose to focus solely on price charts will need to develop a price action strategy that will involve analyzing the pattern or character of how the price of a security or asset behaves in order to ascertain when to enter or exit a position. 

Understanding the mechanics of price action and developing a highly effective price action trading strategy has the potential to be highly profitable. In this article, we explore the techniques and indicators that will help in building this strategy. 

How to use this guide: 

  • Learn the price action methodology step by step 
  • Open a demo account and practice price action trading strategies with virtual funds 
  • When ready open a live trading account and explore a wide range of markets 

What is Price Action Trading? 

Price action trading is a methodology where a trader makes decisions based on the price movement on the charts as opposed to relying on lagging indicators and fundamentals. Price action traders also ignore them and only look at the price history. 

Price Action
Source: CAPEX WebTrader

Price charts reflect the beliefs and actions of all the traders trading the market. For example; if the price has made a sudden large move higher, then the price action charts will clearly show this because all you are looking at is the price movement. 

This movement could have been caused by many different factors, but the underlying reason does not change the fact that the price made a sharp move higher.  

This was created from the bulls (buyers) having control over the bears (the sellers).  

As a price action trader you are creating a clear system so that over a set of trades and after you have taken into account all of your wins and losses, you are making profits. 

Price action allows you to do this and also create a system that suits your personal style. You can trade on many different markets, you can use the small to larger time frames and you can even use price action to scalp the markets. 

Understanding Price Action Trading 

As we go through this post and discuss the different price action strategies, systems, and patterns, there are three things to keep in mind; 

#1: Price Action Discounts Everything 

Price action has been criticized by experts for not following the fundamental factors. As a price action trader, the only thing that you are looking to do is analyze the chart in front of you. For example; the trend, patterns, and potential trade setups. You are trading what you can see in front of you and not what you ‘think’ could happen like with fundamentals. 

 #2: Price Moves Based on Trends 

After establishing a trend, the future price movement will more likely stay in the same direction. Until a trend bends it is your friend and it is often one of the best ways to put the odds in your favor. 

#3: History Repeats Itself 

History does repeat itself. When price action trading you are using chart patterns to analyze the market's movements. Many forms of price action analysis have been used for more than 100 years and they are still relevant today because it illustrates the same patterns in price movements.  

When reading price action charts we are reading trader behavior that is showing itself through patterns. The reason these patterns continue to repeat is that people and traders continue to repeat the same habits when put in similar situations. 

Price Action vs Technical Indicators 

Price action trading is based on the belief that past price history can help predict the future of a market or the potential for a pattern to repeat. Technical indicators are similar in this way. However, when using price action you are reading live price as it is being printed on a chart, whereas indicators are ‘lagging’. 

This means that indicators are using old price information to create the indications you see. For example; a 21-period moving average is using the past 21 periods of price action. Whilst some traders are very anti indicators, often the best systems will come when price action and indicators are combined. The reason for this is because indicators can often help you filter out bad price action, find trends, find strong momentum and even help with profit targets.

Simple Price Action Trading Strategies 

Some of the simplest trading techniques involve using price action. 

The reason is that when price action trading you are simply looking and reading raw price action. From there you can create any system that suits you. Some of the best systems you will find are also the simplest with the clearest rules. 

Simple price action trading systems include: 

  • Price action trend trading 
  • Price Action candlestick trading 
  • Price Action Pattern trading 
  • Combining price action and indicators 

How to Find, Enter and Place Price Action Trades? 

Using simple and repeatable price action triggers that form time and again in the markets can be a great way to find entries into the market. 

These triggers will often get you in at the best time and just as the market is about to reverse, giving you the optimum entry price. 

Why Are Entry Signals so Important? 

Buying and selling a currency pair in order for you to gain profit from the differences between the entry and exit price is your main objective in forex trading, stock trading, or cryptocurrency trading. Buying low and selling high is universal. Some traders spend more time thinking profoundly on entry points, whilst others believe that success sometimes relies on how a trader exits their trades. 

Knowing the value of a currency pair that will appreciate in the future isn’t enough unless you have a clear conception of when the appreciation will occur. 

Remember the saying; “Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime”. 

Just like in online trading, you don’t need to get the signals, but learn how to find them and teach yourself how to actually get profits for a lifetime. Without the mastery of trade timing and good trigger points, you will never make any profits. That’s why a trader uses charts in their daily trading. You can use charts to determine everything that is happening in the financial markets. One of the most useful and common types of charts is the candlestick chart. 

How Can Candlestick Charts Help You? 

It is a type of financial chart that is more visually appealing than the common bar chart, thus making price action easier to interpret and analyze. 

It can also help an investor make wiser buy and sell decisions because of its recognizable patterns. Patterns play a very crucial role in trading, so here’s to a breakdown of the most helpful patterns for your daily trading needs. 

Pin Bar 

Pin bars are one of the most powerful price action patterns as they are easy to recognize which means both professionals and retail traders use them. 

price action pin bar
 

What is a Pin Bar? 

The pin bar (also known as Pinocchio Bar) formation is a reversal setup. It is a one candle/bar formation that has an obvious large tail or shadow either up or down. 

A pin bar is a single candlestick setup that clues price action into potential reversals in the market. It also has an elongated wick that sticks out. There is also a Fake Pin Bar that is different than the normal pin bars. 

Because of the price action, you can now determine the difference between the two. If a long wick sticks out from recent prices then it’s a pin bar, if the long wick does not stick out then it’s not a genuine pin bar, but rather a ‘FAKE PIN BAR’. 

How to Spot the Pin Bar? 

Bearish pin bars form after several bullish candles and have a nose that is higher than the top of the previous candle. The nose must be at least 75% of the candle size and the candle body must be less than 16%. (Vice Versa for a Bullish Pin Bar). 

Price action pin bar
Pin Bar Entries 

The best way to trade in any market is to tradeline with the trend. In a trending market, a pin bar entry signal can offer a better risk-reward with lower risk. 

If the pin bar shows a rejection to lower prices, it’s a bullish pin bar since the rejection shows the bulls or buyers are pushing prices higher. 

Aggressive - High Potential Reward and Risk: 50% Retrace 

This entry involves taking a 50% retrace of the pin bar or other reversal candle wick. 

For this entry, you would be setting a trade entry and waiting for the price to move higher or lower 50% in the opposite direction of where you actually want the price to go for your trade. 

You do this to get a much tighter stop loss and a potentially higher reward payoff. 

Medium Reward / Risk Entry: Entry on Close 

This entry on reversal trade signals involves entering as soon as the price has closed. When the reversal candle such as the pin bar has closed and it meets your criteria, you simply enter the trade. 

Lower Reward / Risk: Entry on Confirmation / Break Higher or Lower 

With this entry type, you are creating a trade entry and waiting for the price to break higher or lower, above or below the pin bars high or low. 

Price is then breaking in the direction that you are looking for price to move. This is lower risk but can create bigger stops that will give you a lower reward. Each entry has its payoffs for potential risk and reward. 

price action pin bar
 

Engulfing Bar 

Engulfing Bars = EB’s, also known as Outside Bars = OBs are one of the most widely used strategies in online trading. EB’s can generate very accurate and reliable signals if identified and understood correctly. 

What is the Engulfing Bar? 

There are two types of engulfing bars:

  • Bullish Engulfing Bar
  • Bearish Engulfing Bar 

price action engulfing
 

Bullish Engulfing Bar (BUEB) 

The bullish candle fully engulfs the previous candle. It can even engulf more than one candle, but to be a valid bullish engulfing bar, it must engulf at least one of the previous candles. 

Bearish Engulfing Bar (BEEB) 

The bearish candle fully engulfs the previous candle. Both Bullish and Bearish Engulfing Bars have a “lower low” and “higher high” like the preceding candle. 

How to Spot Engulfing Bars? 

Looking for the engulfing bar is pretty simple. The candle should completely cover the range of the previous candle, taking out the previous high and low. 

price action engulfing

Inside Bar 

One of the most familiar candlestick patterns is the inside bar. It forms when price trades within the high and low ranges of a previous day. You can call an inside bar a ‘breakout play’. The best IBs are made in trending markets with the direction of the trend. 

What is an Inside Bar? 

The inside bar is formed when the second bar or candlestick is engulfed within the previous bar or candlestick high and low. It is a two-bar price action trading strategy in which the inside bar is smaller and within the high to low range of the prior bar. It can be at the top, middle, or bottom of the bar. 

How to Spot the Inside Bar? 

You can see what it looks like in line with a trending market below. As you can see below it is a down-trending market so the inside bar pattern would be called the inside bar sell signal. 

price action inside bars
 

Here’s another example; this time it’s an inside bar pattern with a trending market. 

In this example, the market was trending higher so the inside bar would be referred to as the inside bar buy signal. 

price action signals
Inside Bar Entry 

Inside bars can be traded both as reversals and market trend continuations. 

The most commonly used entry with the inside bar is to place a buy stop or sell stop at the high or low of the mother bar. This way your entry order is filled when the price breaks out above or below the mother bar to confirm your move and to miss as many false inside bars moves as possible. 

How to Use These Reversals Price Action Triggers? 

Support and Resistance 

In technical analysis, support and resistance levels are the most important concepts to determine long and short trading opportunities. 

Support is a price level where due to a concentration of demand, the price will often turn around and be ‘supported’. Resistance zones are the opposite to support zones and are levels in the market where the price is finding more sellers and less demand; in other words, the price is finding resistance. Resistance zones can be great spots to target bearish reversal trades or to use with your exits. 

If you can recognize the zones of support or resistance on your charts, it will provide both valuable entry and exit points. 

Trend lines 

There are 3 different types of markets. These are the uptrend (higher highs and lows), downtrend (lower highs and lows), and sideways trends (ranging). 

Uptrend trendlines (valleys) are drawn along the bottom of identifiable support areas. And in a downtrend, lines (peaks) are drawn along the top of identifiable resistance areas. 

 

You should not try and make the line fit the market. 

So how can you draw them? It's easy! Locate a minimum of three major points that align higher or lower. 

What are the Stop Loss Strategies Used? 

Market volatility is never-ending. As a trader, the hardest part is to mitigate losses. 

NOTE: Set your own stop losses depending on your individual preferences. 

Below are some of the most popular and commonly used stop-loss strategies. 

Pin Bar Stop Loss Strategy 

You can place a stop-loss behind the tail of the pin bar whether it’s bearish or bullish. As a result, when the price hits your stop loss, the pin bar setup will turn out to be invalid. 

Remember that the market is just notifying you that your pin bar setup was not strong enough, don’t ever think that it’s a bad thing when the price hits the stop loss. 

Inside Bar Stop Loss Strategy 

The inside bar stop-loss strategy gives you two options on where you can place a stop-loss. It can either be behind the inside bars high or low or even behind the mother bars high or low. If you want a lower risk inside bar stop-loss strategy, then it’s behind the mother bars high or low. Just like the pin bar stop-loss strategy, the inside bar setup becomes invalid once hit. 

Confluence Stop Loss Strategy 

Traders often use this kind of setup. With this strategy, you will use support and resistance levels, previous highs and lows, moving averages, trend lines, and channels to find an appropriate stop level. The good thing about confluence stops is that they are often used at obvious price levels in the market. 

Note: If the price repeatedly takes out your stops by just a few points, add more confluence levels or add a little padding to place your stops outside the stop hunting zone. 

Volatility Stop Loss Strategy 

Professional traders often use this strategy because it has the ability to adapt to changing market conditions. If the volatility is high, you can use a larger stop loss for greater swings and you can shorten it when the market calms down. 

In times of high volatility, you should widen your targets to counter the reduced effect on reward: risk ratio. If the volatility is low then you should set closer targets because the price won’t travel as far. 

Final Thoughts 

Use price action patterns for entry according to your own risk tolerance and how aggressive you are as a trader. 

Always remember to use a stop loss and test and always test new strategies on a demo account first. 

We also offer educational resources like CAPEX Academy to help you understand trading and get to know the risks. 

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Miguel A. Rodriguez
Miguel A. Rodriguez
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Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.