Most profitable chart patterns

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This tutorial is all about trading chart patterns. There are many chart patterns that technical traders use to identify trade setups, chart patterns like flags, pennants, diamond, cup and handles and wedge just to name a few. However, here in this article I am only going to cover the most popular and most profitable trading chart patterns.

I decided to write only about these patterns because of the potential for a big move in the forex market or in the financial market for that matter . We will go into greater detail about each one below:

  • Symmetrical triangle
  • Ascending triangle
  • Descending triangle patterns
    Double top
  • Double bottom
  • Head and shoulders
  • Reversal head and shoulders pattern

Once you are done reading this article, you will know how to draw these chart patterns, how to trade them, when to trade them, where to place your protective stop loss and also where to place take profit targets. Let’s get started…

Triangle chart patterns

There are three main types of triangle chart patterns: symmetrical chart patterns , ascending patterns , and descending patterns.

#1. Symmetrical triangle pattern

Symmetrical pattern is formed by a series of highs that are lower than the preceding high and a series of lows that are higher than the preceding low.

Basically, the slope of the Price’s high and the slop of Price’s low converge together to a point where it looks like a triangle. Hence called triangle pattern. The chart below is an example of a symmetrical chart pattern.

triangle patterns_ asymmetrical

How to draw symmetrical chart pattern

Drawing symmetrical chart pattern is very easy- if you know how to draw trendlines and support and resistance levels  then you can also draw symmetrical chart pattern. In fact, trendlines and support and resistance levels are the core of triangle patterns.

How to trade symmetrical chart

After you have drawn your symmetrical pattern,Wait for the market price to break either the falling or rising line.

Buy setup

  • Wait for a bullish candlestick to break and close above the descending trendline then place a buy trade.
  • Stop loss- Place your stop loss few pips below the candlestick that breaks the trendline.
  • take profit- Use the swing high as your profit target.

Sell setup

  • Wait for a bearish candlestick to break and close below the falling trendline then place a sell trade
  • Stop loss – For your stop loss, place it few pips above the candlestick that breaks the rising trendline.
  • Take profit – use the previous swing low as your profit target. See the example below.

triangle patterns_ symmetrical buy example

 

 


#2. Ascending triangle pattern

Ascending pattern indicate an upward trend, with a horizontal resistance line and a series of higher lows. Here is how this pattern looks like

triangle patterns_ ascending

Although in  most cases the price is expected to break the horizontal resistance line, price can break either way. Sometimes the price fail to breaking the horizontal resistance line and break the rising line. Therefore, it doesn’t matter which line the price will break, the only thing that matters is the break-out.

How to trade ascending and descending patterns

Similar to symmetrical pattern, wait to the price to break the pattern before you can place a trade. As soon as you spot these patterns, wait for the breakout to appear.

Note the breakout only become valid when the price break and close above the resistance line, or when it break and close the below the support line.

Buy setup

  • Note: the price must break and close. If the candlestick that touches the horizontal line breaks the line, wait for The price to close above the horizontal line then  Place a buy trade.
  • Stop loss- Place your stop loss few pips below the candlestick that breaks the trend line.
  • take profit- Use the swing high as your profit target. See the chart below for example.

triangle patterns buy example

 

Sell setup

  • If the candlestick breaks the ascending line then wait for the price to close below the falling trendline then place a sell trade
  • Stop loss – For your stop loss, place it few pips above the candlestick that breaks the rising trendline.
  • Take profit – use the previous swing low as your profit target.

 


#3. Descending triangle pattern

This triangle pattern is the opposite of ascending triangle pattern- It looks like ascending triangle, except that ascending triangle has a horizontal resistance line and a diagonal support line.

Descending pattern is formed by a horizontal support line and a diagonal descending trendline. This is how descending triangle pattern looks like.

triangle patterns_descending

On this pattern, the price is expected to break the horizontal support line. However, the price can break either way.

How to trade descending chart pattern

Sell setup

  • Note: the price must break and close. If the candlestick that touches the horizontal line breaks the line, wait for the price to close below the horizontal line then  Place a sell trade.
  • Stop loss- Place your stop loss few pips above the candlestick that breaks the trend line.
  • take profit- Use the swing low as your profit target.

 

Buy setup

  • If the candlestick breaks the descending line then wait for the price to close above the falling trendline then place a buy trade
  • Stop loss – For your stop loss, place it few pips below the candlestick that breaks the falling trendline.
  • Take profit – use the previous swing low as your profit target.

 

Here is a cautionary note: Triangle patterns, just like other techniques, are not a completely reliable . They do have false breakouts that’s why it’s very important that you wait for the candlestick to close, even so, the close of the candlestick won’t guarantee you a successful.

 


Double top and double bottom chart patterns

Double top and  double bottom chart patterns are  a reversal patterns that are found or formed at the end of an uptrend or downtrend and signal the end of the trend.

There are two types of these patterns:double top pattern and double bottom pattern

Double top pattern 

A double top is a bearish reversal pattern that is formed at the top on an up trend and it indicates a downtrend movement or the end of an uptrend. This pattern has 2 tops at about the same level.

The first top is formed when the market price rise up to hit  a certain level, then reverse in the opposite direction until it hit a certain level again where it can’t continue to go down. That level is called a necklice.

From the neckline, the price retrace back up to re-test the same level again, but price fail to break the level again, from then price drop.

Note: this pattern is not complete until the price drops and break the neckline. Here is an example of what double top looks likedouble top pattern

Notice this pattern is similar to that of  the head and shoulders pattern, except this pattern has only 2 peaks instead of 3 peaks ( 2 shoulders with no head)

how to trade double top pattern?

Wait for the neckline to be broken ( the price must break and close below the neckline). When that happens, place a sell trade.

Stop loss– place your stop loss above the candlestick that breaks and close below the neckline.

Take profit target- Calculate the distance in pips between the neckline and the top Or you can use the previous swing low as your take profit target. See the example on the chart double top pattern

 


Double bottom pattern

Everything you just read about double top pattern is the opposite of the double bottom. A double bottom is a bullish reversal pattern that is formed at the bottom on a down trend and it indicates the end of an downtrend.

This pattern has 2 bottoms at about the same level. The first bottom is formed when the market price fall down to  a certain level, then reverse in the opposite direction until it hit a certain level again where it can’t continue to go up. That level is called a necklice.

From the neckline, the price retrace back down to re-test the same level again, but price fail to break the level again. From there, price go up. Again, this pattern is not complete until the price break the neckline. Here is how a double bottom looks like.

double top pattern

How to trade double chart pattern?

If you can trade a double top, you can trade this pattern too. Let’s see how.

Wait for the neckline to be broken- the price must break and close above the neckline. Once that happen, place a buy trade.

Stop loss– put your stop loss few pips below the candlestick that breaks and close above the neckline.

Take profit target – Calculate the distance in pips between the neckline and the double bottom. See the example below.

 double top pattern

There you have it. I am sure now you know how to spot these two patterns and also how to trade them.


Head and shoulders patterns 

A head and shoulders pattern is a trend reversal pattern that is formed at the end of an uptrend or downtrend and signal the end of a trend.

This pattern is formed by a left peak called a shoulder, a higher peak called a head , and  a right peak called shoulder that is formed almost at the same level as the left shoulder.

There are two types of head and shoulders pattern: a head and shoulders top and a head and shoulder bottom also know as an inverse head and shoulders

Head and shoulders top

This pattern is formed at the end on an uptrend and it indicators a reversal movement. See the chart below.

Head and shoulders pattern

Most important thing to remember is that a head and shoulders is not complete until the neckline is broken as shown above.

How to trade head and shoulders top pattern?

once this chart pattern is fully formed, wait for the price to  retrace back to neckline. If the price touch and break the neckline then place a sell trade. Meaning the candlestick has to break and close below the neckline. Once the candlestick break and close below the neckline, place a  sell trade.

Protective stop loss-Place your stop loss few pips above the candlestick that touches the neckline

Take profit target-For take profit, measure the distance from the neckline to the  head and use that as your take profit. If the distance between the neckline and the head is 120 pips ,the you should target 120 pips profit.

You can also use the previous swing low as your take profit target. I used the following chart as an example.

Head and shoulders pattern

 

Notice the bearish (red) candlestick that broke the neckline closed below the neckline. That’s when you place place a sell trade.

 


Head and shoulders bottom

Head and shoulders bottom is the opposite of a head and shoulder top as you can see the picture below.

To trade the head and shoulder pattern, you simple wait for the neckline to be broken and  then place a buy trade.

Protective  Stop loss-Place your stop loss few pips below the candlestick that breaks the neckline

Take profit – Measure the distance in pips between the neckline and the  head and use that as your take profit. If the distance between the neckline and the head is 120 pips ,then your profit target should be 120 pips.

These patterns can be formed in all trading timeframe- from 1 minute up to monthly timeframe. However, those patterns that a formed on smaller time frames are not as reliable as those formed on higher timeframes therefore if you want to trade these patterns make sure you only trade those formed on daily and weekly timeframes.

Here is a cautionary note: head and shoulders patterns, just like other trading chart patterns, are not a completely reliable. They do have false breakouts that’s is why it’s very important that you wait for the candlestick to close first, even so, the close of the candlestick won’t guarantee you a successful.

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