Guide to Trading the Stair Steps Pattern with Trendlines

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What is the Stair Steps Pattern?

The Stair Steps Pattern as its name suggests is when the candles form stair steps or stairs-like pattern which moves at an ascending direction.  Just like a regular stair, it is made up of a series of rises (vertical component) and runs (horizontal component). The rise would be the actual increase of the price while the runs would be the sideways movement of the price. The length of a Stair Steps Pattern can go on as long as the market is bullish and will be cut off or will end when the market reverses to a bearish market.

The bullish Stair Steps Pattern is made up of a series of higher highs and higher lows as shown in the image where the green arrows show the higher highs, and the red arrows below the candles show the higher lows. Therefore, for a price movement to be identified as a Stair Steps Pattern, it should always have higher highs and higher lows.

In the same way, the Stair Steps Pattern can also be found on bearish markets however the conditions should go against the previously mentioned conditions for a bullish Stair Steps Pattern. A bearish Stair Steps Pattern should have a series of lower highs and lower lows as the market continues toward a bearish trend.

As an overview of the Stair Steps Pattern, the pattern will start when the market is consolidating or moving sideways. After consolidation, the price is assumed to increase and form a new high – the new high is displayed by the long green candle which is higher or taller than the previous candles. After the new high is established, the price can drop momentarily at a level that is not lower than the previous lowest low. In the same way, the price can also move sideways at a level that is close to the current high. When a new candle moves higher than the current high, it becomes the new higher high – this establishes the next step of the ladder. The cycle continues as long as the market is bullish.

While the Stair Steps Pattern is already good enough to execute position trades or long-term trades, it’s not actually an ideal pattern for scalpers as well as swing traders because it lacks signals of when the price can momentarily drop. To counter this problem, a trendline can be used. By simply establishing a trendline, a trader would be able to identify when and where to make safe exits on a chart.

To create a trendline, simply draw a line that connects the higher highs of a chart as shown in the image. With a trendline, a trader would be able to see where the price is expected to stop before moving toward the other direction. From the sample image, the trend line is used to identify the possible maximum point of increase for the price. Once the price hits the specified trendline, the price is expected to drop momentarily or consolidate before forming another step of the stair. In the same way, a trend line that connects the lower lows can also be drawn in order to identify the point where any price drop would stop and potentially move back to a bullish trend.

A Stair Steps Pattern is assumed to stop or end when the price breaks or breaches the trend line. For the case of the sample image above, the Stair Steps Pattern will end when the price breaks the lower trend line.

By using trend lines with the Stair Steps Pattern, not only will a trader be able to identify the ideal entry and exit points but can also determine if a trend is likely to reverse or continue.

Finding the Stair Steps Pattern on an Actual Chart

As mentioned earlier, a basic way to identify the Stair Steps Pattern is by simply looking at the price movement. It should be composed of a higher high and a lower low for a bullish Stair Steps Pattern, and a lower high and lower low for a bearish Stair Steps Pattern.

For this particular example, let us refer to this range of the asset – BTC, which has both a bullish and bearish Stair Steps Pattern.

This example with BTC shows two diagonal line movements of the price – one diagonal line that moves down toward the middle, and one diagonal line that moves up.

First, let us identify the bullish Stair Steps Pattern. As an initial condition, the chart should have a series of higher highs and higher lows as the price moves up. This first condition is verified by the green lines forming stairs or steps. Also, the ideal momentary exit points on this chart are identified by drawing a trend line that connects the higher highs. In this case, the ideal short-term exit would be when the price touches or reaches the trend line. For long-term exits, or when the market is expected to change toward a bearish market, the ideal exit point would be when the price breaks or breaches the lower trend line. This ideal point of exit is shown by the red arrow from the image.

The other half of the chart shows a bearish Stair Steps Pattern because of the series of lower highs (red arrows) and lower lows as shown in the next image. This example shows that while the market is moving at a downward trend, it is still possible to make long as well as short trades within the medium and short-range scale through the help of trend lines.

The trend reversal is then identified or verified when the price breaks the upper trend line – as shown by the green arrow on the image.

For both bearish and bullish Stair Steps Pattern examples, the ideal short and mid-term entry points for long trades would be when the price bounces from the lower trend line. On the other hand, the ideal short trades would be when the price bounces from the upper trend line.

Our Final Thoughts

The Stair Steps pattern is a great pattern formation when dealing with long bullish and bearish trends. While the position trader can benefit greatly benefit from this pattern, both the short and mid-term trader can also benefit from it by taking advantage of the short bounce and pullbacks within the trend lines.

As an additional confirmation for the safe and ideal entry and exit points, moving averages can also be used along with support and resistance levels. These indicators and levels can help a trader find where the price is assumed to make a bounce or pullback.

Now, the Stair Steps pattern can only be taken full advantage of when used at the right time and at the right market. By practicing how to find this pattern on an actual trade will a trader be able to gain experience and confidence. Fortunately, eToro comes with a virtual account where you can join real-time trades using virtual funds. Simply log in to your eToro virtual account and click on the “Virtual Portfolio” to start trading with virtual funds.

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