Pattern trading can be sometimes very profitable. However, first you should be well conversant with the different chart patterns. There are basically two types of chart patterns. One are the chart patterns that generally represent price consolidation and include patterns like triangles, flags, pennants, wedges, rectangles and the head and shoulder pattern among others. Pattern trading may be considered one form of breakout trading.
These chart patterns are mostly a signal for a breakout or a continuation of the existing trend. For the most part these chart patterns are traded when a breakout of one or another kind occurs. There is a famous head and shoulder shampoo also in the market. You might be using one. Dont confuse the head and shoulder with the name of a shampoo. It is a chart pattern that you must be familiar with if you want to continue reading this article otherwise first make yourself clear about these chart patterns and then continue reading this article.
The second type of chart patterns that are the Japanese Candlestick patterns! Candlestick patterns are not tied as closely with breakout trading. Now when we talk of pattern breakouts it should be clear which chart patterns constitute a continuation pattern and which chart patterns are considered reversal patterns.
The most common chart patterns found on the currency charts that are generally considered to be reversal formations include double tops/bottoms, triple tops/bottoms and head and shoulder tops and bottoms.
A continuation pattern means that the trend is going strong and the chances of its reversal are small. When a continuation pattern approaches breakout on the side of the pattern that would denote a continuation, technical traders patiently wait for a breakout. The most common chart patterns that are generally considered to be continuation patterns include flags, pennants, triangles, wedges, rectangles and others.
One benefit of pattern trading lies in the precise profit targets. This type of trade is treated as a breakout trade with similar type of entry and stop loss placement as with standard support/resistance breakout trades.
The traditional signal for the trade in the head and shoulder pattern is after that price breaks the neckline. Profit target is derived by measuring the height from the top of the head to the neckline then projecting that height from the neckline breakdown for the profit target. So a good example of a precise profit target is that of the head and shoulder pattern.
Similarly the height of the rectangle is projected up or down to derive the profit target after the breakout in case of the rectangle consolidation pattern. Triangles, flags, pennants and other chart patterns also have convenient build in profit targets.
Candlestick patterns in themselves are not usually considered as trading signals. Rather candlestick patterns are most often used as important trade confirmation tools in conjunction with other technical indicators.
For example, it should not be taken as a reversal signal to buy low if the hammer candlestick pattern occurs after a steep well defined down trend. However, if this hammer candlestick pattern occurs right at a well established support level, the hammer candle may be taken as a strong signal that a potential long trade may be profitable.
Author Resource:
Mr. Ahmad Hassam is a Harvard University Graduate. Try This 1500 Pips A Day Forex Signal Service from heaven! Learn These Candlestick Patterns !
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