What is the pricing model? Synthesis of price patterns in trading

What is the pricing model?

Price patterns are geometric structures that reflect market movements over a certain period of time, with specific patterns repeating in the past, used by traders to predict price trends when a similar sign appears.

Price models are an important tool in Technical analysis, helps identify order entry points, exit orders, and effectively manage risk.

Advantages and disadvantages of trading according to the price model

Advantages

• Intuitive, easy to remember:The price model has a specific shape, easy to understand name, which makes it easy for traders to remember.
• Provide strong signal: When the price pattern is confirmed, it provides clear signals of a trend reversal or continuation, helping traders to make correct trading decisions.
• No Delay:The price model does not rely on any technical indicators, so it does not experience the same lag as when using tools such as EMA, MACD, or Ichimoku. This allows traders to enter orders immediately, even before technical indicators give a trading signal.
• Easy Risk Management:Identifying the price pattern helps traders identify support and resistance levels, thereby providing reasonable take-profit and stop-loss levels.

Disadvantages

• It takes time and experience:Although the price pattern in theory is easy to identify, when the price is running it is quite difficult to determine the pattern. Therefore, for accurate analysis and effective use, traders need experience and understanding of the market.
• Waiting for confirmation:An incomplete price model may not give an accurate signal. Traders have to wait for the pattern to complete and be confirmed before making a trade, which sometimes takes opportunities away.
• Depends on past data: The price model is based on past price action to predict the future, however, this does not guarantee that the market will evolve in the same way as before.
• There may be interference:The market can create “false price patterns”, which make it difficult to distinguish between the real pattern and the interference pattern, which in turn leads to the wrong trading decision.

Common price patterns in trading

Price models are important tools in technical analysis, helping to predict market trends. They are divided into three main groups: reversal, continuation, and complex. The following are typical models in each group.

Reversal price model

Head and Shoulders

Shoulder Head Shoulder Modelsignals a reversal from rise to fall. The model consists of three peaks: the top in the middle of the highest (head), two lower lateral peaks (shoulders), the seam between the two bottoms of the model is called the neckline.

How to enter the command with the shoulder head model:

• Wait for the price to break the neckline, confirm the finished model.
• Enter a sell order if the price closes below the neckline with increased volume.
• Place cut holes on the right shoulder, aim for profit equal to the distance from the head to the neckline.

Double Top and Double Bottom

The double top pattern consists of two equal peaks, signaling a downtrend. In contrast, the double bottom pattern consists of two equal bottoms, signaling an uptrend.

How to enter the command with the double top and double bottom model:

• With double top model, enter a sell order when the price breaks the neckline below the two bottoms. Set the stop loss above the highest peak, aiming for profit equal to the distance from the top to the neckline.
• With double bottom model, enter a buy order when the price breaks the upper neckline. Set the cut of the loss below the lowest bottom, the profit target is equal to the distance from the bottom to the neckline.

Triple Top and Triple Bottom

The three-top and three-bottom model is an enhanced version of the double-top and double-bottom model, with three clear peaks or three bottoms.

How to enter the command with the three-top and three-bottom model:

• With three-peak model, enter a sell order when the price breaks the neckline below the two bottoms. Set the stop loss above the highest peak, aiming for profit equal to the distance from the top to the neckline.
• With three-bottom model, enter a buy order when the price breaks the upper neckline. Set the cut of the loss below the lowest bottom, the profit target is equal to the distance from the bottom to the neckline.

Continued price pattern

Triangular pattern (Triangles)

Triangular modelconsists of three types:

• The ascending triangle has an ascending bottom, the top is fixed.
• The descending triangle has a descending top, a fixed bottom.
• The isosceles triangle has both a gradually narrowing top and bottom.

How to enter the command with triangle models:

• Wait for the price to break the trendline.
• Enter the order in the direction of the break, with the hole cut on the opposite side of the triangle.
• The profit goal is the height of the triangle at the widest point.

Flags and Pennants

Flag modelappears after a sharp rise or fall, the price accumulates in a parallel channel (flag) or small triangle (pigtail).

How to enter the command with the flag pattern:

• Enter orders in the direction of breaking the pattern, usually in the same direction as the previous trend.
• Set the stop loss outside the pattern and the profit target is the length of the previous trend.

Rectangles (Rectangles)

Rectangular model is also called Danvas model. This is a model whose price moves in a fixed zone, forming a zone of resistance and support in parallel.

How to enter the command with a rectangular pattern:

• Enter the order when the price breaks through the support or resistance zone.
• Target profit equal to the height of the rectangle.

Complex pricing model

Cup and Handle (Cup and Handle) model

The cup and handle model is a continuation of the upward trend, whose price forms the shape of a cup (rounded curve) and a handle (a slight descending channel).

How to enter the command with the cup and handle model:

• Enter a buy order when the price breaks the handle with increased volume.
• Place the hole cut below the bottom of the handle, aiming for a profit equal to the height of the cup.

Diamond (Diamond) Model

The diamond model (Diamond) is a rare model, with the beginning being an extended triangle, and the latter a narrowed triangle. It can be a reversal or continuation pattern.

How to enter the command with a diamond pattern:

• Enter the order in the direction of the price break.
• Set the hole cut outside the opposite edge of the pattern, aiming for a profit equal to the height of the diamond.

Wedge model

Wedge patternis formed by two converging trend lines, with both the top and bottom of the price moving narrowing gradually over time.

• A bullish wedge occurs when the price rises, with progressively higher peaks and bottoms, usually signaling a downward reversal or continued decline in a downtrend.
• Conversely, a bearish wedge appears when the price falls, with descending peaks and bottoms, often signaling an upward reversal or a continuation of the upward trend.

How to enter the command with the wedge pattern:

• Enter the order in the direction of the price break.
• Cut the hole outside the wedge, aiming for a profit equal to the height of the wedge.

Note when trading according to price patterns

Patiently wait for the clear break signal

When trading with a price pattern, it is important to wait for a clear breakout signal from the market, such as the price having to close above the line Trendlineor neckline.

For example, in the shoulder-shoulder model, if the price has not created a closing candle under the neckline, the model is not yet complete. If you enter the order too early, you may face the risk that the price returns to the old trend instead of completing the pattern.

Do not fantasize on your own, pre-draw the model

A common mistake among new traders is to anticipate a pattern when it is not complete. This results in trading based on subjective expectations rather than market realities. Always trade based on what you see, not what you think.

Understand that the price model does not guarantee an absolute win rate

There is no trading method with a 100% win rate, including trading with a price model. Although models usually have a fairly high win rate, you still need to manage your funds closely and set stop losses to protect your account.

Always remember that trading is a game of probability, and the goal is to keep profits for the long term rather than trying to win every order.

Prioritize Larger Timeframe Analysis

When trading on price patterns, checking the pattern on a larger timeframe such as H4 or D1 will give you a better overview. Large timeframes usually provide clearer and more reliable signals, avoiding signal interference as on small timeframes.

Preparing the scenario for opposing cases

The market does not always live up to expectations. Always have a plan in place for the worst case scenario, such as the price not breaking the neckline but turning the head back up.

Having a script available gives you better psychological control and avoids making emotional decisions when the market unexpectedly changes.