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Day trading can be a challenge even for the most seasoned traders. The market is constantly moving and timing profitable trades can sometimes seem impossible. However, experienced traders have a wide array of technical tools at their disposal and look out for technical patterns on the price chart to anticipate future movements.
Some of these chart patterns may be easy to spot, while others can easily get mixed up in the dynamics of the market. This is especially true for Forex traders, as the FX market is exceptionally liquid and prices move at breakneck speeds, which can make day trading more rewarding, but also riskier.
Despite this, with solid MT5 technical indicators and an eye for spotting patterns on a price chart, traders can quickly identify the variables necessary to indicate a profitable trade scenario and act on it as fast as possible.
If you are a beginner trader and would like to know more about day trading patterns and which ones you should be looking out for, then this investfox guide is for you.
Day trading patterns are chart patterns that occur during intraday trading sessions. These patterns can provide traders with valuable information about market sentiment, potential trend reversals, and potential entry and exit points for trades.
Some notable day trading patterns to look out for include:
Day trading patterns are very significant because they provide traders with a structural method of analyzing market movements to make quick trade decisions and take advantage of profitable opportunities. However, it must be noted that no single trading pattern can guarantee a profitable trade and traders must use multiple indicators to find high probability patterns.
Bullish and bearish flag patterns typically show a sharp price movement towards either direction, which is followed by a period of consolidation, when the price trades sideways, before assuming the prior direction once again:
Although bullish and bearish flag patterns are frequent occurrences on the price charts of many currency pairs, they are by no means guaranteed. The core assumption behind bullish and bearish flag patterns is that the price will resume its original direction after the consolidation period has ended, which is not always the case. Therefore, flag patterns are not always reliable and traders should look for signs in the broader trend to decide whether the price will resume moving in the same direction as it did before consolidation.
The head and shoulders pattern is another popular technical pattern that occurs when a price chart makes three “peaks”, with the middle peak (the head) being higher than the other two (shoulders).
The pattern fully forms once the price rises to the left shoulder, drops down, rises highest over the head, drops down again, and rises again to the right shoulder. Once the price drops below the support level connecting the two shoulders, the pattern has been concluded.
In general, the head and shoulders pattern signals a trend reversal, as it shows that the buying pressure causing the uptrend is decreasing, and the selling pressure is increasing. The break below the support level confirms that the trend has reversed, and traders will often take a short position to profit from the expected price decline.
A variation of the head and shoulders pattern, the inverse head and shoulders, is used to identify a reversal from a downturn. The inverse has the same three peaks, but the middle one is lower than the other two. The pattern is formed when the price falls to the left shoulder, rises to a high, falls again to the head, rises for a second time, and falls down to the right shoulder.
The pattern is complete when the price rises above the resistance level connecting the two shoulders.
The cup and handle is a bullish continuation pattern that is often used to identify buying signals.
The pattern is called so, due to its appearance on the price chart, representing a cup with a handle, with the cup being a curved bottom and the handle being a short period of consolidation that follows the cup pattern.
The pattern is formed when the price falls to create the left side of the cup, then rises to create the top of the cup, and falls again to create the right side. The form resembles a “U” shape on the chart. Afterward, the handle is formed by a small consolidation period, where the price moves sideways before breaking out above the resistance level formed by the top of the cup.
The cup and handle is considered to be a bullish continuation pattern because it suggests that the price will continue to rise after the breakout from the handle pattern. It shows that the selling pressure has been exhausted, and buyers are now entering the market.
To confirm the pattern, traders will often look for high trading volumes during the breakout moment.
However, it is important to note that the cup and handle pattern alone may not be enough to confirm a buy signal and should be used in conjunction with other technical indicators.
Double tops and double bottoms are trend reversal technical patterns that are commonly viewed on price charts.
These patterns are considered to be more reliable, as they depict that the price has failed to break through a significant price level twice, indicating a shift in momentum.
Each of the patterns is complete once the price breaks through the support or resistance level, which can be viewed as a sell signal in case of a double top, and a buy signal for a double bottom pattern.
A triangle pattern is a chart pattern that is used to signal a trend reversal or continuation. It is formed when the price of an asset moves in a narrowing range, creating a triangle shape on a chart.
There are three distinct types of triangle patterns:
Triangle patterns are considered reliable indicators of trend continuation or reversal because they show that the buying or selling pressure is becoming increasingly weaker and that a significant price move may be imminent.
Day trading patterns can be important indicators of trend reversals and continuations, which forms the basis of most decisions made by day traders. However, these patterns are not perfect and will not always generate foolproof buy and sell signals.
Some notable day trading patterns include:
While day trading patterns and technical indicators are not the same, chart patterns can be used in conjunction with technical indicators to confirm the validity of a trend reversal/continuation and the buy/sell signal.