Chart patterns are an important part of technical analysis, but they take some getting used to before you can use them effectively. To help you get comfortable with them, here are some explanations to help you understand.
Firstly, a chart pattern is a form in a price chart that helps to suggest what prices might do next, building on what they have previously done. Chart patterns are the foundation of technical trading analysis and require a trader to know precisely what they are seeing and what they are searching for.
We should be aware that there is no one “best” chart pattern, as they are all used to show different trends in a large variety of different markets. Many times chart patterns are used in candlestick trade, which makes it a little bit better to see previous openings and closings in the market.
This is a personal effort, I hope you enjoy the explanation.
I hope it is simple for you.
Now we will proceed with our explanation
Understanding the Patterns and Their Limitations
1 – Definition of models
-A pattern is defined by at least two trend lines (straight lines or arcs).
-All patterns have a mix of entry and exit points.
-Patterns can be both continuation and reversal patterns.
-The patterns are fractal, which means that they may be seen over any graphical time period ( weekly, Daily, Minutes, etc.).
-A pattern is not full or active until a break-out has occurred.
2- Model Limitations
-Keep in mind that some of our patterns can be dangerous for investors.
-See trends where there aren’t any
-Believing “market traditions”, both technical and fundamental, with no evidence
-Seeing behind rather than ahead
-Looking backwards instead of forwards
-Holding on to original price objectives of models after conditions have changed.
3- Trend trading skills
-Breach of a trend line, support or resistance, or a previous breakout point.
-It means a change in the behaviour of buyers and sellers and indicates the beginning or end of a tendency.
of a trend.
entry stop orders are used to enter trades after the price has broken.
False breakouts and failures
The prize broke out but almost immediately returns to its starting price.
Breakout failure (trap)
A fake breakout happens and the price then breaks in the opposite direction.
Protects the capital protect stop
Determines the amount of capital risk before entry.
– Filters, such as percent, point or cash.
– Trend lines, support or resistance levels with filter
Trading false breakouts using protective stops
– Enter on the breakout
– Place a protective stop outside the breakout bar, opposite the direction of the breakout.
– Place an entry stop at the same level (called a “stop and reverse” order).
– If the price continues in the direction of the breakout, take advantage of the entry on the breakout.
– If the breakout is false, take advantage of the stop and reverse order.
– Pullback (on a downward break)
– Throwback (on an upward break)
– Do not always occur
– Performance may suffer
There are some popular chart patterns that you should keep in mind.