5 Patterns That Are Great for Scalping
Patterns are graphical representations of price movements on a trading chart that traders use to identify potential trends and their reversals. Although they can be applied to any timeframe, there are those that are more effective for short-term trading, including scalping. By analysing these patterns, scalpers can take advantage of quick price movements and produce small, short-term gains in the market.
This FXOpen article will discuss the 5 chart and candlestick patterns for stocks, forex, cryptocurrencies*, and commodities and explain how scalpers may use the best candlestick patterns for scalping.
What Is Scalping?
Scalping is a common trading strategy in financial markets, including stocks, currencies, and commodities. It involves making multiple trades within a short period, aiming to profit from minuscule price movements. Chart and candlestick patterns are important for scalping because they can provide insight into the short-term price action of an asset. Chart patterns are more reliable than candlestick ones, but it takes more time for them to form. At the same time, candlestick patterns appear more frequently on a price chart and help traders make trading decisions quickly.
The 5 best chart and candlestick patterns include:
Morning Star and Evening Star
The morning and evening stars are some of the best candlestick patterns for scalping. A morning star is a bullish candlestick setup that appears after a downtrend and suggests a potential reversal. It consists of three candlesticks: long and bearish, indicating a continued downtrend, small-bodied, representing market indecision, and a long and bullish that closes above the midpoint of the first candlestick.
An evening star is a bearish candlestick setup that appears after an uptrend. It consists of three candlesticks: long and bullish, representing a continued uptrend, small-bodied, indicating market indecision, and a long bearish candle that closes below the midpoint of the first candle suggesting a potential downward reversal.
The morning star and evening star are both effective for scalping as they indicate potential turning points in the market. This can help a trader identify which direction the price is going to move, providing an opportunity to enter and exit quickly.
Bullish and Bearish Rectangles
Bullish and bearish rectangles are chart patterns that occur during periods of consolidation, suggesting a break in a current trend. The bullish rectangle appears in an uptrend, with the price reaching a resistance level and consolidating. A break above this level confirms a continuation of the uptrend. The bearish rectangle appears in a downtrend, with the price reaching a support level and consolidating. If the price breaks below this level, it signals a continuation of the downtrend.
Rectangle patterns for scalping stocks, forex, and other financial instruments indicate a period of market indecision, with buyers and sellers in equilibrium. They provide an opportunity for scalpers to identify sharp breakout movements with clear support and resistance levels. They may allow them to get an accurate entry and exit.
Bullish and Bearish Flags
Bullish and bearish flags are chart setups that occur after a significant price movement in either direction. Bullish flags form in an uptrend and are confirmed when the price breaks above the upper boundary of the flag; bearish flags form in a downtrend and a breakout of the support line occurs.
Bullish and bearish flags are effective for scalping because they are reliable patterns that indicate a continuation of the current trend. They have precise targets and stop-loss levels, making it easier to manage risks while still taking advantage of the short-term price movement.
Bullish and Bearish Engulfing
Bullish and bearish engulfing patterns are candlestick formations that signal the potential for reversals in the trend. A bullish engulfing pattern appears in a downtrend, where a small bearish candle is followed by a large bullish candle which covers it fully. Similarly, a bearish engulfing pattern appears in an uptrend when a small bullish candle is followed by a larger bearish candle that covers it fully. These patterns suggest buyers or sellers overpower the other, respectively.
Engulfing patterns are useful for scalping because they can indicate a trend reversal which can be used to make quick trades. They are also easy to spot and act on, making them an effective scalping tool.
Three White Soldiers and Three Black Crows
The three white soldiers and three black crows patterns are candlestick formations that can indicate potential trend reversals. Three white soldiers form after a downtrend, suggesting a potential uptrend, while three black crows form after an uptrend, suggesting a potential downtrend. These formations highlight changing market sentiment as buyers or sellers gain control.
The three white soldiers setup consists of three consecutive bullish candles opening within the previous candle's body and closing above the high or close price of the previous candlestick. The three black crows pattern forms with three consecutive bearish candles opening within the previous candle's body and closing below the low or close price of the previous candlestick.
Although these patterns appear on the chart less often than stars, for instance, they are effective for scalping because they provide accurate signals.
Conclusion
Traders should also be cautious of false signals and consider the overall market context before relying solely on the top 5 chart patterns. It is crucial to develop a well-rounded trading plan, manage risk effectively, and continuously educate oneself to navigate the complexities of the financial markets. Traders can open an FXOpen account to practise these setups rigorously. The TickTrader platform provides users with the ability to draw a wide range of patterns and indicators directly on price charts.
*At FXOpen UK and FXOpen AU, Cryptocurrency CFDs are only available for trading by those clients categorised as Professional clients under FCA Rules and Professional clients under ASIC Rules, respectively. They are not available for trading by Retail clients.
Read more: https://fxopen.com/blog/en/5-patterns-that-are-great-for-scalping/
Text source: Forex Trading Blog
