Understanding Price Action to trade Forex

PATTERN OR PRICE ACTION ANALYSIS
1> Uptrend
Uptrend is defined as a series of higher high's and a series of lower low's. Obviously
this series could be very particular to a timeframe like 1hour , 4 Hour etc
What I mean to say that product traded might be in an 4 hour uptrend by defination but may also
be in a daily downtrend ( The overall trend !)
Lets look at the 4 H chart of EUR/USD
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So what does this trend indicate to you ?
“Buy on dips”…. until you find resistance on a daily chart which reverts the price action and it
starts making series of lower high's and lower low's
2>Downtrend :
Its just the opposite of uptrend ! A series of lower high's and lower low's .
So if you see such price action what is your strategy
“ sell the rallies”

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Now lets look at the same chart in a smaller time frame 15 mins and see if we could see there was a
possible change in trend? ( note give atleast 50-60 recovery to establish new high in 15 mins chart)
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Lets see if can learn how to understand when a trend is redefining it self . Please look
at the chart below:
On left hand corner of chart you can see a high and low in place and next high made in fact is a
lower high. What we need next is the previous low (which is indicated by blue horizontal line
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should be broken and then we could have a lower low in place. What does this mean ?
The up trend is no more valid as a lower high and lower low is in place. Does it makes sense?
As the price prevails a series of lower high's and lower low's are made. Now note the higher high
(marked with blue alphabets) and higher low is in place ? What does this indicate ?
Its simple folks ! There might be trend reversal .
3> Reversal patterns
3.1> Double Top/Double Bottom
Double Tops appear on a chart in the shape of the letter "M" and are quite common.
A peak price is reached before a small decline, which causes the valley between the Double Tops,
and then the price rallies again to a peak roughly equal to the level of the first. The price then falls
away on a new downtrend.
Volume is important in determining whether a true Double Top formation is being created or if it is
going to be a fake. Look at the volumes associated with both of the peaks.
• If the volume associated with the first peak is greater than that associated with the second
peak, this suggests that prices are unlikely to go higher - confirming the Double Top
formation.
• If the volume accompanying the second rise is the same as that accompanying the first, or
even greater, it is likely that the uptrend will continue.

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The time span taken to create the Double Top formation can also help determine the likely
progression of the price data.
• If the two tops are fairly close together in terms of time, it may well be a consolidation
period, a pause for breath, before the rally continues.
• If the peaks are separated over a longer period and the valley between the two peaks is deep
it is more likely to turn into a genuine Double Top.
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In the chart above the double red arrows show a POTENTIAL DOUBLE TOP. However
the double top wasn't confirm until the neckline (blue horizontal line ) was broken and retested
( retest is shown by a red check marked)
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Double Bottom:
“W” kind of pattern
The formation of a double bottom and the indicators of the reversal are much the same as for a
double top, but the volume patterns are different. A true double bottom will show more volume
on the second rally up than on the first rally.
Please have a look at Double Bottom for USD/JPY and how the blue horizontal line (neckline or
flat resistance line was tested)

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3.2> Head and Shoulders Pattern :
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• The left shoulder is formed after an extensive increase in price, usually supported by high
volume. The shoulder rounds as the price dips slightly, usually on lower volume. This dip is
the start of the neck line and the head is about to form.
• The head is formed with heavy volume on the rising part of the head and less volume on the
falling part. Prices then fall to somewhere near the same level as the low of the left shoulder.
It does not have to be at exactly the same level and could be slightly higher or lower, but
definitely below the top of the left shoulder.
• The right shoulder is formed by a rally in the price to a level roughly equal with that of the
left shoulder. Again it can be slightly higher or lower but definitely below the high of the

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head.
Once the right shoulder has started to form you can draw in a "neckline" across the bottoms
created between the left shoulder and head and the head and right shoulder. When the price falls
from the right shoulder and breaks through the neckline the Head and Shoulders Top formation has
been confirmed and it is your signal to consider selling the share.
Note that the Head and Shoulders Top formation does not need to be perfectly symmetrical.
Please see the H&S pattern in EUR/HUF which is currently developing on daily ? Did you sell
this ?
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Also note how the neckline( Blue trendline ) is tested .
Inverse Head and Shoulders

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A Head and Shoulders Bottom is the inverse of a Head and Shoulders Top, and it signifies a
reversal from a downtrend to an uptrend.
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3.3> Triangles and Wedge breakouts:
Symmetrical Triangles
The symmetrical triangle usually forms during a trend as a continuation pattern. The pattern
contains at least two lower highs and two higher lows. When these points are connected, the lines
converge as they are extended and the symmetrical triangle takes shape. 70% of the times they acts
as continuation pattern. However there are instances when they tend to act as reversal pattern.

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Now lets look at the EUR/USD daily as symmetrical reversal at the bottom of daily range
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Ascending Triangles
The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation
pattern. There are instances when ascending triangles form as reversal patterns at the end of a
downtrend, but they are typically continuation patterns. Regardless of where they form, ascending
triangles are bullish patterns that indicate accumulation.
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Descending Traingles:
The descending triangle is a bearish formation that usually forms during a downtrend as a
continuation pattern. There are instances when descending triangles form as reversal patterns at the
end of an uptrend, but they are typically continuation patterns.

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