In technical analysis, chart patterns are simply price formations represented in a graphical way.

Chart patterns are without a doubt one of the most useful tools when doing technical analysis of price charts. Chart patterns are a very popular way to trade any kind of markets because the most profitable chart patterns give us a visual representation of the supply and demand forces.

What makes chart patterns so appealing is that it also brings to light what happens behind the scene aka the buying and selling pressure.

Note* A chart has its own language and it speaks through chart patterns. And chart patterns leave footprints of the big money or the smart money. These footprints can lead us into highly profitable trades.

Why are Chart Patterns Important?

If you remove all your indicators from the charts and everything else that might make your chart less clear and just look at the price action, whether it’s 5-minute chart, daily chart or whatever it’s your preferred time frame you’ll actually gain more insights into what actually happens in the market.

As long as the candlesticks have the variable open, high, low and close; you can use them just to confirm your position or even entering a new trade. You can build a really successful chart pattern trading strategy without the need of any other technical indicator.

There are bullish and bearish chart patterns and what makes them work is that they tend to reoccur over time making it possible to backtest them and find their probability of success rate.

✅ CHART PATTERN TYPES

Throughout this article series, we’re going to discuss how to make money with the most profitable chart patterns. Some of the most profitable chart patterns and chart pattern trading strategy includes:

Triple Top Chart Pattern Trading Strategy

Cup With Handle Trading Strategy

Bump and Run Chart Pattern

Price Channel Pattern

Symmetrical Triangle

Double Top Chart Pattern Strategy

Double Bottom Chart pattern Strategy

Rectangle Chart Pattern Strategy

And many more …

It doesn’t matter what time frame or what market you trade because chart patterns are present everywhere there is a battle between buyers and sellers.

Now…

Let’s discuss how we can use the chart pattern trading strategy and make money trading any market.

Chart Pattern Trading Strategy – Rules

We have developed five step-by-step guidelines that would be important to take in consideration when trading any of the chart patterns:

Step 1: Always determine if the market is in trend mode or consolidating

This step is important because although some of these simple chart patterns often are forms of consolidation they are actually continuation patterns of an underlying trend.

For example, a bullish flag pattern – you can read more about it HERE – is a pattern that forms after a larger move up, and the pattern itself is just a brief form of relief (or consolidation) from the underlying trend, before breaking to new highs.

Basically, the bullish flag pattern is a continuation pattern.

We can distinguish mainly two types of chart patterns:

Continuation Patterns: signals that the trend will continue

Reversal Patterns: signals the possible end of a trend and the start of a new trend.

An example of a reversal pattern is the double top pattern highlighted in the figure below:👇

It’s important to determine whether the market is trading or consolidating because this will reveal what type of chart patterns will work best for each trading environment.

Note** The reason why many price action traders fail is because they don’t follow this first rule and they try to trade every pattern regardless of the whole picture.

Step 2: Decide what Chart Patterns you want to use

Do you like to trade reversal patterns or you’re more comfortable trading continuation chart patterns?

Figure that out, and once you have decided which way to go try master that particular trade setup.

Repetition is the mother of all learning and the more you trade the most profitable chart patterns the better you’ll become at spotting these chart patterns in real time.

Step 3: What is the story behind the Chart Patterns?

What you have to do here is to construct a story behind your favorite chart patterns.

What do we mean by that?

Simply, look at the whole price picture not merely focusing on the chart patterns. What you need is that this story to confirm your price action pattern. Everything else must point in the same direction as your chart patterns.

For example, the narrative behind the bullish flag highlighted in Step #1 is quite easy to spot. We’re moving in an uptrend because we have developed a series of higher highs and higher lows.

Secondly, we broker and close above an old high; no resistance spotted above market price are all good ingredients that speak volume in favor of our bullish flag pattern

Step 4: Trade Chart Pattern Trading Strategy in confluence with good price location

Chart patterns work best in conjunction with a good price location which can add confluence to our trade.

What do we mean by price location?

In simple terms, a price location is just an important area on the chart from where normally we would expect a price reaction. That price location can either be a support/resistance level, swing high/low points or some pivot points and even technical indicators if you choose to combine the two.

For example, the price channel pattern highlighted in figure 3 worked out because we had confluence with the higher time frame resistance level. The EUR/USD was simply trading in an upward channel, but heading right into a resistance level.

Step 5: Make non-subjective trading rules for trading these Chart Patterns

The last step to build a chart pattern trading strategy is not just to have some non-subjective trading rules, but you also have to write them down and follow your plan strictly.

There are many possible ways a trader can profit from these chart patterns.

For example, the bullish flag pattern can be entered either at the retest of the flag support or at the breakout above the flag.

Become a master of only one setup and one chart pattern trading strategy; prove yourself that you can be profitable trading one pattern before you move on. So, find a pattern that you like and become very good at that chart pattern trading strategy

Conclusion

One of the ways that we learn how to trade correctly is by gaining the right education and screen time and Leon Tech takes pride in providing you with top-notch education.

We can fast track your career by giving you the most profitable chart patterns which is easy, but the one thing we can’t give you is screen time and experience. That’s something that you need to gain over a period of time.

When it comes to chart pattern trading strategy, there are no magic bullets because you’re going to make mistakes and secondly, you’ll still be having losing trades. The whole idea is to become very selective on the chart patterns you trade.

Finally, do your own research #dyor #BTC #chartpatterns #Binance #leontech



The Cup and Handle pattern was first introduced by William O’Neil in his book “How to Make Money in Stocks”. Since then, this pattern has gained widespread recognition among traders and investors alike.

The purpose of this article is to offer insights into the following topics:

Fundamentals and identification of the Cup and Handle pattern

Key components

Essential aspects

Table of Contents

What is a Cup and Handle pattern?

Key Components of a Cup and Handle Pattern:

Important aspects:

1. Prior Trend

2. Cup length

3. Cup depth

4. Handle

5. Breakout

6. Volume

7. Target

8. Stop-loss

Exhibits

A Cup and Handle pattern with a shallow handle in the shape of a parallel channel

A Successful Cup and Handle pattern with a V-shaped cup and a shallow handle

What is a Cup and Handle pattern?

The Cup and Handle pattern is a widely recognized bullish continuation pattern. This pattern is formed when the price of an asset experiences a period of consolidation, followed by a slight dip in price (the handle), before resuming its upward trend.

While the Cup and Handle pattern is often seen in uptrending assets, it can also occur in assets that are in a downtrend or have been trading sideways. In these cases, the pattern can signal a potential trend reversal or the beginning of a new uptrend.

The cup portion of the pattern is typically visualized as a “u” shape, resembling a rounding bottom pattern. This phase represents a consolidation period where the price of the asset moves sideways, forming a base of support.

The handle is formed when the price of the asset pulls back slightly, creating a smaller “u” shape. This phase represents a retest of the support level established during the cup formation.

The handle is a critical component of the pattern, as it is often seen as a buying opportunity for traders. If the handle forms correctly, it can signal that the consolidation period is coming to an end and that the price is likely to continue its upward trend.

Once the handle formation is complete, the stock may reverse course and resume its prior uptrend. Traders can use this pattern as a signal to enter a long position in the asset, with a stop-loss order placed just below the support level established during the cup formation.

Key Components of a Cup and Handle Pattern:

The pattern consists of three key components:

Cup

Handle

Neckline/Resistance

Key Components of a Cup and Handle Pattern:

Important aspects:

1. Prior Trend

In general, the Cup and Handle pattern is a bullish continuation pattern and occurs in up-trending stocks. However, some traders also use it as a reversal pattern in a downtrend or sideways trend.

2. Cup length

When analyzing the Cup and Handle pattern, it is important to pay attention to the shape and characteristics of the cup formation. Typically, cups with longer and more “U” shaped bottoms provide a stronger signal, indicating a more prolonged period of consolidation and a stronger base of support.

Ideally, the perfect Cup and Handle pattern would have equal highs on both sides of the cup, indicating a symmetrical and stable consolidation phase. However, this is not always the case, and traders should be cautious when analyzing asymmetrical cups. While an asymmetrical cup can still be a valid pattern, it may indicate a less stable consolidation phase and a weaker support base.

On the other hand, cups with sharp “V” shaped bottoms should generally be avoided, as they indicate a lack of consolidation and weak support levels. These types of cups are less likely to provide a valid base for the subsequent handle formation and can lead to false signals.

3. Cup depth

While the ideal depth of the cup formation can vary widely depending on the asset being analyzed, a depth of up to 60-70% of the previous uptrend may still be considered valid. However, in general, it is best to look for cup formations with a depth of around 50% of the previous uptrend.



4. Handle

The handle can occur in several forms, including a flag, pennant, or rectangular consolidation, and typically retraces anywhere between 40-60% of the depth of the cup.

However, it is important to avoid handles that are overly deep, as they may weaken the bullish signal and decrease the likelihood of a continuation of the uptrend. Generally, the best Cup and Handle patterns have a shallow retracement on the handle, with a depth not exceeding 50% of the cup. In some cases, the price may also retrace up to the 0.618 Fibonacci level.



5. Breakout

A breakout above the reaction highs and neckline serves as a bullish confirmation of the Cup and Handle pattern. When the price breaks above the neckline or the resistance level, accompanied by a surge in trading volume, the pattern is considered complete, and a bullish trend is expected to follow. It’s important to note that after the breakout, the price may test the demand by returning to the neckline before moving higher.

6. Volume

Ideally, the trading volume should decrease during the formation of the base of the cup as well as during the formation of the handle. Conversely, the volume spike when the price breaks above the neckline level, confirming the breakout. However, it’s essential to note that these are only guidelines and the actual volumes may vary in practice.



7. Target

Using the measurement objective technique, we can easily determine the target of the Cup and Handle pattern, which is equal to the depth of the cup. To calculate this, measure the vertical distance between the lowest point of the cup’s base and the neckline. By adding this distance to the breakout point, we can estimate the price target for the up move.

The target comes out to be equal to the depth of the cup. (Chart courtesy: TradngView)

8. Stop-loss

One common approach is to place the stop-loss at the lowest point of the handle. This level is often seen as a critical support level, and a break below it can indicate that the pattern has failed and that the asset is likely to continue its downward trend.

However, in situations where the price oscillates up and down several times within the handle, placing the stop-loss at the lowest point may not be the most effective approach. In these cases, then the stop-loss order can also be placed below the most recent swing low.

Stop loss placed under the low of the handle.

Exhibits

A Cup and Handle pattern with a shallow handle in the shape of a parallel channel

The handle can occur in several forms, including a flag, pennant, or rectangular consolidation.

A Successful Cup and Handle pattern with a V-shaped cup and a shallow handle

Sometimes the V-shaped cup and handles also play out successfully.

Cup and Handle pattern with a failed breakout



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