Follow Chart Patterns
Think of patterns in a stock chart like footprints, with other traders leaving the tracks. Big picture: You’re looking at the movements of the market herd. And once you really understand what you’re looking at, the patterns can give you an indication of what the herd will do next.
It’s all about anticipation. When you can anticipate what happens next, you learn where the odds are stacked in your favor. As result, you can start thinking about your trades in a more dynamic way. No more lunging in the dark, hoping for the best.
Knowing chart patterns can also help you determine appropriate stop-loss and take-profit levels.
Successful traders use chart patterns to trade all kinds of markets profitably. We recommend that you make chart analysis a major part of your trading strategy.
Examples of Key Chart Patterns
To further understand chart patterns and how to use them, here are two examples of patterns that are regularly found in many stocks.
A breakout pattern involves a stock breaking above a key price level.
The above chart shows KALY, a penny stock traded on the OTC markets, form a resistance level of around 0.0085 in November 2018.
In mid-December 2018, the stock breaks out above this level on increased volume, before making a run of several hundred percent.
Traders who bought this breakout could have multiplied the capital they invested, assuming they were nimble in exiting the trade.
Breakout and Retest
In a breakout and retest pattern, stocks that break above or below a key level often come back to the breakout point before continuing their move.
This chart shows CWCO, a Nasdaq-traded stock, establish a support level of around $13.25 in August 2018.
In September 2018, CWCO broke below support before returning to the level in November 2018. The previous support level acted as resistance, and the stock continued its move to the downside.
Traders who missed entering a trade on the initial break of the support level could’ve still profited from the down move by short-selling when CWCO retested the level.
Only Trade Patterns That You Master
Do a quick Google search on charting and you’ll find a slew of information on how to invest money or trade using chart patterns. You’ll find that there are literally thousands of recorded chart patterns.
All these patterns can be completely overwhelming. Many newbies will learn the basics of a few patterns … then they place bad trades. They haven’t fully learned what makes a great chart setup and what doesn’t.
That’s why we advise that if you’re new to trading, pick one or two chart patterns. Get real cozy with them. Then backtest them and try to master the intricacies of the patterns.
You want to live and breathe your patterns, know them like the back of your hand. Also, keep previous examples of these patterns. In short, make them your best friend. That’s how many traders develop the confidence and expertise to kill it in the markets.