Our team at Trading Strategy Guides is launching a new series of articles called Chart Pattern Trading Strategy Step-by-Step Guide which will enhance and elevate your trading to a new level. This technique will only give you a framework to examine methodically the fight between the bulls and the bears.
By trading the most profitable chart patterns you’ll be able to deduce who is winning this fight between the bulls and the bears.
This strategy can be used to identify a stock chart pattern or basically any instrument that you are planning on using for day trading.
We share this because it will greatly improve your ability to understand the price movements and price breaks and therefore make you a much better trader. The key to this style of trading will be to identify how a pattern forms and also give you a greater understanding of market analysis as a whole. This article will introduce several entry level patterns then dive into some special patterns also such as the symmetric triangle and double bottoms. We also believe that it is important to use these with pivot points as well. This type of training will set you apart from the average traders so make sure you
I recommend to start that you get some basic stock charting software with some very simple tools such as moving average and other indicators. This can help you perform market analysis and also help you be in front of the charts when a pattern forms. The ascending triangle will be valuable pattern in your trading arsenal as well as the rounding bottom, head and shoulders patterns, inverse head and shoulders, reverse head and shoulders ,triple bottom, cup and handle and the descending triangle. These patterns will help you find trade ideas much faster than what the average trader will be able to find and it will help you make sure that you enter the trade at the right price levels.
These types of patterns will allow you to trade any currency pair and the trades are not dependent upon market trends or the economic calendar to find successful trades in your day trading. This write up will not be like other blog articles you have read because we are going to give step by step instructions on how to place trades using the exact price pattern for the the strategy.
There are thousands of traders around the world that trade these specific type of formations like the triangle pattern. Famous trader Dan Zenger has turned $10,000 into $42 million in under 23 months by simply using a chart pattern trading strategy.
To truly succeed in trading you can simply start to mimic what professional traders do and begin to test the strategy and then measure the results.
We have dedicated a lot of time to the studying of price action and you can see some evidence by studying some of the best pure common chart patterns strategies here: Forex Strategy: How to Trade Bullish Flag Pattern, here: Simple Wedge Trading Strategy for Big Profits and here: Price Action Pin Bar Trading Strategy.
Let’s move forward and define exactly what we are looking at and more importantly, we should define how we can profit from them.
What are Chart Patterns?
In technical analysis, chart patterns are simply price formations represented in a graphical way.
Without a doubt this is one of the most useful tools when doing technical analysis of price charts. Chart patterns are a very popular way to trade any kind of markets because the most profitable chart patterns give us a visual representation of the supply and demand forces and also the relative strength of the specific price levels.
If we’re on the supply and demand topic we recommend studying more this subject here: Supply and Demand Trading-Learn about Market Movement.
What makes chart patterns so appealing is that it also brings to light what happens behind the scene aka the buying and selling pressure.
Note* A chart has its own language and it speaks through chart patterns and they leave footprints of the big money or the smart money. These footprints can lead us into highly profitable trades.
Why are Chart Patterns Important?
If you remove all your indicators and momentum indicators from the charts and everything else that might make your chart less clear and just look at the price action, whether it’s 5-minute chart, daily chart or whatever it’s your preferred time frame you’ll actually gain more insights into what actually happens in the market.
As long as the candlesticks have the variable open, high, low and close; you can use them just to confirm your position or even entering a new trade. You can build a really successful chart pattern trading strategy without the need of any other technical indicator. Here is an example of master candle setup.
There are bullish and bearish chart patterns and what makes them work is that they tend to reoccur over time making it possible to backtest them and find their probability of success rate.
Chart Pattern Types
Throughout this article series, we’re going to discuss how to make money with the most profitable chart patterns. Some of the most profitable chart pattern trading strategies include:
- Triple Top Chart Pattern Trading Strategy
- Cup With Handle Trading Strategy
- Bump and Run Chart Pattern
- Price Channel Pattern
- Symmetrical Triangle
- Double Top Chart Pattern Strategy
- Double Bottom Chart pattern Strategy
- Rectangle Chart Pattern Strategy
- And many more …
Earlier we posted a clear price chart of the EUR/USD but if you try and look more closely and read the chart patterns language we can identify some of the most profitable chart patterns (see figure below).
It doesn’t matter what time frame or what market you trade because chart patterns are present everywhere there is a battle between buyers and sellers.
Let’s discuss how we can use the trading strategy and make money trading any market. They key is to look at the lower trend line and also to try to find a triple bottom show up anywhere on your chart.
Chart Pattern Trading Strategy – Rules
We have developed five step-by-step guidelines that would be important to take in consideration when trading any of the chart patterns:
Step 1: Always determine if the market is in trend mode or consolidating
This step is important because although some of these simple chart patterns often are forms of consolidation they are actually continuation patterns of an underlying trend.
For example, a bullish flag pattern – you can read more about it HERE – is a pattern that forms after a larger move up, and the pattern itself is just a brief form of relief (or consolidation) from the underlying trend, before breaking to new highs.
Basically, the bullish flag pattern is a continuation pattern.
We can distinguish mainly two types of chart patterns:
- Continuation Patterns: signals that the trend will continue
- Reversal Patterns: signals the possible end of a trend and the start of a new trend.
An example of a reversal pattern is the double top pattern highlighted in the figure below:
It’s important to determine whether the market is trading or consolidating because this will reveal what type of chart patterns will work best for each trading environment.
Note** The reason why many price action traders fail is because they don’t follow this first rule and they try to trade every pattern regardless of the whole picture.
Step 2: Decide what Chart Patterns you want to use
Do you like to trade reversal patterns or you’re more comfortable trading continuation chart patterns?
Figure that out, and once you have decided which way to go try master that particular trade setup.
Repetition is the mother of all learning and the more you trade the most profitable chart patterns the better you’ll become at spotting these chart patterns in real time.
Our team at TSG is a huge fan of the triple top chart pattern because of the potential profit available once a new trend has developed.
Step 3: What is the story behind the Chart Patterns?
What you have to do here is to construct a story behind your favorite setups.
What do we mean by that?
Simply, look at the whole price picture not merely focusing on the chart patterns. What you need is that this story to confirm your price action pattern. Everything else must point in the same direction. Finding the proper direction to place your trades will help you to increase your win rate.
For example, the narrative behind the bullish flag highlighted in Step #1 is quite easy to spot. We’re moving in an uptrend because we have developed a series of higher highs and higher lows.
Secondly, we broker and close above an old high; no resistance spotted above market price are all good ingredients that speak volume in favor of our bullish flag pattern
Step 4: Trade Chart Pattern Trading Strategy in confluence with good price location
Chart patterns work best in conjunction with a good price location which can add confluence to our trade.
What do we mean by price location?
In simple terms, a price location is just an important area on the chart from where normally we would expect a price reaction. That price location can either be a support/resistance level, swing high/low points or some pivot points and even technical indicators if you choose to combine the two.
For example, the price channel pattern highlighted in figure 3 worked out because we had confluence with the higher time frame resistance level. The EUR/USD was simply trading in an upward channel, but heading right into a resistance level.
Step 5: Make non-subjective trading rules for trading these Chart Patterns
The last step to build a chart pattern trading strategy is not just to have some non-subjective trading rules, but you also have to write them down and follow your plan strictly.
There are many possible ways a trader can profit from these chart patterns.
For example, the bullish flag pattern can be entered either at the retest of the flag support or at the breakout above the flag. You can also trade with the breakout triangle strategy.
Become a master of only one setup and one chart pattern trading strategy; prove yourself that you can be profitable trading one pattern before you move on. So, find a pattern that you like and become very good at that chart pattern trading strategy
One of the ways that we learn how to trade correctly is by gaining the right education and screen time and our team at TGS takes pride in providing you with top-notch education.
We can fast track your career by giving you the most profitable chart patterns which is easy, but the one thing we can’t give you is screen time and experience. That’s something that you need to gain over a period of time. Here is another strategy called trading volume in forex.
When it comes to chart pattern trading strategy, there are no magic bullets because you’re going to make mistakes and secondly, you’ll still be having losing trades. The whole idea is to become very selective on the chart patterns you trade.
Thank you for reading!
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