Chart patterns are one of the most accurate and reliable analysis and trading techniques known to men, and have been used for decades to generate accurate buy / sell signals in stocks, currency pairs, and commodities. In this article, you will learn the correct way to trade stock chart patterns for profit.
The first step is to become 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 very accurate – if you trade correctly, you can hit a 70-75% hit rate with them with ease. Learn how to identify these patterns and where the entry points are, and how to calculate the stop loss and the size of the win.
The second step is to pinpoint the precise entry point, and for that we will use candlestick formations. Learn about various candle formations like Engulfing, Morning Star, Evening Star, and Doji. These candlestick formations will help you pinpoint the exact entry point to your trades so that you enter right when the reversal starts and not before. Typically, we will want to see that the price creates at least one candle in the direction of the reversal before entering, and should bypass the previous candle to signal entry.
Once you know how to mark the entries, it’s time to calculate your stop loss and make a profit. The stop loss should generally be placed 1 point above the highest high of the last 3 bars (for short trades) and 1 point below the lowest low of the last 3 bars (for long trades). Calculate the location of the profit-taking using the measurement rule for each pattern and then: Calculate the risk: reward ratio. That is, the relationship between risk and reward. Divide your potential profit by your potential risk and you get the risk: reward ratio. If this ratio is less than 1, it is recommended that you do not enter the trade because you will risk large amounts to win a smaller amount, and this is not recommended for long-term survival and profitability in the markets.
Keep in mind that while at first identifying the exact entry points and patterns won’t be that easy as it takes some experience to get it right, so don’t be put off 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 a 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 give up, and you will see those profits accumulate in your trading account.
