Learning more about detecting and tracing tradable chart patterns is one of the most effective ways to take your trading game to the next level. The trading market spends the bulk of its time moving sideways. Within each of those sideways phases are patterns waiting for savvy traders to detect them.
You can enjoy the best reward to risk ratios at the breakout points of each of those patterns. Each time a pattern gets completed, brand new trends emerge. This is why tradable chart patterns should form the foundations of your technical analysis.
Patterns connect trending phases, and if you’re looking to trade trends, you need to be able to trade patterns to do so.
What are tradable patterns?
Forex chart patterns and tradable patterns indicate an impending breakout. It’s important to spot these movements in the market before they happen. This way, you can take advantage of them and maximize your profits in the process.
Charts have always been an essential part of trading, as they visually represent how prices change over time. Candlestick charts are the most popular day trading charts. But charts like bar and line charts are commonly used in the industry.
All of these chart types represent similar data, but they all look remarkably different. They’re separated into time segments showing open and closed, as well as high and low prices within a given period.
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The art of detecting and tracing patterns
The more you can strip the process of trading down to its basics, the greater your chances of success. Doing this with pattern trading is surprisingly simple.
There are numerous different ways to detect patterns, so when you get started, it’s easier to stick to the more obvious and apparent patterns you find.
Forex trading patterns are visible patterns based on past indicators and movements that appear to have a high probability of recurring under certain predictable circumstances. These circumstances often indicate the movement of a trade in a certain direction based on the same indicators that created the pattern.
Candlestick, bar, and line charts are also important as they demonstrate the relationships between prices and time. This is especially useful if you are using day trading strategies to study the patterns in these charts. Technical analysis of these patterns will allow you to develop your trading methodology and improve your profit margins.
In all of these charts, if an opening price was higher than the closing price for a specific period of time, the bar is red. This is called a bearish bar. If the opening price was lower than the closing price for that period, you will instead see a green ‘bullish’ bar pictured.
Types of tradable chart patterns
There are three primary types of tradable chart patterns and a multitude of secondary patterns in Forex technical charting, based on the potential price directions of these patterns.
Primary patterns
1. Continuation chart patterns
This pattern indicates that a new move will likely continue on the same trajectory on which it is currently moving. Examples include rectangles and pennants. Wedges can form part of this group, although wedge patterns are reversals and require a dedicated section of their own.
2. Reversal chart patterns
These patterns make themselves evident at the end of a trend, and indicate that a price movement is likely to reverse. Examples of reversal chart pattern movements include:
- Ascending and descending triangles
- Double or triple top/bottom
- Head and shoulders
- Cup and handles movements
3. Bilateral chart patterns
These formations show that a price will certainly move to some degree, but cannot provide any information about the direction in which that move will progress. Even if you cannot predict the probable direction of a move, you can still use this information to open a position in the direction of a breakout once it happens. You will also be more prepared for it as you are in this neutral yet poised position.
Secondary Patterns
4. Continuation/reversal patterns
Some trading patterns, like wedges, can be either reversals or continuations in different situations.
5. Pennant chart patterns
Pennants, much like rectangles, are continuous chart patterns that form after strong price moves. After a significant upward or downward move, buyers and sellers will halt their trading actions before taking additional steps in the same direction. This means that the price often consolidates and forms a distinct triangle called a pennant.
Pennants can be bullish or bearish, depending on the direction of the trend. The anticipated move is usually a measured one, which means the target from the breakout point is equal to the size of the pennant.
When trading a pennant, open your position whenever the price closes a candle beyond the pennant, as this confirms the formation. You should also place your stop loss directly beyond the pennant’s opposite level. Buyers and sellers often spring into action at the sight of a strong move, which forces the price to burst out of the pennant formation.
6. Bearish pennants
Bearish pennants form during steep downward trends. A sharp price drop prompts many sellers to close their positions, while others join in on the trend and force the price to consolidate briefly.
Once enough sellers have jumped in, the price breaks below the bottom of the pennant and continues to drop. Pennants often signal far stronger moves than other chart patterns.
7. Bullish pennants
Bullish pennants indicate a continued increase in price after a pause.
8. Rectangle chart patterns
Rectangles, which can be either bullish or bearish, display a trend continuation formation. In these trends, the price begins to move sideways to form a rectangle, and other movements break out of the rectangle formation once it’s complete. This move is likely to be at least as large as the rectangle’s size.
9. Head and shoulders
Bullish patterns have three swing lows, while bearish patterns show three swing highs, with the neckline connecting the two high or low swings. The break of a neckline confirms the change of a trend, which makes head and shoulders a reversal chart pattern.
10. Wedges
Two lines converge in a wedge pattern pullback. A bullish wedge chart pattern shows an upwards trend called a Falling Wedge. A bearish wedge chart pattern shows a downward trend called a Rising Wedge. The converging trend lines in these patterns show that the magnitude of the swings within the pattern is decreasing and that the wedge is moving against the so-called path of least resistance.
When the market moves with the trend, it confirms that the trend is resuming. Trade a bullish wedge pattern by buying when the price breaks above the resistance. Trade a bearish pattern by selling when the price breaks below the support.
The Bottom Line
Knowing how to use data to detect and trace tradable chart patterns can assist you in maximizing your trading profits. But it’s not a guaranteed strategy for success. Trading chart patterns reach beyond basic pattern recognition and cannot be used in isolation.
Instead, it’s recommended that you use short term price patterns, volumes, and other support/resistance tools to identify solid trading opportunities. The target projection of chart patterns is a valuable tool for setting targets. But it should be combined with other support and resistance predictors for best results.
