Price patterns can be a powerful tool for traders. Classic pullback patterns can be used to establish your confidence and put you years ahead of your peers. The human brain is designed to detect patterns in data. While computers have become essential tools for technical analysis, they are not as adept at recognizing trading patterns as a human. That’s because they don’t look at data the way you do. Here are three ways to identify trading patterns:
Identifying Key Levels
You’ll want to know what key levels look like. These levels are often grouped together by direction. A breakout from a key level means that it’s time to sell. A breakdown from a key level is another signal. The price may retrace back to the breakout line, which necessitates a short trade. This pattern can also occur in the opposite direction. This means that you can trade long or short based on a support or resistance level.
Triangles
Traders can place stop-loss orders inside the triangle. A conservative trader will want to place a stop on the far side of the pattern while an aggressive trader may want to enter on the initial break. The most common entry point is a break of the neckline. If you’re unsure of what to expect from a triangle, make sure to monitor it. The Ascending Triangle is one of the best-known trading patterns. You can use it to determine whether the stock is going lower or higher.
Bull Flags
Another popular pattern is the bull flag. This type of trading pattern is relatively simple. Using a free scanner like Chartmill or Finviz can help you find them. A bull flag pattern will occur when a stock surges on high volume after a consolidation pattern and breaks out above the bottom of the consolidation pattern. Always place a stop order below the bottom of the consolidation pattern and set a profit target with a risk to reward ratio of at least 2:1.
Reversal Patterns
The opposite of a continuation pattern, reversal patterns seek to unearth where the trend has reversed. Traders who follow trends have long adopted the “trend is your friend until it bends.” Common reversal patterns include head and shoulders, double tops, and triple bottoms. When they occur, it’s a good time to sell or buy, because the trend will most likely continue.
Candlesticks
Another type of chart pattern is the candlestick. Candlestick patterns are most effective in active day traders because they are easy to identify. Because they form in a short period of time, traders can use these to size up the situation quickly. A candlestick pattern will show a large gap in a single direction or a high number of bars that move in one direction. These patterns are a good tool to have at your side, but if you don’t have any experience in the trader world, this is the perfect way to start.
Moreover, stock chart patterns can also be used to identify breakouts or trends. Some of the best examples of these are mentioned above. The techniques behind these patterns are based on tried and tested methods. When used correctly, these patterns will allow you to calculate entry and exit points, stop-loss orders, and profit targets. These patterns can be applied to all markets, including forex and stock trading. They are not complicated, but they do require practice.
