How to use chart patterns to invest
Chart patterns are used by almost every single investor, they are crucial to understanding market movement, Trends, support & resistance. Ignore them at your peril.
Reversal patterns are chart formations that could indicate that, the original underlying trend is about to change direction.
If a reversal chart pattern forms during an uptrend, it can indicate that the trend will reverse and that the price could head down. Alternatively, if a reversal chart pattern is seen during a downtrend, it suggests that the price will move up later on.
To invest with these chart patterns, you may place an order beyond the neckline and in the direction of the new trend. Aim for a price that’s almost the same as the height of the formation or a little less.
If you see a double bottom, place a long order at the top of the formation’s neckline and go for a target that’s just as high as the distance from the bottoms to the neckline.
Equally important is to use a “stop loss” to manage your “Risk”. A reasonable stop loss may be considered around the middle of the chart formation.
Continuation patterns are those chart formations that may indicate that the underlying trend could resume.
They are also known as “consolidation” patterns because they show how BULLS or BEARS reduce trading activities before moving further in the same direction as the previous trend.
continuation patterns include wedges, rectangles, and pennants. Additionally, wedges can be considered as reversal or continuation patterns, depending on the trend on which they form.
To invest with these chart patterns, you may place an order above or below the formation (following the direction of the ongoing trend, of course). Then aim for a price that’s at least the size of the chart pattern for wedges and rectangles or a little less
For pennants, you can aim higher and target a price towards the height of the pennant’s mast.
For continuation patterns, stops are usually placed above or below the actual chart formation.
When trading a bearish rectangle, you could place your stop loss a few pips above the top or resistance of the rectangle.
Bilateral chart patterns can be a little harder to interoperate and tend to be a little more ambiguous, basically these indicate that the price can move in either direction.
If you wish to invest using these indicators, you should consider both scenarios (upside or downside breakout) and place one order on top of the formation and another at the bottom of the formation.
If one order gets triggered, you can cancel the other one (O.C.O.).
The only problem is that you could catch a false break if you set your entry orders too close to the top or bottom of the formation. Use your stop loss carefully.