Pattern rails rules of trade. The rails pattern is a reversal candlestick pattern

This is another rather simple pattern of candlestick analysis, which is now commonly referred to as the newfangled word Price Action. It is clear that in order to detect this setup (as it is customary to call patterns in Price Action), a chart presented in the form of . By the way, in the classical analysis of Japanese candlesticks there are two figures very similar to the pattern we are considering, these are:

  1. Veil of dark clouds. A reversal pattern indicating a downward price turn. It differs from the setup under consideration, perhaps, only in that the second (bearish) candlestick must necessarily be shifted upward relative to the first (bullish) candlestick.
  2. Clearance in the clouds. A pattern that indicates an upward price reversal. In it, the second (bullish) candle should be shifted down relative to the first (bearish).

So, what is the Rails pattern? In fact, these are two long-body candles of different colors, located one after the other. The bodies of candles should be at least 70-80% of their entire length. The bodies of the candles should be approximately equal in size and be approximately at the same level. At the same time, the longer the body of the candles, the more pronounced the pattern.

Rails pattern. U-turn down Pattern Rails. U-turn up

Rails are a reversal pattern that shows a change in investor sentiment. If the first candle of the pattern is bullish, and the second is bearish, then it indicates a downward price reversal. Conversely, if the first candle is bearish and the second is bullish, then the price is expected to reverse upwards. We note right away that this pattern does not belong to the category of strong figures, so we do not expect strong signals from it that tell us nothing less than a whole trend change (although, of course, this also happens). However, it may well indicate insignificant prices that can be successfully processed using pending orders.

How to trade the Rails pattern

As mentioned above, for trading using this pattern, it is best to use.

For a pattern that predicts a downward reversal (the first candle is bullish, the second is bearish), a pending sell order is placed just below the second candle (see Fig. 1).


Fig.1. Postponed selling on the Rails pattern

Loss limiting is done with , set at the level of the upper part of the bearish candle.

For a pattern that heralds a price reversal upwards (the first candle is bearish, the second is bullish), we place a pending order to buy just above the second candle (see Fig. 2).


Fig.2. Pending buy on the Rails pattern

We limit the loss at the bottom of the bullish candle.

Any trader would like to learn how to detect a market reversal in time, which would allow him to increase his capital well. A large number of indicators have been created to detect a trend reversal, but many of them, unfortunately, give signals with some delay. Today you will learn about another Forex reversal pattern called Rails. The figure of the rails indicates that the trend will change its direction soon.

What does the Rails pattern look like on the chart?

The Rails pattern includes 2 candles with long bodies and short shadows, and most importantly, they must be in different directions. You can see how this pattern looks on the chart in the following picture.

Let's discuss the trading rules based on this pattern. Pay attention to the fact that at the beginning there was a long rising candle with short shadows, this indicates that the buyers who won before that win the market. After that, a descending candle with a long body and short shadows appeared on the chart, which indicates that the sellers won.

This was an example of a trend reversal from an uptrend to a downtrend. If the first candle was black and the second white, then this would indicate that the downtrend is changing into an uptrend.

Confirmation Signals

The Forex rail figure can appear both before a global trend change and before a rollback from the main movement, after which the trend in the market will continue. In this regard, it is recommended to confirm this with the help of additional tools.

To increase the profitability of trading, experienced traders are advised to adhere to the following rules:

  • Enter the market only in the direction of the trend.
  • Use only those figures that have emerged near important support and resistance levels.

It is also important in the course of trading to use only those figures that are distinguished by the purity of the formation. That is, it is recommended to use only those models that have sufficient body length and short shadows. At the same time, it is desirable that these candles stand out for their length compared to other bars, which confirms the increase in activity in this period of time.

How to enter the market correctly

It is recommended to enter the market when this model appears using pending orders, which are placed behind the opposite side of the setup.

Trades are opened with stops that are set on the opposite side of the model. These figures are strong if they appear after a long trend and near important support and resistance levels.

Immediately after the appearance of the pattern, a Buy Stop order is placed at the top of the pattern, and the stop for the order is placed under the low of this pattern.

When a pattern appears that heralds the beginning of a downtrend, a Sell Stop order is placed a couple of pips below the low of the candles, and a stop is placed a couple of pips above the high of the candles.

As for take profits, they should not be excessively large, since the second candle is already a strong impulse, which, according to the laws of the market, will soon begin to fade. For this reason, it is advisable to use a small fixed take profit, which can be placed near the nearest support or resistance level. A take can be a maximum of 1.5 times the size of the stop. Experienced traders in this case do not recommend using a ratio of 2 to 1.

Market Entry Examples

I want to note right away that it is not so difficult to identify the figure of the rails on the chart. To do this, it is not at all necessary to enlarge the chart, since candles should stand out strongly on the chart by their size. In case of non-compliance with this condition, it is best to refuse to enter the market.

Let's look at an example of opening a trade on the GBP/USD pair on the daily chart. Note that the rail pattern in our example appeared after a long uptrend, which indicates that the price is highly likely to change its direction.

Also note that this figure appeared near the support level, which increases the reliability of this figure. The model is not badly formed, although ideally the shadows should be a little shorter. So, open a pending sell order slightly below the lows of the candles, set a stop a couple of points above the high of the pattern.

The take for the deal is located at the nearest important level, which in our example can be clearly seen on the chart.

Note that after the order was triggered, the price moved 70 pips, which is negligible for daily charts. I repeat that when opening orders, you do not need to set too large targets.

Now I bring to your attention the Rails figure, which does not need to be used for trading.

Pay attention to the selected area in the previous picture. You see a rails pattern with candles whose body length is less than neighboring candles. This suggests that this pattern arose when there was low activity on the market, in this regard, it is best to refuse to open transactions on this pattern.

A strong pattern should stand out clearly on the chart, it should have candles with long bodies. In general, a trader should always remember the meaning of this figure.

In the following picture, you can see an example of a pattern appearing after a long downtrend. Despite the fact that the price reversed after its appearance, it was not necessary to use it to enter, since the bodies of the candle, just as in the previous example, do not stand out in size compared to other bars.

In such situations, you need to be very careful, otherwise you risk getting a large number of erroneous signals. When a rails pattern appears on the chart with small candle bodies, the price can either reverse or continue its previous direction. In such situations, it is recommended to use additional indicators to find suitable points to enter the market.

In the next picture, you can see another example of entering the market when a railroad pattern appears. Pay attention to the fact that after the downward movement, a pattern with large candles appeared. This model can be used to enter the market.

Immediately after the close of the second candle, a pending sell order is placed a couple of pips below the low of the pattern and with a stop a couple of pips above the high of the pattern. Take profit is placed at the nearest support level.

The picture below shows another example of this pattern being applied.

Looking at the above example, you may notice that after a significant reduction in price level, at the time of the opening of the currency market, a gap and a bearish candle with a large body appear on the chart. Further, due to the activity of buyers, the range of the previous day was bought off, due to which a large rising candle was formed on the chart. After the close of this candle, a rails pattern appeared on the chart.

Since the candle combination is clear, we can create a position against the current trend. In this case, it is recommended to use a pending Buy Stop deal set above the maximum point of the candle combination. Stop-Loss should be placed below the low of the pattern, and Take-Profit close to the resistance level.

Patterns called rails are another candlestick countertrend pattern, if the pin bar, inside bar, bullish and bearish engulfing are the main ones, then the Rails Pattern is a secondary pattern. It occurs quite often on the chart and, in combination with support/resistance levels, gives good entry points to the market.

On the chart, this pattern looks like 2 candles with large bodies, but of different colors (that is, one of them is bullish, the other is bearish). At first glance it may seem that the formation looks exactly like an absorption or a gap in the clouds / a curtain of dark clouds. These models really have a lot in common, but there are also minimal differences.

The meaning remains the same - these formations indicate that the market is experiencing a temporary weakening of the current trend and a possible impulse against the main trend. This impulse movement can turn into a market reversal, but most often after the pattern, the movement quickly fades and the chart moves in a horizontal channel.

Now about how the rails pattern differs from similar candlestick analysis formations:

    • rails - the only condition is that there are 2 candles with a large body side by side on the chart. The pattern should be taken into account only if it was formed at the end of the upward movement / downward movement;
    • gap in the clouds - occurs at the end of a downward movement. There are additional conditions - the bullish candle must update the low of the bearish candle, its opening price must be lower than the Close price of the bearish candle. For a bearish pattern (veil of dark clouds), the formation rules are reversed;

  • absorption - also looks like 2 large candles on the chart, but the second candle must rewrite the previous extremum and completely absorb its body.

The patterns are really very similar in appearance, it is not particularly important whether you name the model correctly. It is much more important that you understand how they work and under what conditions patterns increase in strength and can be used to make trades.

The pattern itself is secondary, so it must be used in combination with other signals to enter the market. We recommend paying attention to the position of the pattern relative to the support/resistance levels.

The rules for trading on the rails pattern are as follows:

  • the signal should not be taken into work if it appears as part of the price movement in the horizontal channel. In this case, he simply says that the bulls and bears cannot figure out which of them is stronger - hence such fluctuations;
  • if the pattern relies on the support/resistance level, its strength increases;
  • The ideal place to form the rails model is at the end of the correction. In this case, the probability of working out increases, and the subsequent price movement is likely to be significant. If the pattern is formed at the top/low of the trend movement, then most likely it warns the trader about the beginning of the correction. That is, the possible movement will be less.

You should only enter the market with pending orders. The pending position is placed behind the high/low of the second candle at a short distance from it. Stop loss is placed beyond the opposite extremum. Take profit can be set at the nearest support/resistance level.

Most often, this pattern fails to take large profits. But if the model works out, then it happens quickly, you don’t have to keep the deal open for several days.

Pattern recognition indicator

Such a tool is freely available, it can even be downloaded through the market in the MT4 terminal itself. This tool is called FindPatternRails, the rails pattern is very simple, so the indicator is not particularly complicated.

From the settings, a trader can change:

  • Shift_between_the_opening_and_closing_prices - in fractions of one, the difference between the Close and Open prices of the pattern candles is set. 1 is the height of the pattern;
  • Relative_size_of_the_pattern – model height, the larger the value, the fewer patterns the indicator will show on the chart. It will take into account only candles with a large body;
  • ATR`s_period_for_calculate_relative_candle_size – data from this indicator is used to calculate the ratio of the sizes of pattern candle bodies.

The indicator is good because it allows you to set the parameters of the patterns that will be highlighted on the chart. After adding the indicator, the trader will see the following picture.

On the chart, the indicator highlights both pattern candles and draws a level at the candle's closing price, which should be guided by when placing a pending order. In the screenshot, all 3 patterns are bearish, that's why the indicator drew the line from below.

FindPatternRails is not bad and can really help in finding the Rails Pattern, but you still have to filter the indicated models yourself. Don't forget - the indicator just evaluates the ratio between 2 candles, it doesn't take into account:

  • the length of the shadow of the candles and the ratio of the body of the candle to it;
  • the nature of the price movement before the formation of the pattern. It doesn't matter if the market was dead calm before the rails or the strong trend.

In the example above, the first pattern on the left should not be considered worthy of attention at all - candles are too small, and there was no sensible movement before its formation. But the indicator of the candles was singled out only because the ratios between the sizes of their bodies were fulfilled.

Conclusion

The rails pattern is an excellent tool that allows you to determine the beginning of a rollback or vice versa, the completion of a correction for a trend movement. Most often, after this pattern, there is an impulse movement. It is small, but gives a chance to earn.

Keep in mind that the pattern does not belong to the group of main RA patterns, so it is advisable to use it in combination with the same support/resistance levels or other technical analysis tools. If you take into work only ideal models, then you will consistently stay in the black.

Hello dear friends! We continue to study trading on foreign exchange market price action method. The article will focus on the “Rails” pattern, it is a reversal setup and signals a change in the direction of price movement. It is not so common on the charts, but it should definitely be taken into account as an additional tool for technical analysis.

The "Rails" pattern consists of two impressive in size and oppositely directed candles, while their bodies should be as large as possible, ideally 70-90% of the entire candle size.

Do not look for it with a magnifying glass on the chart, the pattern should stand out clearly and clearly!

We enter the market with pending orders placed a little higher (High) of the second candlestick if it is a bullish setup and lower (Low) if it is bearish.

Stop loss is set accordingly on the opposite side of the entry. In the case of a bullish setup, just below (Low) our pattern (it can be Low, both the first and second candle), and in the case of a bearish setup, just above (High).

Let's see what the "Rails" pattern looks like on the chart:

An important point, the pattern should have support in the form of horizontal levels, , etc. That is, there should be an additional confirming factor of our setup, if it is not there, and the pattern was drawn from scratch, take it into account it is forbidden!!!

Do not set big goals, maximum the nearest horizontal level or one and a half stop-loss sizes, in view of the fact that the movement can quickly end and turn into a flat, due to the impressive size of the candles themselves. Their size already tells us that a strong movement has taken place, and it is not worth waiting for some other strong impulse.

Let's visually consider the entry and exit from positions on the patterns shown above:

As you can see, both patterns have supports in the form of horizontal levels. The bearish, in addition, has a support in the form of an exponential moving average with a period of 50 (acts as a dynamic level).

The take profit of the bearish setup was set just above the nearest horizontal level, and the bullish setup was one and a half stop loss sizes.

In the first case, the target was taken, in the second, alas, the price did not reach the take profit (the pattern does not always justify our hopes). But it was desirable to exit this position at a dynamic level, or at least when there was a rebound from it, the profit would not be big, but the deal would not go negative.

Important: pay attention to the trend. Let's say the rails pattern was formed on a price correction, and if the market entry is in the direction of an established trend, this gives it strength. In the case I have considered, entering the market on a bearish setup was just in line with the trend.

That, in fact, is all that I wanted to tell about the Rails pattern. Happy trading! Goodbye.

Sincerely, Evgeny Bokhach

Related articles:

Which belong to the main models, they also distinguish secondary patterns that give, although less strong, but still quite clear signals for trading actions. Strengthening factors in trading with Price Action models, as a rule, are horizontal, Fibonacci levels, etc. The secondary setups include the Rails pattern. The pattern is represented by two large candlesticks that clearly stand out from the rest. The body of the candle should be at least 70% of its entire length. The main condition is that candles are multidirectional, that is, one is bearish, the other is bullish. The setup refers to a reversal and predicts a change in the direction of the price trend.

The model will be the stronger, the more reinforcing factors will accompany it. Strengthening factors include:

  • - the size of the candles - the longer they are, the stronger the signal;
  • - the appearance of the model upon completion corrective movement in the direction of the previous trend;
  • - presence of support - horizontal levels, Fibonacci levels;
  • - older time frames give stronger signals.

Rules for trading on the Rails pattern.

There are two types of Rails pattern - bullish and bearish. The bullish pattern is characterized by the arrangement of candles, where the first is descending, the second is ascending - a signal of a trend change to an upward one:

Rice. 1. Bullish pattern of the Rails pattern.

In a bearish pattern, the first candle is up and the second is down. This model gives a signal of a trend change to a downtrend:

Rice. 2. Bearish pattern of the Rails setup.

When a Price Action Rails pattern appears, it is necessary to check for support in the form of significant support or resistance levels. If the setup is located on them, then you can consider the possibility of making deals.

Trading according to the Forex Rails model is carried out using. The order is placed after the complete drawing of two setup candles on the chart: for a bullish model - a little higher than the formed model, for a bearish one - a little lower. Stop loss is required and is placed on the opposite side of the setup, slightly lower (for a bullish model) or slightly higher (for a bearish model):

Rice. 3. Trading on the Rails pattern.

The Rails pattern signals short-term price momentum in the direction opposite to the previous trend. As a rule, after this impulse begins, therefore, you should have time to correctly recognize the model, and enter the market for your part of the profit, albeit not very large. Profit will also be taken at significant nearby levels:


 Rice. 4. A way to exit a trade on a horizontal level.

The second option for this Price Action pattern is to set a take profit one and a half times more than a stop loss.

In the vast majority of cases, after the formation of the Rails pattern and entering the trade, the price rolls back towards the stop loss. But until the rollback is 50% of the pattern height, the pattern is considered to be working. Otherwise, it is better to close the order manually, albeit with a small loss, and wait for new signals to enter the market. And one more thing - if you doubt whether combinations of two candlesticks are a Rails pattern - such a combination better to skip. According to subjective feelings, even a cursory glance at the chart should be enough to recognize this price pattern.

Bar pattern Rails is pretty simple model Price Action for beginners to understand. On the charts, these patterns are very clearly visible, there is no need for application to determine this candle combination. And although when trading this pattern you will not get more than 1000 points of profit, the strategy built on the Rails model will bring a small but stable income after understanding the operation of this candlestick combination and working it out on a demo account!

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