The technical analysis world is full of magical bar patterns, price patterns, structure patterns. You can google it and you’ll see various formation candlesticks supposed to predict the reversion of the price.
Here are some examples.
In fact, some of them are really reliable and can be used to predict the price direction under certain conditions. The most important word in the previous sentence is not “some” but “conditions”. Seeing a really strong pattern on a chart adds probability to see the quotes moving in the defined way. However, these raw probabilities, based only on the pattern itself, are not enough.
In order to spot high probability setups, we’ll have to add some other components relying on the inherent price properties.
Before that, I introduce you to the 2 best price patterns in the technical analysis world : the engulfing bar and the pin bar. These have a lot of nickname : outside bar, big shadows, pinocchio bars, hammer bars, kangaroo tails, …
The engulfing bar is technically :
- A bar which has a range including the previous one (or several ones)
- That’s all
The Pin bar is technically:
- A bar which has a wick
- A head which is at least in the top tier of the bar
- The head has to be in the range of the previous bar
Of course, if you jump in a trade for each of these patterns, even on significant S/R levels, you will see your money disappear in a lightning fast speed. There are good, bad and ugly engulfing bar and pinbars. The work of the trader will be to separate the good setups from the bad ones in order to take only the perfect patterns. As usual, it can takes time to notice the differences immediately.
Here is a collection of pinbars, with good, bad and ugly price patterns:
We can see that surprisingly some of the “good” setups didn’t work well. And some of the “bad” setups did the job in a nice way. Here, I just speak about pure price action pattern, not about levels and price structure.
If you want the model of the perfect pinbar that has a really good chance of success, wherever located on the chart, here are 2. GBPCHF March 2015 on weekly chart and GBPJPY September 2014 on daily chart:
You can already notice that the best pinbars are printed when there is room on their left. The best setups are visible when the price come after a consolidation period of time.
Little tip : If you find a significative pinbar with a 10% head, you can think about what you can do with it, even if the S/R level is not relevant. Here is an example on the AUDCHF H4 :
Of course, these perfect setups are not seen every weeks, even months. But you can be sure that the odds are with you when you ride them. More the wick is long, more the setup is good.
Now, we can do the same with the engulfing bar pattern. Technically, the engulfing bar is easier to evaluate because the bar is either in the previous range or is not. That’s all. It makes it a more reliable pattern than the pinbar in my opinion.
Since the technical constraints of the Engulfing bar are really easy to address, the location is the main way to separate the good from the bad setups. However, a particular Engulfing bar is a reliable pattern. When you see this, you can be sure to have the odds with you :
This kind of engulfing bar is composed by :
- A large body engulfing several previous bars
- The close is near from the lowest or highest
- The wick is large and shapes a extrem spot in the local price structure
This perfect textbook setup engulfing bar is part of the header picture of this website.
The pinbar and engulfing bar are the 2 best price patterns to use on the Forex market as far as I know. They offer really high-probability setups when you take in the good environment. The second rule of my trading system is really easy to apply : enter the market only if you see one of these 2 price patterns.