This is a huge episode covering our understanding and implementation of patterns. Patterns play a huge part within our strategy; we use patterns to spot direction and provide clear areas of interest to get involved in the market, without them, we would be trading the market without our parameters set. Throughout my trading career I have found that using patterns and structure as a form of technical analysis is a very powerful way to analyse the charts. Having an understanding of market sequence, market structure and institutional concepts (which we will touch upon later in the strategy) is super powerful, but patterns will be instrumental to the Pattern Play & SMC Strategy. Grab your notepad as this video is one of the most important in the series, our strategy is based heavily around patterns and pattern formations, So let’s dive straight into it! Reversal Patterns A price pattern that signals a change in a trend is known as a reversal pattern. These patterns signify periods where either bulls or bears have run out of steam - the trend will pause and then head in a new direction as new pressure forces the trend to bend and reverse. For example, an uptrend supported bulls can pause, signifying even pressure from both the bulls and bears, then eventually giving way to the bears. This results in a change in trend to the downside. The longer the pattern takes to develop and the larger the price movement within the pattern, the larger the expected move once price breaks out. Patterns are never ‘one size fits all’, there will be an element of discretion used, they come in all shapes and forms and can be seen across all timeframes. In this video we will be covering: Head and Shoulders Rising wedges and falling wedges Ascending channels and descending Channels Reversal patterns should never be taken on their own accord. There should always be another added confluence in place before taking the trade, yes they are strong indicators of where price will be heading next but within this strategy we should be aware of ‘valid setups’ vs ‘high quality setups’. A 'valid setup' is simply a trade that looks good on the lower time frames and has only a few confluences, for example just ascending channel formation. A 'high quality setup' is one that has multiple confluences both on the higher timeframe and the lower timeframe. Patterns taken on their own without other influences involved would be classed as only a 'valid setup'. The probability of the move playing out is significantly reduced without our other methodology involved. First up we have the Head and Shoulders pattern. Head and Shoulders https://www.tradingview.com/x/ywQ3Kr3X/ By definition - “A head and shoulders pattern is a chart formation that resembles a baseline with three peaks, the outside two are close in height and the middle is highest. In technical analysis, a head and shoulders pattern describes a specific chart formation that predicts a bullish-to-bearish trend reversal”. As we can see we have a left shoulder form with price rejecting a key level. Once the trend has turned around, the head forms. And then finally we have the right shoulder form. Now, the right shoulder typically rejects from the same price level as the left shoulder, however this isn’t always the case. Sometimes we won't get a perfect head and shoulder pattern so we have to use other confluences to gauge where price will reject. In the example shown here, you can see that price action is range bound. Price action is bouncing between 1.15400 and 1.16400 here on EURUSD. When the market has tried to push to the upside we have failed to do so with any conviction. This has left a pattern that has one spike to the upside, followed by a heavy retrace with every following attempt being failed. For entry on the right shoulder, price action has hit an order block around the 1.16000 level, after this the market pushes to the downside… You’ll see this a lot, after the right shoulder has formed the following price action normally reverses and continues to the downside. As a general rule of thumb, if you measure the neckline to the head, then place that distance on the break of the neckline, it will give you a rough guide on a profit taking area. Inverse Head and Shoulders An inverse Head and shoulder is essentially the opposite. This is when you see price push to the upside after completion with the formation being developed below the market. https://www.tradingview.com/x/WAjHfgy8/ This is an example of an inverse head and shoulder setup (prior to the buy) In this scenario we have forecasted a price reversal as price action has the characteristics of inverse head and shoulder forming. In this setup price action is pretty range bound between the 1.68600 region and the 1.70800 region. Every-time price has pushed to the downside the bull has stepped in a quickly bought price action back up. This signals that maybe the trend is running out of momentum to the downside and a reversal could be on the cards. … remember, no formation is ever set in stone and guaranteed to play out. Ascending Channels https://www.tradingview.com/x/4wa3WGkV/ Ascending and descending channels are two of my favourite patterns to trade from. They are formed from higher highs and higher lows that create a larger reversal pattern. An ascending channel is an uptrend that moves between two ascending boundaries. Price becomes confined in two parallel lines where one trendline supports and the other acts as resistance. The logic is that someone should enter short when price reaches resistance and long when price reaches support but the odds are better if someone enters only in high probability trades, this is why we look for other confluences. https://www.tradingview.com/x/Ka2qKYI3/ With ascending channels we will be looking to trade this pattern when price action has completed 3 touches on either side of the pattern, as this is where we will see the highest probability of the trade reversing and going in our intended direction. Descending Channels https://www.tradingview.com/x/uT64BL56/ A descending channel forms in the opposite direction to an ascending channel. Price action is making a series of lower highs and lower lows correctively. This makes a larger ‘channel pattern’ formation that can be used to indicate a price reversal. In this example, the bottom trendline is support and the top trendline is resistance. https://www.tradingview.com/x/YlcjyVBs/ Similar to ascending channels, we will be looking to trade descending channels when price action has completed 3 touches of its structure on both sides of the pattern. Rising wedge/falling wedge A rising wedge is more of an advanced version of an ascending channel. Where with ascending and descending channels you have a steady flow of higher highs/ higher lows creating a nice even channel pattern. With a rising and falling wedge the impulses tend to be more volatile with the corrections being smaller. The means towards the top (or bottom) of the wedge price action really begins to squeeze to form an area where price is waiting to explode and reverse. Similarly to what we covered in the previous video, we only really want to be taking these patterns when there are other confluences in place. Like when the higher timeframe structure agrees with our analysis, when there is another technical indicator in place that agrees with the trade going in our forecasted direction. One of the most important characteristics of a rising wedge is when you see low volume candlesticks being produced near the top or bottom of the formation https://www.tradingview.com/x/jRj20kUh/ Take a look at this example here on USDJPY, if we strip price action back for what it is we can see two key characteristics. We can see a rising wedge complete it’s 3 touch structure up into the larger ascending channel. There are two pattern confluences here to suggest that the market could potentially be ready for a reversal. The candlesticks that were produced at the top of this structure show low volume, i.e the bulls have run out of steam to keep pushing price to the upside. Remember patterns do not have to be respected perfectly, you will often see price spikes out of structures before retracing. Take a look at that previous example = do you see how price drove to the upside before coming back into the pattern. Even in this most extreme area of the market the sellers are still going to outlook for the most extreme area of liquidity. What we see commonly within the market is that price can become quite manipulated around the areas that line up with the 3rd touch of the market. Don’t always assume that because there is a 3rd touch that the market must respect that pattern perfectly and push in your intended direction. The best traders see these areas as ‘opportunities’ within the market and not set in stone. There is additional SMC methodology we will teach later on that can provide us real accuracy when trading these patterns.