Chart patterns are incredibly popular in many different markets because they allow
you to not only find profitable trades, but also manage them.
Whilst there are many charting patterns you can use, some of the most popular
repeat over and over again. They form on all time frames and you can use them in Crypto.
In this post we go through exactly what chart patterns are and how you can start
using them in your own trading.
What are Chart Patterns?
Chart patterns are different to candlestick patterns.
Whilst many traders will be using Japanese candlesticks to find their trading
patterns, there is a difference between a chart pattern and a candlestick pattern.
A candlestick pattern is normally a one or two candlestick pattern only. For
example, a candlestick pattern may be an inside bar or a dragonfly doji.
Example Dragonfly Doji
💠This candlestick pattern is created with price first opening, then trading lower, followed by price pushing back higher and wiping away all of the sessions losses.
This shows that whilst the bears were at first in control of the selling, at the end of the session that bulls had jumped back in to wipe away any of the losses.
How to Use the Dragonfly Doji
💠Trades are often entered into once price confirms the pattern and the doji breaks.
An example of this may be if looking to go long on a bullish reversal, setting your entry to trigger when price breaks the high of the doji.
Your stop loss for this candlestick pattern could be on the other side of the dragonfly doji and if the pattern does not confirm you would take off your entry order.
Keep in mind this is a one candlestick pattern. It will always work best when you are using it with your other technical analysis and favorite trading indicators.
Because this pattern is a sign of indecision they tend to work best at areas of supply and demand and when trading inline with the overall trend.
Dragonfly Doji Examples
A potential entry for this pattern could be to enter when price confirms the pattern on the breakout higher.
Once this occurs the stop could be placed below the low of the doji and targets could be set according to your risk reward profile.
Dragonfly Doji’s Don’t Always Work
Because this is a one candlestick pattern and it is signalling indecision it will not always work.
That is also why it is important you don’t trade this signal by itself and that you use it in conjunction with your other technical analysis.
Below is an example of a doji pattern that will often fake out a lot of traders. This candlestick is up at the extreme high and will often signal price is about to move back lower and not higher as most will look to trade the dragonfly doji.
How to Use Chart Patterns
You can use chart patterns in different ways in your trading, but the most popular is
to find and then make high probability trade entries.
Chart patterns repeat time and time again. The reason they continue to form and
continue to repeat is because each pattern is price showing you what traders are
doing through the price action.
Given similar sorts of circumstances traders will tend to behave in the same ways
over and over again. Think about how traders get greedy when looking to make
money or fearful when they start losing it. These emotions don't change.
This is the same reason why the same patterns continue to form over and over
again. Traders do the same things over and over again in the markets which creates
the same patterns.
You can use this knowledge to your advantage by finding and then trading these
patterns to make profitable trades.
💥Trading Classic Chart Patterns
There are endless amounts of chart patterns you can learn to use in your own
trading.
Often the best way is to find one or two classic chart patterns and then mastering
them so you know them back to the front. This is far better than finding and trading
20 x different patterns, but being very average at them all.
1.Head and Shoulders
The head and shoulders is quite possibly the most popular of all the chart patterns.
Once you know how to identify it you will start to see it on all your charts and time
frames and you will see how profitable it can be. When done correctly this pattern
can be incredibly reliable.
The head and shoulders pattern is formed with three peaks and a neckline. The
first peak is shoulder one or the 'left shoulder'. The second peak is the head and
the third peak is the right shoulder.
2.Double Top and Double Bottom
This is a very easy pattern to identify, but a very reliable reversal pattern.
This pattern is formed with two peaks and a neckline. For example; with a double
top we need to see price form two peaks rejecting the same resistance level.
For a double bottom we need to see price forming two swing lows rejecting the
same support level.
Entry is normally taken when price breaks higher or lower through the neckline .
Day Trading Chart Patterns
Charting patterns are not just for the higher time frames and you can use them for
both day trading and intraday trading.
The most commonly used pattern that is used by everyone from the big banks right
down to the smallest retail trader is support and resistance.
When using support and resistance you are either looking to buy / sell the bounce,
or buy / sell the breakout.
When buying or selling the bounce you are looking for the support or resistance
level to hold and for price to make a reversal.
When buying or selling the breakout you are looking for a key support or resistance
area to break.
Intraday Chart Patterns
Another very popular pattern that can be used on all time frames and in many
different markets is role reversal trading.
With role reversal trading you are using support and resistance levels, but you are
looking for these levels to change their roles.
See the example chart below. At first price finds this level as a support level. Price
then breaks lower. When price makes a new move back higher you are watching to
see if the old support level will hold as a role reversal and new resistance level. If it
does you can look for short trades.
You can use these role reversals as old support / new resistance and vice versa, old
resistance and new support levels.
