Understanding chart patterns further by segregating and grouping them

There are plenty of chart patterns that we can use when we trade. However, do you know how they work? Do you know when to use them? Yes, these can help you earn more profits, but it is also essential to understand what they are and when to use each one of them? Today, we are going to further elaborate on that matter by segregating and grouping them by three.

One of three: reversal patterns

Reversal patterns give us a signal that the current trend will change direction soon. Furthermore, reversal chart patterns seen in an uptrend tell us that the trend is about to reverse and the price will decrease in a short while. On the other hand, reversal chart patterns seen on downtrends tell us that the price will increase anytime soon.

Let us enumerate some of the most popular reversal chart patterns.

  • Double top
  • Double bottom
  • Head and shoulders
  • Inverse head and shoulders
  • Rising wedge
  • Falling wedge

How do we trade them?

We place orders above past the neckline following the new trend’s direction. Your goal should be the same or near the size of the formation’s height. For instance, you saw a double bottom. You went long above the formation’s neckline — it is the same size as the distance from the bottoms up to the neckline.

It is essential to place stop orders anywhere around the middle of the chart’s formation. For instance, when you measure the distance between the double bottoms and the neckline then divide it by two, you can use that as a stop size.

Two of three: continuation chart patterns

Continuation chart patterns tell us that the current trend will continue. They are also known as consolidation patterns since they show us that buyers and sellers take a quick break before bringing the price further in the previous trend’s similar direction. By now, you should be aware that trends do not tend to move in a straight line upwards or downwards — they have a pause, then move sideways, correct higher or lower, and then slowly get the momentum back and continue the overall trend.

Let us enumerate some of the most popular continuation chart patterns:

  • Falling wedge and Rising wedge (They can also be reversal patterns depending on the trend of formation)
  • Bullish pennant and bearish pennant
  • Bullish rectangle and bearish rectangle

How do we trade them?

We place orders above or below the formation depending on the current trend’s formation. For rectangles and wedges, your goal should be at least the same size as the chart pattern. For pennants, your goal can be the same height as the pennant’s mast. It is crucial to place stop orders above or below the chart formations.

Three of three: bilateral chart patterns

Bilateral chart patterns tell us that the price can move in either direction. Let us take the rectangle pattern as an example. Its price could either break in the topside or downside.

How do we trade them?

Think about what you will do for both scenarios, then place an order above and below the formation. As soon as one gets triggered, cancel the other one, and you are good to go. However, you should be alert about false breaks if you ever placed entry orders too close to the formation’s top or bottom. Also, do not forget your stop orders.

The three leading chart pattern groups

It might sound like they are too many. Sometimes, you may be confused, but it is not rocket science at the end of the day. The chart patterns’ names’ are pretty self-explanatory. Give yourself enough time to study them, and soon enough, you will know how they work and when you can apply every single chart pattern.

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