The world of trading is a fascinating one. There are so many things that one can learn and even have fun with. One of the things that we will discuss today is chart patterns, which are an integral part of the trading world.
It is not enough to know what they are; we must also understand how they work. This article will tell you about the different types of charts and how they are used.
Reversal Chart Patterns
Reversal chart patterns are the kind of chart patterns that show that an ongoing trend is about to change its course. If a reversal chart pattern forms during an uptrend, it is likely that the trends will reverse. It further means that the price will head down soon. In the same way, if a reversal chart pattern is seen during a downtrend, the price will likely go up.
There are six types of chart patterns that give reversal signals: double top, double bottom, head and shoulders, inverse head and shoulders, rising wedge, and falling wedge.
To trade these chart patterns, place an order beyond the neckline and in the direction of the new trend. The next step is to go for the target with the same height as the formation of that trend.
Continuation Chart Patterns
Continuation chart patterns are the chart formations that show that the ongoing trend will resume. Another name for these patterns is consolidation patterns because it shows how the buyers and sellers take a break before continuing in the same direction as the prior trend.
Trends do not usually move in a straight line, higher or lower. Instead, they pause and move sideways, change the higher lower pattern, and then regain momentum to continue with the same trend.
The different continuation patterns include wedges, rectangles, and pennants. It is to be noted that we can consider wedges either reversal or continuation patterns, depending on the trend they form.
To trade these patterns, place an order above or below the formation. It will be done following the direction of the ongoing trend. Stops are usually placed above or below the chart formation for continuation patterns.
Bilateral Chart Patterns
Bilateral chart patterns are trickier than the rest because they show that the price can go either way. We refer to it as a bilateral signal. If you want to play these chart patterns, you need to consider the upside and downside breakout of both scenarios. We place one order on top of the formation and another at the bottom of the construction.
If one order gets triggered, you can cancel the other one. There is, however, one major disadvantage. You could catch a false break in these kinds of patterns. If you set your entry orders too close to the top or bottom of the formation, this is likely to happen.
Bottom line
If you are a first-time trader or even a veteran, it is essential to know the patterns. And not just this, you must also know what these patterns can do and how they could benefit the trader. Without such details to pay attention to, it is unlikely to succeed in the world of trading.
