Emotions run high when you are trading especially when the market is volatile. Sometimes, these emotions get the best of you leading to numerous mistakes. These mistakes can cost you loads of money. In some cases, recovering from these losses is impossible. Therefore, exercising care before you start trading is an excellent idea. Doing that is possible if you have a number of tools to help you. Some of the most practical tools that you can have are trading patterns. Unfortunately, people know little about these trading patterns. That means they cannot use them as effectively as they should. You can take advantage of them. Doing so is only possible if you learn 3 things you should know about trading patterns.
1. Trading Patterns Are Different
Securities have different prices at different times. Viewing them at a specific point in time does not reveal anything useful. More specifically, predicting the market price tomorrow is important if you only have today’s price. Therefore, trading patterns reveal the price movements of a security over a particular period. You will view these movements on a chart. They will appear as lines connecting specific prices. However, these trading patterns are different. For example, the primary categories that exist when it comes to trading patterns are reversal or continuation patterns. Reversal patterns inform you when the stock is likely to turn around while continuation patterns indicate a pause in the trend. Determine the pattern that is suitable for you and then stick to it.
2. Approaches to Each Pattern Exist
Learning about different patterns is possible as is settling on one of them. However, using them is another matter. Many people fail when it comes to using a particular pattern so they go for another one. Eventually, they end up using several of them even though they have mastered no of them. The only way you can become success at using a particular pattern is by developing specific approaches to it. For example, adopting three approaches to exit your current trade is possible. These approaches include trailing stop loss, capturing the swing, and price projection. It is worth noting that your goals play a role in determining the approach that you will take. For example, a trailing stop loss is a suitable choice if you want to ride massive trends.
3. Signals in Trading Patterns
Signals are the essence of a trading pattern. More specifically, they help you make sense of the lines that you see on the chart by summarizing them. Trading patterns should have conspicuous signals that are easy to interpret. They should be useful as well. For example, a Head & Shoulders Trading Pattern has signals pointing to a possible trend reversal. This reversal occurs because the buyers have reached their ceiling when it comes to price of the security that they are trading. Interestingly, Head and Shoulders Trading Patterns have an inverse version known as the Inverse head and shoulders pattern. In this case, the signals show possible reversals because the sellers cannot push the price to a lower level than it is.