Trading Chart Patterns

Spotting price patterns is not easy even for an experienced trader. It requires a lot of professional training before one can spot patterns correctly. In times before computers traders used to spend hours drawing charts on paper and trying to figure out possible patterns. Early computers made life easier but only for huge institutional traders who had help from qualified programmers and analysts, individual traders still had to rely only on their eyes. But recently computers became so powerful and trading platforms so advanced that finally pattern recognition is now available for individual traders too. Our simple but effective tool makes trading chart patterns much easier for everyone.

It automatically scans chart for possible patterns in different ranges and displays the best of the found ones. If there is a live pattern the indicator always displays it first, in other case a historical patter may be displayed. The indicator fires an audio-visual alert to draw your attention. When a potential pattern is detected the indicator paints it on the chart, marks the stop and target prices and outputs the pattern information in the chart top left corner. See the picture below (click to maximize):

Bearish-Butterfly-Start

Trade Opportunity

When you see a patter emerging immediately you need to make a decision if you take it and if yes then when. First of all you should remember that while some patterns designate trend continuation and the others trend reversal, for both types there must be some kind of trend. Sometimes a pattern may be found in a rangebound market (especially on lower timeframes), these patterns, while some of them might work well are not recommended to trade. Below is the list of continuation and reversal patterns:

Trend Continuation Patterns:

  1. Bat.
  2. Gartley.
  3. Shark.

Trend Reversal Patterns:

  1. Butterfly.
  2. Crab.
  3. 5-0.
  4. AB=CD.
  5. Three Drives.

Apart from trend direction you can use support and resistance lines to increase probability of a good trade. Support/resistance levels you can look for are: pivot points, Fibonacci retracements, extensions and expansions, swings highs/lows, trend lines, volume based levels (market profile, vwap etc), daily and weekly highs/lows and so on.

Trade Enter

When pattern is detected and you ensured that it is correctly placed, the next step is to decide when to put a trade. You can utilize one or both of the following:

  1. Risk/reward entry. The indicator marks stop and targets so you can calculate potential loss and profit and put a limit order at the price where the ratio is adequate for you.
  2. Confirmation entry. You can use a supporting indicator or candle formation to help you identify the precise entry.

Trade Exit

When the order is placed and filled, the stop loss is placed a little below/above the stop level marked on the chart by the indicator. As target price you can use one of the 2 levels the indicator displays. It is advised to use the first target if you are not able to monitor the position or cannot leave your terminal to trail the position automatically. Ideally you would start trailing few ticks before the first target and tighten the trail stop as the price progresses to the second target. Sometimes patterns can result in much bigger moves, but while it is tempting to go for big profit it is not advisable unless you expect big move basing on some other information.

Example of where only the Target 1 is reached (click to maximize):

Bullish Gartley Target 1

Example of where the Target 2 is reached (click to maximize):

Bullish Butterfly Target 2

 

When Pattern Fails

Even carefully selected patterns can fail. In most cases your stop loss will take care of exiting trade, but in certain cases market gives opportunity to minimize or eliminate the loss completely. Normally when pattern develops it should work out fairly quickly. It is a good rule that if the price did not move in the anticipated direction within the same number of bars as CD took, you should look for covering the position at the best available price.