NINE(9) PROFITABLE CHART PATTERNS EVERY TRADER NEEDS TO KNOW
There’s a difference between chart patterns and candlestick patterns.Chart patterns are not candlestick patterns and candlestick patterns are not chart patterns:
Chart patterns are geometric shapes found in the price data that can help a trader understand the price action, as well make predictions about where the price is likely to go. Candlestick patterns on the other hand can involve only one single candlestick or a group of candlestick which have formed one-after-the other in regard to how they form in relation to one another in terms of their body length, opening and closing prices, wicks(or shadows) etc. Not knowing what chart patterns are forming can be a costly mistake. If you are like that, this is your opportunity to get back on track.
Why costly mistake? Because you are completely unaware of what is forming on the charts and you end up taking a trade that is not in line with what the chart pattern is signalling or telling you!
These are the 9 chart patterns you will learn about today:
Triangle chart patterns-symmetrical, ascending and descending (3 patterns) Head and shoulders and Inverse Head and Shoulders (2 patterns) Double Bottom and Double Top (2 patterns) Triple Bottom and Tripple Top (2 patterns) But first up, I am going to talk about triangle chart patterns.
Symmetrical Triangle There are 3 types of triangle chart patterns and the chart below shows the differences between each very clearly:
Now, let’s start with the symmetrical triangle pattern first.
Is A Symmetrical Triangle Bullish Or Bearish Chart Pattern? The Symmetrical triangle chart pattern is a continuation pattern, therefore, it can be both a bullish or bearish pattern:
What does this mean then? Well, if you see this pattern in an uptrend, expect a breakout to the upside. See an example below:
If you see a symmetrical triangle pattern form in a downtrend, then expect a breakout of this pattern to the downside like this one shown below:
How To Draw A Symmetrical Triangle You will see price moving up and down but this up and down movement is converging to a single point. You need a minimum of 2 peaks and 2 troughs to draw the two trendlines on both sides. It will be only a matter of time before price breaks out of the pattern and either moves up or down.
Two Simple Ways To Trade The Symmetrical Triangle #1: Trade the Initial Breakout
The best way is to confirm that the breakout actually happens with a candlestick before placing your order. What I do I is, for example, say I’m watching a symmetrical triangle form in the 4hr charts and I know that soon a breakout will happen. I then switch to the 1hr chart to wait for the breakout to happen. If a 1hr candlestick has broken the triangle and closed below/above it, that’s my trade entry signal. So I will place a pending buy stop/sell stop order to catch the breakout from there.
Often I want to make sure that the 1hr candlestick closes outside of the triangle before I enter a pending buy stop or sell stop order to capture the movement that happens to avoid false breakouts while the candlestick has not closed yet.
But here’s the problem with trading triangle breakouts, see chart below:
I don’t like trading breakouts like the one shown above and here’s why:
The stop loss distance is too large. I’d prefer to enter trades with breakout candlesticks that are close to the trend lines that have been broken. I often see that such breakout of extremely long candlesticks are not sustainable and the price will often tend to reverse after such candlesticks as can be seen by the chart above…notice that after the breakout candlestick, there was one bearish green pin bar and then for the next 4 candlesticks afterwards, the price went down. This is what tends to happen with such long breakout candlesticks. So if you entered a buy order using that long breakout candlestick above, you would have to wait a while for your trade to turn profitable.
#2: Trade the retest of the trendline that is broken
The second way to enter is to wait for a retest of the broken trendline in the triangle pattern then either buy or sell. This may also be handy if you had an extremely long breakout candlestick on the initial breakout, your best option is to wait for a retest of the breakout trendline then if that happens you enter. Stop loss Placement Options On Symmetrical Triangle Pattern Here are 3 ways on how to place a stop loss on triangle patterns, which include symmetrical, ascending and descending triangle patterns which you will learn next. The stop loss placement techniques here are applicable to all triangle patterns so take note of that:
Ascending Triangle Chart Pattern And ascending triangle pattern looks like this chart shown below:
And this is how a real chart looks like:
Is Ascending Triangle Pattern Bullish Or Bearish? It is considered a bullish continuation pattern in an existing uptrend. So when you see this forming in an uptrend, expect a breakout to the upside.
However, it can also be a strong reversal signal (bullish) when you see it form in a downtrend.
Stop Loss Placement Options You can use the strategies given in the symmetrical triangle.
Take Profit Options I prefer to target previous resistance levels as my take profit target.
Or as shown on the chart below, you can use the “x” pips distance as your take profit target. Another way to do it would say 3 times the “x” pips or 2 times the “x pips” distance. That should give you your profit target level(s).
Descending Triangle Chart Pattern
Important things to note about the descending triangle chart pattern: The descending triangle chart pattern is characterized by descending resistance levels and a fairly horizontal support levels converging to a point until a breakout happens to the downside as shown below:
And this is how a descending triangle looks like on a chart shown below:
Is Descending Triangle Pattern Bullish Or Bearish? It is a bearish chart pattern that forms in a downtrend as a continuation pattern.
However, this pattern can also form a bearish reversal pattern at the end of an uptrend.
Therefore regardless of where it forms, it’s a bearish chart pattern.
How to Trade The Descending Triangle Formation Similar to the other 2 triangle patterns, you can either trade the initial breakout or wait to see if price reverses back to test the broken support level and then sell.
Note: with a triangular pattern, I often prefer to wait for a candlestick to breakout and close outside of the pattern before I enter a trade. This helps to reduce false breakout signals.
But there will be times when I will just trade the breakout with a pending sell stop order just a few pips under the support level to catch the breakout when it happens but when I do that, I sit and watch the close of the 1hr candlestick to make sure that it does not close above the support line (if that happens, it may mean a false breakout).
And then there are the issues of extremely long breakout candlesticks again like this:
As mentioned previously:
when you have such extremely long breakout candlesticks like that, better to sit and wait to see if price will reverse and get back up to the support level that was broken ( a retest) which will now be acting as a resistance level and then sell when that level is touched. How To Take Profit I prefer to use previous support levels, lows or troughs and use those as my take profit target level.
Another method of taking profit that is commonly used is to measure the height of the triangle and if the height is said 100 pips then that is your take profit target. The chart below should give you a clear idea of how it’s done:
Note that on the chart, the descending triangle formed the end of an uptrend.
Head & Shoulders Chart Pattern The head and shoulder chart pattern is a bearish chart pattern. This is what a head and shoulder reversal pattern looks like:
Important things to note about the head and shoulder pattern:
The head and shoulders pattern is a bearish reversal pattern and when found in an uptrend, it signals the end of the uptrend. Here’s how this pattern forms:
Eventually, the market begins to slow down after going up for some time and the forces of supply and demand are generally considered in balance. Sellers come in at the highs (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.) Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again. Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline. Here’s another example:
How To Trade The Head & Shoulder Chart Pattern. The following chart below makes it much clearer.
Inverse Head and Shoulder Pattern You will also see this pattern, though not as popular, it’s good to keep an eye out for it. The inverse head and shoulder pattern is a bullish reversal candlestick pattern and just the opposite of head and shoulders pattern.
Here’s what it looks like on the chart shown below:
And this is what it looks like on a real chart:
Double Bottom Chart Pattern A double bottom chart pattern is a bullish reversal chart pattern and when it forms in an existing downtrend, it signals a possible upward trend.
Here’s what It look like:
3 Ways on How To Trade Double Bottoms #1: Trade the breakout of the neckline:
Many traders once they see that the double pattern has formed and the neckline is being tested, that’s when they get in as soon as a breakout happens.
#2: Wait to enter on the retest of Broken Neckline
Then there are other groups of traders that like to enter when price reverses back down to touch the neckline, which now would act as a support level. Once it hits that neckline level they buy.
#3: Buy on bottom 2. In this way, you have the potential to ride the trade all the way up if the neckline is intercepted. You should consider buying on bottom 2 as buying on a support level…as a matter of fact, that is what it is! Look for bullish reversal candlestick patterns for trade entry signals.
Take Profit Target levels If you buy on bottom 2, you can use the neckline as your take profit level, or any previous highs above that as well. If you buy the breakout of the neckline, use the distance between the bottom and the neckline in pips to calculate your profit target. See chart below for example:
Double Top Chart Pattern A double top chart pattern is a bearish reversal chart pattern and when found in an uptrend and once the neckline is broken, that confirms a downtrend. The double tops are very powerful patterns and if you get into a trade at the right time, you stand to make a lot of profits when the breakout happens to the downside.
Here’s an example of a double top Chart Pattern shown below:
How to Trade the Double Top Chart Pattern There are 3 ways to trade the double top chart pattern:
#1: Trade the initial breakout of the neckline.
#2: The technique I like most to take a sell trade on Peak 2 when I see a bearish reversal candlestick. And if the price moves down and intersects the neckline and continues to do down further, your profits are dramatically increased.
#3: You can wait for the price to go back up to test the broken neckline (which would now act as resistance level) and when you see a bearish reversal candlestick pattern, go short (sell) as this example below shows:
This is how it would look like in a real forex chart:
How to Take Profit On The Double Top Chart Pattern Use a previous low (support levels) to set take profit targets. Or another option would be to measure the distance between the neckline and the highest peak (the range) and use that difference in pips as take profit target if you are trading the breakout from the neckline.
Triple Bottom I do not see triple bottoms forming quite as often…Regardless of that, you should have an idea of what it looks like:
Triple bottoms are bullish reversal chart patterns, which means if found in a downtrend and this pattern starts to form and once the neckline is broken and price head up, this confirms that the trend is up.
Here’s another example of a triple bottom shown below:
How to Trade The Triple Bottoms Many traders wait until the neckline is broken and trade the initial breakout. Others will wait for a retest of the broken neckline to enter a buy order once they see a bullish reversal candlestick… I prefer to take trades on the 3rd bottom by watching the price action. If I see a bullish reversal candlestick pattern, I buy. Why do I do that? Well, if the price goes up and breaks the neckline and goes upward, I would be in a lot more profit than if I bought the breakout of the neckline. Profit taking methods would be similar to double bottom chart pattern mentioned previously…
The Triple Top Chart Pattern Triple tops are the opposite of triple bottoms and they are bearish chart patterns. They rarely occur but its good to know what they look like.
Triple tops when found in an uptrend, it signals the end of the uptrend when the neckline is broken and price heads down.
How To Trade The Triple Top Chart Pattern Some conservative traders wait for the neckline to be broken to trade that breakout. Some will most likely wait for a retest of the neckline and then sell. I prefer to take trades on Peak 3 and if the trade breaks the neckline and goes all the way down, I have a lot more profit to make. The key to taking a good trade on peak 3 is by looking for bearish reversal candlesticks. These are your signals to go short. If you take a trade at peak 3, your profit target can be the neckline. Or if you take a trade on the breakout of the neckline, measure the distance in pips between the neckline and the highest of the 3 peaks and use that distance to calculate your profit target. Or you can use a previous low and use that as your take profit target level as well.
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