Chart Patterns are one of the most accurate and reliable analysis and trading techniques known to men, and they have been used for decades to generate precise buysell signals on Stocks, FX pairs and commodities. In this article you will learn the correct way to trade stock chart patterns for profits.
The first step is to make yourself familiar with the patterns. There are many sites that show you chart patterns, and we recommend that you start by trading only chart patterns and only the most reliable ones: Double Top, Triple Top, Double Bottom, Asymmetrical Triangle and Channel. These patterns are relatively common and they are very accurate: if traded correctly you can reach 70-75% hit rate with them with ease. Learn how to identify these patterns and where are the points of entry, and how to calculate stop loss and profit size.
The 2nd step is to signal the precise entry point, and for that we will use candlestick formations. Learn about several candlestick formations like the Engulfing, Morning Star, Evening Star, and the Doji. These candlestick formations will help you signal the exact entry point to your trades so you enter right when the reversal starts and not before it. We will usually want to see price creates at least one candlestick in the direction of the reversal before entering, and it should bypass the previous candlestick to signal the entry.
After you know how to signal entries it is time to calculate your stop loss and take profit. Stop loss should usually be placed 1 point above the highest high of last 3 bars (for short trades), and 1 point below the lowest low of last 3 bars (for long trades). Calculate the take profit location using the measure rule of each pattern, and then: calculate the risk:reward ratio. This means, the ratio between the risk and the reward. Divide your potential profit with the potential risk and you will get the risk:reward ratio. If this ratio is less than 1, it is recommended that you don’t enter the trade because you will risk big amounts to gain a smaller amount, and this is not recommended for long-term survival and profitability at the markets.
Note that while at the beginning identifying the patterns and the exact entry points will not be so easy, as it takes some experience to do it well, so don’t get discouraged and keep learning on a demo account, and after a few months you will become a very good chart trader, and trading chart patterns will become very easy for you. After 1 year, most traders develop kind of sixth sense that they can use to know if a certain trade will be profitable or not, without even being able to explain it. The main idea is to be consistent and not to give up, and you will see those profits accumulating in your trading account.