Chart Patterns – A disciplined approach.

The chart patterns are the oldest strategy to read the price movements and to predict future market trends.

What are you going to learn in this article:

  • WHAT are the price patterns?
  • WHY they are so important.
  • HOW TO identify the chart patterns using the Trading Cycles!
  • The best Reversal Pattern. (Jump there!⇓)
  • The standard Continuation Pattern.

Ready? Go!

Introduction to the Price Patterns

Everything that passes in the minds of the market participants has its own manifestation and when they change their ideas, a demand and supply imbalance occur in the market and the price move.

The process from one idea (buy, hold or sell) to another doesn’t instantly happen but it takes time, and during this transition phase, the price keeps moving creating the chart patterns.

The importance of the Price Action

Analysing the price patterns you can identify the transition phases and trade the reversals or continuations of the current market trends.

Real life example? Here two Reversal Pattern and their effect on the Pound/Yen.

Gbp/Jpy H1

How to identify the Chart Patterns

The chart patterns are a geometrical figure created by combining the Minimum and the Maximum using the Trend Lines.

The main issue:

When comes the time to spot the patterns, the main problem is:
Without a systematic method to identify Min and Max, you could draw a countless number of figures! 

Have a look! ⇓

Eur/Usd H1

A beautiful painting, but NOT an operative chart. BAD!
How could you do backtests? How could you create a specific set of rules for your trading system?

How to solve the problem!

You already know how to detect the minimum and the maximum of the trading cycles from the previous article.

USE THEM!

  1. Open a chart.
  2. Highlight the tops and bottoms of the cycle.
  3. Draw the trend lines between the cyclical turning points.
  4. Look for the patterns!

 

Using this easy method, at all time you'll open your platform, you will always see the same patterns.
In this way, you can:

  • Easily create an automatic trading system.
  • Do backtests.
  • Be disciplined!

Here the updated chart using the trading cycles.

updated with cycles(Eur/Usd - H1)

 The best Reversal Pattern

The best reversal pattern is the head and shoulder combined with the 1-2-3 Pattern from Joe Ross.

I did a lot of backtesting and the best set up is when the entry maximum is:

  • Lower high for the long positions.
  • Higher low for the short one.

Head and shoulder. 1 2 3 Joe Ross(Xau/Usd - H1)

 The standard continuation pattern

The continuation patterns are a break in the trend which allows you to enter in the main direction at a better price.

The standard sequence is:

  1. Identify a Trend.
    Higher highs - Higher lows for a bullish trend.
    Lower lows - Lower highs for a bearish trend.
  2. Wait for a break of it.
    A lower high for an uptrend.
    A higher low for a downtrend.
  3. Join the trend!
    Buy or Sell the breakout of the last Min or Max.

Continuation patterns(Nikkei225 - H1)

⇓ Show the way! ⇓

Subscribe to the newsletter!

Receive the weekly market UPDATES and GET ACCESS to all the PREMIUM contents!

I will never give away, trade or sell your email address. You can unsubscribe at any time.

Leave A Response

* Denotes Required Field