Price Action & Patterns

Learn how raw price movements and chart patterns reveal market sentiment.

What is Price Action?

Price action refers to the movement of a security’s price plotted over time.
Traders analyze this raw price data to interpret market sentiment without relying on lagging indicators.
It is the foundation of technical analysis, offering direct insight into supply and demand dynamics.

Common Price Action Patterns

Price action manifests through recurring structures that traders use to anticipate moves:

Why Patterns Matter

Patterns help traders anticipate potential reversals or continuations in trends.
They are visual representations of collective trader psychology and market sentiment.
When combined with volume, momentum indicators, and higher‑timeframe context, they become powerful tools for decision‑making.

Limitations

Patterns are not foolproof. They can fail due to:

  • Low trading volume
  • Unexpected news events
  • False breakouts

Always confirm with supporting signals and broader market context.

Support & Resistance

Support and resistance are foundational concepts in price action analysis. They represent zones where price tends to stall, bounce, or reverse due to shifts in supply and demand.

Support

Support is a price level where buying interest emerges. When price falls to this level, buyers absorb selling pressure and often cause a rebound.

  • Psychology: Traders perceive the asset as undervalued near support.
  • Common setups: Bullish reversal patterns, Doji or Hammer candles, volume spikes.
  • Risk management: Stop‑losses are often placed just below support.

Resistance

Resistance is a price level where selling interest dominates. When price rises to this level, sellers take profits or short the asset, often causing a reversal.

  • Psychology: Traders perceive the asset as overvalued near resistance.
  • Common setups: Bearish reversal patterns, Gravestone Doji, engulfing candles.
  • Risk management: Stop‑losses are often placed just above resistance.

Static vs Dynamic Levels

  • Static levels: Horizontal zones based on historical highs/lows.
  • Dynamic levels: Moving averages, trendlines, VWAP.

Confirmation

  • Look for multiple touches of a level.
  • Watch for volume confirmation and rejection candles.
  • Combine with momentum indicators or higher‑timeframe structure.

Visual Example

Support and Resistance zones

Trendlines

Trendlines are diagonal lines drawn across price charts to highlight the prevailing direction of market movement.
They help traders visualize momentum, structure, and potential turning points.

Types of Trendlines

  • Uptrend Line: Connects higher lows, indicating bullish momentum and rising demand.
  • Downtrend Line: Connects lower highs, signaling bearish pressure and declining interest.
  • Sideways Trendline: Connects relatively equal highs and lows, marking consolidation zones or range‑bound markets.

How to Draw Them

  • Use at least two swing points (lows for uptrend, highs for downtrend).
  • Extend the line forward to project potential future support or resistance.
  • The more touches a trendline has, the more reliable it becomes.

Market Psychology

  • Respecting a trendline shows confidence in the prevailing trend.
  • Breaking a trendline often signals shift in sentiment or trend exhaustion.

Confirmation Techniques

  • Watch for volume spikes on trendline breaks.
  • Combine with candlestick patterns (e.g., Engulfing, Doji) near the line.
  • Use momentum indicators (RSI, MACD) to confirm divergence or continuation.

Common Mistakes

  • Forcing trendlines to fit a bias.
  • Using only one point to anchor a line.
  • Ignoring timeframe context — a trendline on a 5‑minute chart may not hold on a daily chart.

Practical Use

  • Entry points: Buy near rising trendline support, sell near falling trendline resistance.
  • Stop placement: Just beyond the trendline to define risk.
  • Trend reversal: A clean break with follow‑through often signals a new phase.

Visual Example

Trendline examples

Candlestick Patterns

Candlestick patterns provide insight into short‑term market psychology by showing how buyers and sellers interact within a single session.
They are especially powerful when combined with support, resistance, and trendline analysis.

Doji Candlesticks

Doji candlesticks form when the open and close are nearly equal, signaling indecision in the market.

Types of Doji

  • Classic Doji: Balanced indecision, often seen at inflection points.
  • Dragonfly Doji: Long lower shadow, showing rejection of bearish pressure.
  • Gravestone Doji: Long upper shadow, showing rejection of bullish pressure.

Market Psychology

  • Dojis highlight uncertainty and potential trend reversals.
  • They gain significance when appearing at support/resistance zones or after strong directional moves.

Visual Example

Doji candlestick patterns

Hammer

A Hammer candlestick forms when price drops significantly during a session but recovers to close near its opening level.
This creates a small body near the top of the range and a long lower shadow — a clear signal that sellers were overpowered by buyers.

Key Characteristics

  • Small body near the top of the candle range
  • Long lower wick at least twice the size of the body
  • Little to no upper wick
  • Can be green (bullish) or red (bearish) — context matters more than color

Market Psychology

  • Sellers dominate early in the session, driving price down.
  • Buyers step in aggressively, pushing price back up.
  • Signals potential bullish reversal, especially near support zones.

Best Context

  • Appears after a downtrend or sharp pullback.
  • Gains strength when confirmed by:
    • Volume spike
    • Bullish follow‑through candle
    • Support level or trendline bounce

Common Traps

  • Hammer without confirmation can lead to false reversals.
  • Avoid interpreting Hammers in sideways or low‑volume markets.

Visual Example

Hammer candlestick pattern

Engulfing

An Engulfing candlestick pattern occurs when a larger candle completely covers the body of the previous one.
It reflects a decisive shift in market sentiment, where one side (buyers or sellers) overwhelms the other.

Key Characteristics

  • Consists of two candles:
    • The first candle is smaller, showing weaker momentum.
    • The second candle is larger and fully engulfs the body of the first.
  • Can be Bullish Engulfing (green candle overtakes red) or Bearish Engulfing (red candle overtakes green).
  • Shadows (wicks) may vary, but the body engulfing is the defining feature.

Market Psychology

  • Bullish Engulfing: Sellers push price down initially, but buyers step in strongly, reversing momentum.
  • Bearish Engulfing: Buyers push price up initially, but sellers overpower them, signaling potential reversal.
  • Represents a clear power shift between market participants.

Best Context

  • Bullish Engulfing: Appears after a downtrend or pullback, often near support zones.
  • Bearish Engulfing: Appears after an uptrend or rally, often near resistance zones.
  • Stronger when confirmed by:
    • Volume spike
    • Follow‑through candle in the same direction
    • Alignment with broader trend or key levels

Common Traps

  • Engulfing patterns in sideways markets can produce false signals.
  • Small engulfing candles with weak volume may lack conviction.
  • Over‑reliance without confirmation can lead to premature entries.

Visual Example

Engulfing candlestick pattern

Chart Patterns

Chart patterns are larger formations on price charts that signal potential reversals or continuations in market trends.
They reflect collective trader psychology and often mark key turning points.

Head & Shoulders

The Head & Shoulders is a reversal pattern that signals a potential change in trend direction.
It consists of three peaks: a higher middle peak (the “head”) between two lower peaks (the “shoulders”).

Key Characteristics

  • Left shoulder: Price rises, then falls.
  • Head: Price rises higher than the left shoulder, then falls again.
  • Right shoulder: Price rises but fails to exceed the head, then declines.
  • A “neckline” connects the lows of the shoulders.

Market Psychology

  • Buyers push price up, but momentum weakens at each peak.
  • The break below the neckline confirms sellers have taken control.
  • Often signals a bullish-to-bearish reversal.

Best Context

  • Appears after a sustained uptrend.
  • Stronger when confirmed by volume on the neckline break.

Common Traps

  • Premature entries before neckline break.
  • Misidentifying uneven shoulders as valid patterns.

Visual Example

Head and Shoulders chart pattern

Double Top / Double Bottom

Double Tops and Double Bottoms are reversal patterns formed when price tests a level twice but fails to break through.

Key Characteristics

  • Double Top: Two peaks near the same level, followed by a decline.
  • Double Bottom: Two troughs near the same level, followed by a rise.
  • The neckline (support or resistance) is key for confirmation.

Market Psychology

  • Double Top: Buyers fail to push price higher on the second attempt, signaling weakness.
  • Double Bottom: Sellers fail to push price lower on the second attempt, signaling strength.
  • Confirmation comes when price breaks the neckline.

Best Context

  • Double Top: Appears after an uptrend, signaling bearish reversal.
  • Double Bottom: Appears after a downtrend, signaling bullish reversal.

Common Traps

  • Mistaking normal consolidation for a double pattern.
  • Entering before neckline confirmation.

Visual Example

Double Top chart pattern Double Bottom chart pattern

Triangles

Triangles are continuation or reversal patterns formed by converging trendlines.
They represent periods of consolidation before a breakout.

Key Characteristics

  • Ascending Triangle: Flat resistance with rising support. Bullish bias.
  • Descending Triangle: Flat support with falling resistance. Bearish bias.
  • Symmetrical Triangle: Converging support and resistance. Breakout can go either way.

Market Psychology

  • Price compresses as buyers and sellers battle.
  • Breakout direction reveals which side gains control.
  • Volume often expands on breakout.

Best Context

  • Appears during consolidation phases.
  • Stronger when aligned with the prevailing trend.

Common Traps

  • False breakouts with low volume.
  • Entering too early before breakout confirmation.

Visual Example

Triangle chart patterns