Chart Patterns are the heart and soul of Technical Analysis. Appearing from the 1900s, they are the only proven mechanism to provide leading trading signals in FOREX and trading in general. In this article we will describe 5 Golden Rules for Trading Chart Patterns.
Golden Rule #1: Use Tight Stop Loss
Chart Patterns allow you to identify precise place for stop loss, in order to make in tighter as possible. After a trade is confirmed, quickly set Stop Loss above or below the local support and resistance, to keep you risk low and maximize your Risk:Reward ratio. This is a method that is only applicable when trading Chart Patterns, because trades are taken on Support and Resistance levels.
Golden Rule #2: Use Candlesticks as Entry
When a pattern is identified and a trading signal is taking place - in the form of a touch at Support\Resistance or a Breakout, use candlesticks to define your entry point. Candlesticks are the most objective and precise mechanism to signal and confirm entries to trades. Do not be tempted to use indicators for entry, as most of them lag and will result in late entries and larger stops. Instead, keep your stop loss close and enter early, to catch bigger moves.
Golden Rule #3: Trend Or Range
When trading chart patterns, trader must differentiate and separate periods of Trend and Range. This is important because the phase of the market affects your trading style: In periods of trend, trend-following trades work better so one will try to trade breakouts and retracements. On the contrary, in periods of range, one should take trades on Support and Resistance levels, also called as aggressive trades. One can separate between periods of Trend and Range by using the Bollinger Band's direction. Flat middle band indicate period of range, while trendy indicates trend period.
Golden Rule #4: Use Pattern Targets
Know to calculate the targets for your trades. For most chart patterns, an exact method of calculating the projected target is available. Use this target as your take profit and do not deviate from it (neither lower nor higher). Sticking to solid rules will make your trading more consistent and profitable, though it requires higher discipline.
Golden Rule #5: Beware of Support and Resistance Blocks
When trading a pattern, pay attention to price action in higher timeframes. Higher timeframes have more power over price, and sometimes a block on higher timeframes can stop a perfect chart pattern in a lower one. Look for possible blocks that may prevent price from going in your direction, and eliminate positions when in doubt.
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