There are numerous profitable trading strategies in the financial markets, each designed to help traders achieve stable results. Despite this variety, many traders prefer to work with the Price Action pattern. This approach focuses on analyzing price behavior and identifying specific patterns that signal potential market moves.
Price patterns can be formed by a single bar or candlestick, or by a group of them. The more bars that form the pattern, the stronger and more reliable the signal becomes. One of the most common and effective ones in Price Action is a pattern called a sideways channel pattern, otherwise known as basing.
This pattern got its second name because it often serves as the foundation for a strong price movement. It’s called the sideways channel pattern because, during its formation, the price is range-bound and moves within a very narrow channel.
The sideways channel pattern usually forms near significant price levels. If there isn’t one nearby, there’s a high chance that the spot where the pattern appears will become an important level in the future.
You can find this pattern on any timeframe, but keep in mind: The higher the timeframe, the stronger and more reliable the signal. For better results, it’s recommended to use charts with a one-hour timeframe or higher.
On the chart, the trading pattern looks like a narrow price corridor, where the candlestick bodies stay within one range, without breaking its limits. In the currency market, however, candlestick shadows may extend beyond the channel.
Typically, the channel size ranges from 10–15 points up to 100, depending on the chosen timeframe. The pattern is considered complete when it includes at least 3–4 bars or candlesticks. The more candlesticks involved, the stronger the breakout will be once the price exits the pattern.
Like all Price Action setups, it’s best to look for trades near strong price levels. This provides more accurate entry signals and a clear point to set a stop loss.
The pattern can be traded two ways — on a rebound from a level or on a breakout. In the first scenario, there’s a visible trend, but the price hits a level and fails to consolidate below or above it for at least 3–4 bars. This is a strong signal to enter a trade in the opposite direction of the current trend.
Since this setup is based on candlestick bodies, you need to consider the possibility of the candlestick shadow extending beyond the pattern range. To protect your trade, place the stop loss about 15–20 points beyond the boundaries of the sideways channel pattern.
When there’s a level breakout, the market normally shows this pattern: a trend is already in place, the price hits a key level; however, the price is able to consolidate, and then starts forming a base above or below that level.
In this scenario, you should open a trade in the direction of the current trend once 3–4 bars form inside the pattern. Just like with the first scenario, place your stop loss beyond the level, at least 15–20 points away from the price level.
When it comes to exiting a position, there are two main approaches: The first and most common way is to set a take profit just below the nearest significant price level.
The second way is more advanced and requires you to stay near the trading platform. Instead of a fixed take profit, you use a trailing stop, moving it slightly below the boundary of each newly formed pattern.
This approach is considered aggressive. When a new pattern appears, a position is opened through pending stop orders.
The Price Action sideways channel pattern or basing pattern is one of the most common formations in the market. It typically appears near significant price levels and often signals the start of a strong price movement. This pattern can be found on any financial instrument and any timeframe.
That being said, to achieve more consistent profits, it’s best to work with hourly charts or higher. Since the pattern forms near key levels, it can be traded both on a rebound from the level and on a breakout, depending on how the price behaves during its formation.
When it comes to closing profit, there are two main approaches, and the choice depends on the trader’s style. The first method is setting a take profit below the nearest significant price level. The second method is dynamic exit using a stop loss. Here, the stop loss is moved gradually, following the price movement.
When a new base forms, the stop loss is placed just below it. If the trend continues, you add to the position. This process goes on until the sideways channel, i.e., the base, is broken out in the opposite direction.
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