How we trade through chart patterns:
We have talked a lot about the price patterns that form on the chart of a specific symbol, and we said that they generally represent cases of catching breath and stabilizing for a period before the price continues in its previous movement or reverses the trend.
However, it is not enough to just know how the tool works; we need to learn how to use it. So we decided to talk a little more about how to use these chart patterns, because we must gain profits from what we have learned.
Let’s summarize the chart patterns we learned and classify them according to the signals they provide.
Reversal chart patterns:
Reversal patterns are patterns that indicate the current trend is about to change and reverse.
If a reversal chart pattern forms during an uptrend, it indicates that the trend will reverse and the price will soon decline.
Conversely, if a reversal chart pattern is seen during a downtrend, it indicates that the price will rise later.
In this lesson, we discussed six chart patterns that provide reversal signals, which are:
1 - Double Top/Bottom
2 - Head and Shoulders
3 - Inverse Head and Shoulders
4 - The Ascending Wedge
5 - The Descending Wedge
In the following image, we see examples of how these patterns form in the chart:
To trade these chart patterns, simply place a buy order above the neckline, in the upward direction; or place a sell order below the neckline in the downward direction. Then look for a target approximately the same height as the pattern.
To manage risks properly, don’t forget to have a stop-loss; a reasonable stop-loss can be set around the midpoint of the chart pattern.
For example, you can measure the distance between the two lows from the neckline and divide it in half and use it as your loss limit.
Note: When we say that the target is the same height as the pattern on the chart, and the stop-loss boundaries are half this amount in the opposite direction, it simply means that the expected target is double the loss limits. In other words, the profit-to-loss ratio is 2 to 1.
Continuation chart patterns:
Forming these models on the chart of a specific symbol indicates the likelihood of the actual price trend continuing. These are usually called stability patterns, as they show how buyers and sellers take a quick break and then continue in the same direction as the previous trend.
Trends usually do not move in a straight line up or down; there is always a pause in price movement, then a small sideways movement, and corrective movements may also occur up or down. Thus, the price regains momentum or accelerates movement to continue the entire process. These patterns include:
1 - Wedge
2 - The Rectangle
3 - The Flag
Please note that the wedge pattern can be ascending or descending, depending on the direction in which it forms.
For flags, the price target can be set at the top, equal to the height of the flagpole. For continuation patterns, the stop-loss is usually placed above or below the actual chart pattern.
Bilateral patterns:
Bilateral chart patterns are a bit more difficult because they show that the price can move in either direction.
So what is this signal then?! This is where the triangle patterns come in. Do you remember when we talked about how the price could break above or below the triangle?
To use these patterns, you must consider both cases (rising in an uptrend or collapsing in a downtrend) and place one order at the top of the pattern and the other at the bottom of the pattern.
If one order is executed, you can cancel the other order.
Summary of the speech:
Price patterns in the chart are tools that provide simple analysis and can be profitable if used correctly, but they are not magic wands; they always depend on your perception and can yield significant profits.
There is no such thing as the 'best technical pattern' because all patterns and models in technical analysis work well but not at 100% effectiveness and are always in a state of flux. All patterns are used only to detect potential trends in the market and are not intended to be 100% profitable.
Some patterns are more suitable for high-volatility markets, while others are suitable for low-volatility markets. It is better to use some patterns in a bull market and others are best used when the market is bearish.
We have about 10 commonly used patterns in the market that you will get to know for free in this course, so you don’t need to buy a book on technical patterns.
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