Strategy Masterclass Part 4: Price Action — Support/Resistance, Candlestick Patterns & Chart Formations

📚 This is Part 4 of the Trading Strategy Masterclass series.

What is Price Action Trading?

Price action trading is the art of reading the market's raw price movements without relying on indicators. Price action traders believe that price itself contains all the information you need.

"Indicators are derivatives of price. Why not trade the source directly?"

Strategy 1: Support & Resistance Trading

Identifying Key Levels

Support: A price level where buying pressure consistently overcomes selling, causing price to bounce upward.

Resistance: A price level where selling pressure consistently overcomes buying, causing price to reverse downward.

How to Draw S/R Levels

1. Look for multiple touches — a level tested 2-3+ times is significant
2. Use closes, not wicks — close prices matter more than wick extremes
3. Think in zones, not lines — S/R is an area, not a precise price
4. Round numbers matter — 1.3000, 1.2500 on EURUSD act as psychological levels
5. Higher timeframe = stronger level — Daily S/R > 1H S/R

Trading Rules

Support Becomes Resistance (Polarity Principle)

When a support level breaks, it becomes resistance (and vice versa). This is one of the most reliable patterns in technical analysis.

Strategy 2: Key Candlestick Patterns

Reversal Patterns

Pin Bar (Hammer / Shooting Star)

The most important single candlestick pattern:

• Long wick (at least 2× the body length) rejecting a level
• Small body at the opposite end from the wick
• Bullish pin bar: long lower wick at support → BUY
• Bearish pin bar: long upper wick at resistance → SELL

Engulfing Pattern

A two-candle reversal pattern:

• Bullish Engulfing: Red candle followed by a larger green candle that completely engulfs it → BUY
• Bearish Engulfing: Green candle followed by a larger red candle that completely engulfs it → SELL

Morning/Evening Star

A three-candle reversal pattern:

• Morning Star (bullish): Large red → Small body (indecision) → Large green → BUY
• Evening Star (bearish): Large green → Small body → Large red → SELL

Doji

A single candle where open ≈ close (tiny body), showing indecision. Types:

• Standard Doji: Equal wicks, complete indecision
• Dragonfly Doji: Long lower wick, bullish at support
• Gravestone Doji: Long upper wick, bearish at resistance

Continuation Patterns

Inside Bar

Current candle's range is completely within the previous candle's range.

• Signals consolidation before continuation
• Trade the breakout of the inside bar in the direction of the trend
• Multiple inside bars = stronger breakout signal

Strategy 3: Chart Formations

Double Top / Double Bottom

Double Top (Bearish Reversal):

1. Price hits resistance → pulls back
2. Price hits the SAME resistance again → fails
3. Sell when price breaks below the pullback low (neckline)
4. Target: Distance from top to neckline, projected downward

Double Bottom (Bullish Reversal):

• Mirror image of double top at support levels

Head & Shoulders

The most reliable chart pattern statistically:

Head & Shoulders (Top/Bearish):

1. Left Shoulder: Price rises, pulls back
2. Head: Price rises higher than left shoulder, pulls back to same area
3. Right Shoulder: Price rises to approximately left shoulder height
4. Neckline: Connect the two pullback lows
5. Entry: Sell when price breaks below the neckline
6. Target: Distance from head to neckline, projected downward

Triangles

Ascending Triangle (Bullish):

• Flat top resistance, rising support → Breakout UP expected
• Enter on breakout above resistance with volume

Descending Triangle (Bearish):

• Flat bottom support, falling resistance → Breakout DOWN expected

Symmetrical Triangle (Neutral):

• Converging trendlines → Breakout direction unknown, trade the break either way

Flags & Pennants

Short-term continuation patterns:

• Bull Flag: Sharp rally (pole) → downward channel (flag) → breakout UP
• Bear Flag: Sharp drop → upward channel → breakout DOWN
• Pennant: Triangle forming after a sharp move → continuation

Strategy 4: Supply & Demand Zone Trading

Concept

Supply and demand zones are areas where institutional orders created significant moves. Unlike traditional S/R, these zones are based on the origin of strong moves.

How to Identify

Demand Zone (Buy Zone):

1. Find a strong bullish move upward
2. The zone before the move began = demand zone
3. Mark the base (consolidation area) before the explosive move

Supply Zone (Sell Zone):

1. Find a strong bearish move downward
2. The zone before the move began = supply zone

Trading Rules

Zone Quality Checklist

• ✅ Strong move away (large candles, little overlap)
• ✅ Fresh zone (first or second retest)
• ✅ Aligned with higher timeframe trend
• ✅ Small consolidation base (tight zone)
• ❌ Avoid zones that have been tested 3+ times

Price Action Trading Rules

1. Context is king — a pin bar at a key S/R level is meaningful; a random pin bar is noise
2. Higher timeframes give better signals — Daily > 4H > 1H for price action
3. Always wait for confirmation — don't anticipate; let the pattern complete
4. Combine with volume — price action + volume = highest conviction
5. Keep it simple — don't try to trade every pattern; master 2-3 setups

Summary

📓 Next: Part 5: Risk Management & Position Sizing →
📙 Previous: Part 3: Breakout & Momentum
📚 Series Home: Trading Strategy Masterclass