One thing which people usually say when they hear “trading” or “Day Trading” is that it is complicated as well as daunting. While there may be some truth to this, anyone can actually become a good trader provided he or she is knowledgeable of the basic candlestick patterns. These basic candlestick patterns allow any beginning trader to trade effectively like a pro, having lesser risks and more potential gains. In this article, we’ll be discussing a basic yet powerful candlestick pattern which is the Railway Tracks Pattern – how to distinguish it in a chart and how to use it on an actual trade at eToro.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 67% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is the Railway Tracks Candlestick Pattern?
First of all, a Railway Tracks Candlestick Pattern is a pattern that signals a reversal. This means it is a signal to either buy or sell positions for an imminent change of trend. It is easy to spot in a chart because of its form which is almost the same as the “Tweezer” candlestick pattern. The Railway Tracks candlestick pattern is made up of two candles – bearish and bullish which stand or hang on the same trend line. For a bullish Railway Tracks Pattern, both candles should stand on the same support level or lower trend line. For a bearish Railway Tracks Pattern, both the candles should hang from a common resistance level or upper trend line. See the image below for an illustration of the bullish and bearish Railway Tracks Pattern.
One basic characteristic of a Railway Tracks Pattern is that the bodies of the candles should be more significant than the shadows or tails. The second candle should have a thicker body which overwhelms the first candle – this shows the strength of the second candle which pushes the trend to move in the same direction as the candle. However, there are also times when the second candle may be smaller than the first – this usually happens for short trend reversals.
It got its name from how it looks – which is like a railway track.
The only difference between the Railway Tracks Pattern with the Tweezer Pattern is that the size of the candles may vary. The Tweezer Pattern has candles that are very identical in all proportions such as the body and the shadow, while the Railway Tracks Pattern usually comes with a smaller first candle and a longer second candle and vice-versa, with varying lengths for its shadow. Both the Railway Tracks Pattern and the Tweezer Pattern are signs for reversal, however, the Railway Tracks Pattern is known for dealing with longer price movement or range.
How to Use the Railway Tracks Pattern on an Actual Trade
For us to determine the best application of the Railway Tracks Pattern on actual trade, let us consider a few examples for actual trades by some of the most popular assets on the market. For this example, let us use the assets Apple and Nasdaq 100.
This particular example for Apple has been taken using a weekly range and can be done by simply clicking the range dropdown menu from the tab of tools located on the top right of the panel (as shown on the image below). You can choose from per minute, per hour, day, and week for your preferred range.
In this chart example from Apple, we have a series of pattern formations for Railway Tracks Pattern. We can notice that both candles from all formations have a common trend line – either the support level from the base or the resistance level from the top. All bullish Railway Tracks Patterns have candles that stand on a support level while all the bearish Railway Tracks Patterns are touching a common resistance level.
Another example is for the asset Nasdaq100. For this example we will notice that the candle body is not always the one that touches the trend line – we can see here that the tail can also be used. This example shows a series of instances where the tails were the ones that touched the trend line – not the body of the candle.
What’s important from both examples is that they should always be touching a common trend line. Despite the candle size, including the length of the shadow or tail, both candles should always be touching a common trend line for it to be considered a Railway Tracks Pattern. Both examples show reversal right after the pattern formations.
What we think
Although the Railway Tracks Pattern is easy to comprehend and is a good indicator for a reversal, they may be hard to find in the chart. Oftentimes, you will need to use varying date ranges by changing the duration or range settings as shown earlier. The best range setting to use would be where the price movement is clear and readable. A range setting that is too small (such as the minute range) can provide you with very small and thin candles which can be hard to interpret. On the other hand, a range setting that is too big (like weekly range) can take away trench formations where pattern formation is possible.
Also, this pattern can only be confirmed by drawing a trend line where both the candles should meet. The best exit points would be right after the second candle. However, to avoid risks of trend continuation instead of reversal, a candle confirmation after the pattern can also be considered. If the confirmation candle moves in the direction or trend of the second candle then it would be a good confirmation of the reversal.
One more way to confirm the outcome of the pattern is by checking the volume. Simply compare the volume of buyers with the sellers. If the second candle is bullish, the volume should show that buyers are overwhelming the sellers. On the other hand, if the second candle in the pattern is bearish, the volume should show that the sellers are overpowering the buyers.
The Railway Tracks Pattern is actually quite easy to implement in an actual trade and it involves lesser risks compared to other candlestick patterns. What’s important when dealing with this pattern as well as all other candlestick patterns is to always consider a candle confirmation right after the pattern formation, and take advantage of tools that will help you visualize possible entry and exit points.
Only by understanding the Railway Tracks Pattern can you be able to benefit from it. With a practice account at eToro, you’ll be able to master this pattern in no time and increase your chances of gaining profits.
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