One of the best and most reliable candlestick patterns is the Railroad Track candlestick pattern. The best part about this pattern is that it goes with any type of technical analysis. This pattern works exceptionally well when combined with indicators or price action techniques. However, it alone does not provide buy/sell signals.
In this article, we shall be going through all the tips and tricks on how to trade the railroad tracks using price action analysis.
How is the Railroad Track Candlestick Pattern formed?
It is formed by two opposite candles. In this pattern, both the candles are similar in design, but one must bullish and other bearish.
Below is the representation of a railroad track pattern.
Since this pattern looks very identical to a railway track; it is given the name Railway Track candlestick pattern.
Types of Railway Track patterns
There are two types of railway track pattern, namely, Bullish railway track and Bearish railway track.
Bearish Railway Track Pattern
In this pattern, the first candle is bullish, and the second candle is bearish. If we try reading the pattern, the market showed bullishness in the beginning but came right back down in the end.
Initially, the market shoots up from a specific price, indicating that the buyers are showing some interest in the currency. But, for whatsoever reason, the market suddenly drops back down to that price. This is a signal that the buyers are not willing to buy it at a higher price. Now, the last piece of the interpretation we shall discuss in the subsequent topics.
Below is an example of a bearish railroad track pattern
Bullish Railway Track Pattern
This pattern is opposite to the bearish railway track pattern. Here, the first candle is bearish, and the second candle is bullish.
In this pattern, the first is bearish, indicating some strength of the sellers. However, the very next candle becomes bullish, signifying that the buyers are not letting the sellers go down. If we were to interpret in the seller’s perspective, the market coming right back up indicates that the sellers are not interested in selling at lower prices.
So, how shall we use this information to trade in the markets? The answer to this question will be discussed in the following topics.
In which timeframe should you look for the railway track pattern?
This is one of the most frequently asked questions when it comes to trading candlesticks patterns. Well, every timeframe has its own story within it. So, it doesn’t really matter on which timeframe you trade the pattern. And, if you are trading using price action techniques, then the pattern will work on every timeframe.
What else matters?
This pattern will work only when it appears in a logical area. Not every railroad track will go as per your predicted direction. There are particular setups when the pattern works according to its meaning.
A complete trade example
In this example, we shall learn how to interpret this pattern when the market is in a trending state. Below is the chart of GBP/JPY on the 60mins timeframe. Clearly, we can see that the market is in a downtrend. The orange line represents the seller’s support and resistance.
Like a professional price action trader, we don’t go short when the price is too low. We first wait for a discount (pullback) to kick in; a railroad track pattern to show up, and then we prepare to sell.
As discussed in previous articles, for the big players to do their sells, they need buy orders to fill their sell orders. Here in this example, the downtrend is in the eyes of the public. So, the public starts selling along with the large players. Now, there is nobody to buy their sell orders. And, if the big sellers have more orders to be sold, they need the public to turn into buyers. This is the reason there is a pullback in the market. Looking at the pullback in the below chart, do you think anybody has turned into buyers yet? As the pullback is quite shallow and very slow, not many are seeing it as a buy.
Consider the next chart shown below. We can see that a big bullish candle appeared. Now, we can definitely say that people have started to switch to the buy-side. All we want now is the big sellers to show their presence so that we can go short along with them.
In the following chart, we can see that the sellers shot right back down, and formed the railroad track pattern. Now, both the pattern, and our analysis, are indicating a sell.
The below figure represents the result of the trade, and we can evidently see that the pattern worked exceptionally well.
What about the stop loss and take profit?
While trading patterns, a stop loss is a must. If the pattern is read correctly, the stop loss can be kept above the railway track pattern. However, sometimes keeping the stop loss right above the railroad track pattern could be insufficient. So, it is recommended to give more room than usual for your stop loss while specifically trading candlestick patterns.
As far as the target/take profit is concerned, a decent target would be at the recent lows. And, if the seller is coming in strong, you can close just half your position at the recent low and aim for bigger profits. However, the safest way to play it is by closing the entire trade at the recent lows.
The railroad track is one of the most reliable patterns. However, the pattern provides consistent results only when it appears in a logical area. Price Action traders use this pattern not just as a confirmatory tool, but as a timing tool as well.
Finally, to extract the best from the pattern, always use it by combining it with other technical instruments. All the best!