By learning to recognize patterns early on in trading, you will be able to work out how to profit from patterns. I am a believer in technical analysis and do feel that chart patterns are a very powerful tool.
The measurements of the chart pattern can be used to project the next price movement and what target to aim for. These patterns can either be traded aggressively (with less conformation) or conservatively (with more conformation) so the rules of entry and exit can vary. It's easy to calculate the reward / risk for them, which is important to know before entering a trade.
One of the three assumptions discussed earlier in this tutorial was that HISTORY REPEAT ITSELF. The theory behind chart patterns is based on this assumption – that certain patterns consistently reappear and tend to produce the same outcomes. For example, as market sentiment shifts from optimism to fear, a certain pattern might emerge before traders and investors start selling and send the stock price lower.
As the definition, Chart patterns are the foundational building blocks of technical analysis. They repeat themselves in the market time and time again and are relatively easy to spot. Chart patterns also have an established definition and criteria, but there are no patterns that tell you with 100% certainty where a security is headed. The great thing about chart patterns is that they tend to repeat themselves over and over again. This repetition helps to appeal to our human psychology and trader psychology in particular.
There are 2 types of patterns, depending on how price is likely to behave after completion: REVERSAL & CONTINUATION Pattern, where price is likely to continue its course and bilateral patterns, where price can go either way, depending on whether it breaks to the upside or to the downside. A reversal pattern signals that a prior trend will reverse upon completion of the pattern, while a continuation pattern signals that the trend will continue once the pattern is complete. These patterns can be found across any timeframe.
In this section, we will review some of the more popular chart patterns.
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