Candlestick pattern is one of the basic and indispensable tools in Price Action trading. Candlestick charts were created around 1724-1803 by a Japanese named Munehisa Homma. It is a type of price chart that shows the volatility of a particular asset class.
Followers of Price Action analysis will use candlestick patterns to predict the next direction of the market movement. In this article, I will show you how to use 5 types of candlestick patterns to help Price Action traders make profits comfortably.
Three Bar Reversal pattern
In order, the Bullish Three-Bar Reversal pattern will be as follow.
- 1 bearish candle
- 1 candle has a lower high and a lower low than the previous candle
- 1 bullish candle with a higher low and close higher than the high of the previous candle.
On the contrary, Bearish Three-Bar Reversal pattern will be as follow.
- 1 bullish candle
- 1 candle has a higher high and a higher low than the previous candle
- 1 bearish candle with a lower high and a lower close than the previous candle.
In short, these 3 candles form a V-shaped bottom reversal. When moving to a smaller time frame, this candlestick cluster can be seen as a head and shoulders (reverse) pattern.
How to trade with the Three Bar Reversal pattern in Olymp Trade
Open an UP order when the highest high of the pattern is broken from below.
Open a DOWN order when the lowest low of the pattern is broken from above.
Three Bar Pullback pattern
For the bullish pattern, there will be 3 consecutive small bearish candles appearing in the uptrend when the price retraces. With a bearish pattern, 3 consecutive small bullish candles are appearing in the downtrend when the price pulls back.
When the market has a trend, a price retracement in the opposite direction consisting of 3 small candles is a sign that the market is about to end the retracement and return to the mainstream.
How to trade with the Three Bar Pullback pattern in Olymp Trade
In an uptrend, wait for a retracement to appear 3 consecutive small bearish candles followed by 1 bullish candle. Place an UP order as soon as the top of this bullish candle is broken.
In a downtrend, wait for a retracement to appear 3 consecutive small bullish candles followed by 1 bearish candle. Place a DOWN order as soon as the bottom of this bearish candle is broken out.
Inside Bar pattern – Soul of Price Action
Inside Bar is a 2-candlestick pattern, which is structured in the form of a “candle within a candle”. With 1 large candle with a long body, fully embracing the remaining candle, like a mother holding a child. It has a lot of variations as well as being the most difficult to use, causing traders to sometimes fall in a “trick” created by them.
An Inside Bar must be completely inside the previous candle, called the Mother Bar. In other words, the Inside Bar candle must have a lower high and a higher low than the previous candle.
The Inside Bar shows a leveling off, confusion, not knowing where to go of the price. After the Inside Bar is broken, the price can move very strongly in the broken direction.
Note: The Inside Bar is just a pause of price action, not a reversal.
How to trade with Inside Bar in Olymp Trade
If you have a trend continuation trading style, enter an UP order at the Mother Bar top when the price breaks through it in an uptrend. Enter a DOWN order at the Mother Bar bottom when the price has broken out of the bottom in a downtrend.
If you prefer a reversal trade at an important price zone, do the opposite of the above method. That is to open an UP order when the price surpasses the highest peak of the Mother Bar located at the support level. Conversely, enter a DOWN order when the price breaks out the Mother Bar candle at the resistance level. But also follow the rule of only trading when the Inside Bar is broken.
Outside Bar pattern
Outside Bar is the counterpart of Inside Bar. Its length must cover the entire previous candle. That means it must have a higher high and a lower low.
Inside Bar and Outside Bar candles do not need to distinguish colors. But if the colors of the 2 candles are opposite, it will be more reliable.
According to Price Action analysis, this is a short-term extension of price action. It shows strength on both sides. In most cases, it is not certain whether the bulls or the bears have the upper hand.
How to trade with Outside Bar pattern in Olymp Trade
Trade false breakout of outside bar. Wait for a Bearish Outside Bar to break down and a bullish candle appears. Then open an UP order on top of that bullish candle when the price returns to backtest.
Conversely, wait for a Bullish Outside Bar to break out and a bearish candle. Then place a DOWN order below the lowest low of that bearish candle.
If the Outside Bar closes near the bottom or top, enter the order in the right direction of the breakout because then the Outside Bar will not be False Break.
NR7 Pattern – Explosion of Price Action
The NR7 pattern requires 7 candles. If the last candle in this series of 7 candles has the shortest length, the whole cluster is called NR7. The range here is the length from the highest high to the lowest low of a candle.
Similar to the Inside Bar, NR7 shows that market volatility is decreasing. This downward volatility occurs in 7 candles instead of 2 like Inside Bar. Hence NR7 presents a stronger signal of accumulation.
When NR7 appears, it shows that the market is waiting for a price breakout. So it’s better to stay out.
How to trade with NR7 candlestick pattern in Olymp Trade
If the trend is up, place an UP order at the top of the last candle when the price backtests.
If the trend is down, place a DOWN order at the lowest low of the last candle when the price backtests.
So we have gone through all the 5 easiest Price Action patterns to make profits in Olymp Trade. One important thing that people need to know is that these patterns alone are not profitable.
A system that only relies on candlestick patterns to trade will fail in most cases because of the lack of 2 factors. These are the position of the candlestick pattern and the current trend. We will use the candlestick pattern as a trigger for a trade while all other conditions for Price Action are satisfied.
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