What is a trading pattern?
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A chart pattern is a combination of support and resistance lines formed by a particular form of candlestick that helps define whether the market will move in the same direction or change.
There are two types of technical analysis patterns: inversion and persistence.
Inversion Chart Patterns
The type name describes the idea of the inversion pattern. These patterns predict that the trend will change in the opposite direction after it is formed. If prices fall, the reversal chart pattern indicates that the market is about to rise. As the market rises, the reversal pattern warns that the market will soon fall, so you should liquidate your buying position and prepare for it.
Inversion chart patterns predict that trends will soon change in the opposite direction.
Let's make a list of the most effective and famous reversal chart patterns.
- Head and shoulder and reverse head and shoulder
- Double top and double bottom
- Triple Top and Triple Bottom
Chart patterns look different, but it is important to emphasize one key rule in reading signals. To define the level of profit-taking, measure the distance between the support line and the resistance line at the point where the pattern begins to form. This is the distance between the entry point and the level of profit-taking. The entry point is the point at which the price breaks through the support or resistance line according to the trend.
The idea is that the stopping loss level is divided by 2 by calculating the distance between the support level and the resistance level. This concept is appropriate for the best risk/reward ratio of 1:2. However, it is recommended to take a good look at the market situation and use tracking loss sales in case of uncertainty.
Continuous Chart Patterns
When the current trend stops, a continuous chart pattern appears. This is why it is also called the "integration pattern." The trend line acts as a support line and a resistance line. This happens in the chart when buyers and sellers cannot compete with each other and prices are consolidated for some time. This pattern shows that the market will continue to move in the same direction.
Continuous chart patterns appear when the current trend stops for a while and then continues to move in the same direction later.
Take a look at the list of the most famous consecutive chart patterns.
- pennant or flag
- a rectangle
- Wedge: ascending and descending
- Triangle: ascending, descending, symmetrical
In most patterns, trading ideas are similar. At the point where the pattern begins to form, draw the support line and the resistance line and calculate the distance between them. This is the size of the area between the entry point and the level of profit-taking.
As with inversion patterns, entry points occur when prices break through support or resistance lines against dominant trends.
The level of stop loss is different. To define the magnitude of the risk you want to take, place the stop loss above the resistance for the bearish pattern and below the support for the bullish pattern.
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