The railroad tracks is probably the most powerful price action pattern you’ve never heard of.
Overlooked in favour of more popular patterns by most traders, the railroad tracks is a simple reversal pattern that forms frequently in the forex market. Its appearance is a high probability signal price could be about to reverse, and you can use it in a whole bunch of useful ways.
With how overlooked the railroad tracks is, I thought today would be a good opportunity to detail how it works, so you can start using it in your own trading.
First, I’ll detail what the pattern is and give you the lowdown on it’s bullish and bearish variants.
Then, I’ll show you my top two ways to use it in your trading, along with where you should place your stop trading the pattern and when to take profits off your trades.
So, read to learn all about the powerful railroad tracks pattern?
Let’s jump in…
Railroad Tracks Pattern: What Is It And How Does It Form?
The railroad tracks is a simple two-candle reversal pattern that typically forms at the end of trends or large swings.
The pattern forms when price jumps sharply, creating a big candle, but gets countered by an almost equally big candle that forms right after. Side by side, these two candles look similar to railroad tracks, which is where the pattern gets its name.
Like most patterns, the railroad tracks comes in two variations:
Bullish Railroad Tracks
The bullish railroad tracks is the bullish variant, signalling a reversal to the upside when it appears.
This pattern forms when a strong bear candle is followed by an almost equally big bull candle that causes price to close near the open of the bear candle. It shows the bears, who were in contralto of price, have had the momentum wrestled back from them by the bulls, making a reversal to the upside likely.
For a bullish railroad tracks to be valid, it must have the following characteristics:
- Two candles that form side by side; a bull candle followed by a bear candle
- Both candles must be of a similar length.
- The 2nd Candle MUST NOT close higher than the first.
Bearish Railroad Tracks
The bearish railroad tracks, as you might have guessed, is the bearish variant of the pattern. Its formation indicates a possible reversal to the downside.
The pattern is created when the bears overwhelm the momentum of the bulls, as shown by a strong bear candle cutting deep into the body of a larger bull candle. With the bears back in control, the chances of a reversal followed by a move lower are extremely high.
For a bullish railroad tracks to be valid, it must have the following characteristics:
- Two candles that form side by side; a bear candle followed by a bull candle
- Both candles must be of a similar length.
- The 2nd Candle MUST NOT close lower than the first.
Being a reversal pattern, you’ll usually find the railroad tracks forming either at the end of trends or large swings.
You can see this pattern signalled a reversal of the downtrend, resulting in a new uptrend beginning.
The pattern itself isn’t a great sign price could be about to reverse. So you need to combine it with other key technical points – like support and resistance levels, and supply and demand zones – to really get a high probability signal the current trend or swing could be about to reverse and change direction.
The Psychology Behind The Railroad Tracks
In terms of psychology, the railroad tracks pattern shows the bulls or bears, after being into almost total control, have been blown away by the other side, revealing their true momentum.
The first candle in the pattern, which always shows a sharp move, reveals the bulls are in total control. All the momentum is with them, which is why the candle is so big.
Then we get the second candle…
This is always the opposite of the first candle and pushes price almost back to the open of the first candle. It shows the other side (bears in our case) have entered the market with much more force (momentum) than the bulls. The bulls thought they had the upper hand when actually the bears had much more firepower in reserve.
How To Use The Railroad Tracks Pattern In Your Trading
While the railroad tracks doesn’t appear anywhere near as often as some of the more popular candlesticks, it’s still well worth watching for, and there are a couple of really useful ways you can use it in your trading.
Here are my two favourite ways to use them…
#1 Entry Signal Into Supply And Demand Zones
There’s nothing worse than seeing price return to a good supply or demand zone, but then fail to form a pattern inside, giving NO signal to get into the reversal.
One way to rectify this is to watch for more patterns, and the railroad tracks is a great candidate for this.
Because the pattern forms when one candle cuts deep into the previous candle, almost closing beyond it, the railroad tracks basically act like an engulfing pattern. It shows the banks have entered the market and decided to buy or sell a large amount of currency, making a reversal likely to soon begin.
Here’s an example…
Just after price entered this demand zone, which wasn’t the best zone, all things considered, a bullish railroad tracks pattern formed.
The pattern tells us the banks have decided to buy.
We don’t know why – could be to place buy trades, take profits off sell trades, or close out open sell trades – but in any case, it doesn’t matter; we should see price reverse and begin moving higher.
And what do you know…
Not long after the railroad pattern forms, price reverses and starts rising.
So, if you want another top price action signal to get into S & D trades, start watching for the railroad tracks pattern. Its appearance acts as good confirmation the banks want price to reverse from the zone, giving you a great signal to enter a trade and get into the impending reversal.
#2 Use Railroad Patterns To Get Into Support And Resistance, Fibonacci Trades
Railroad patterns make great entry signals into supply and demand zones, but you can also use them to enter reversal trades at normal technical points, like support and resistance levels and Fibonacci retracements.
Since the pattern is (almost) an engulf, it’s a great signal the banks are buying/selling to make price reverse.
Here are some examples…
See how this railroad pattern formed when price hit a major resistance level?
The appearance of this pattern tells us the banks could be selling because they want price to reverse. It doesn’t mean price is definitively going to reverse – nothing is certain in trading, remember – but it does drastically increase the probability that it will, so is a good signal to use to get short.
A few later, price reverses, confirming the pattern formed from the banks selling.
Again, as with supply and demand zones, we don’t know why they decided to sell – could be to place sell trades, take profits off longs, etc – but in any case, price should now continue lower for a while.
With Fibonacci retracements, you can also use Railroad patterns as entry signals into pull-back trades.
This works the same way as trading the patterns at S & R:
You draw a fib retracement on a pull-back, wait for price to return and touch the level – very important, then see if a bullish or bearish railroad pattern forms and signals a reversal.
If everything works out, price should reverse and resume the prior trend.
Stop Location And Taking Profits
The stop on a railroad pattern trade always goes above the highest high of the two candlesticks for the bullish pattern. For the bearish pattern, the stop must go below the lowest low of the two candles.
It’s a good idea to put it slightly above/below, too, not right at the low or high itself.
Sometimes price will spike the high or low before reversing, so leaving a small gap of a few pips between the high/low and the stop loss price will ensure this doesn’t happen often.
Also, the above rules don’t apply to supply and demand zones. They have their own rules for where the stop must go – either above or below the zone. If you put the stop above or below the candle inside the zone, price will usually break beyond, taking you out of the trade and causing a loss.
When it comes to taking profits… the choice is really up to you.
Any method will work fine, as long as it brings the risk down safely and securely.
I mainly use lower lows/higher highs to know when to take profits, with the Heiken Ashi chart changing colour – see this post – acting as a signal on when I should take a large amount off or close the trade completely.
This combination allows me to stay in the trade longer and take profits at times when it’s safe to do so.
Summary
All in all, the railroad pattern is one you MUST add to your price action arsenal.
While it doesn’t form as often as the more common patterns – like pin bars or engulfs – it’s power and usefulness makes it one still worth watching for, whether as another entry signal into trades from key technical points or as an early warning sign price could be about to reverse.
Start using it today, and you’ll soon see the power of the railroad tracks pattern.
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