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Main » Articles » Trading Strategy

Chart Patterns Strategies

The chart patterns can provide excellent trading opportunities. They are two types - continuation and reversal. When we see a continuation pattern we can expect that the prevailing trend will continue, while a reversal patterns suggests a trend change. The chart patterns show that the market is in a phase of indecision and is taking its breath before the next trend move. The most popular continuation patterns are explained in www.chartpatterns.com. The following principles are valid for the chart patterns:

  • Market should be trending before the pattern is formed;
  • The longer the formation is forming, the bigger move can be expected after a breakout;
  • It takes more time for a bottom to be completed than for a top;
  • The flag waves in the opposite direction. Continuation patterns like flag, wedge and pennant should be formed as corrections of the previous trend;
  • Every chart pattern could fail and the first break out could be fake.

We suggest four basic strategies for trading of chart patterns:

Early Opening of Position

Early Opening

  • The pattern is formed and the support and resistance lines are touched at least 2 times by the price;
  • A short-term reversal pattern (e.g. candlesticks reversal) is formed on the support or resistance lines;
  • We open position after the price breaks above the high (for long position) or below the low (for short position) of the short term pattern;
  • After the position is opened we place stop loss and profit taking orders according to our money and position management rules.

Chart Pattern Breakout

Breakout

  • The pattern is formed and the support and resistance lines are touched at least 2 times by the price;
  • We place a buy order above the resistance line and sell order below the support line. If this is a continuation pattern we can place only 1 order in the direction of the previous trend;
  • We open position after the price breaks above the resistance line (for long position) or below the support line (for short position) chart pattern;
  • After the position is opened we place stop loss and profit taking orders according to our money and position management rules. The stop loss order could be placed below the low/above the high of the breakout bar.

Second Break of the Chart Pattern

Second Break

  • The pattern is formed and the support and resistance lines are touched at least 2 times by the price.
  • A breakout of the support or resistance line occurs but the price returns in the chart pattern;
  • We place a buy order above the high of the breakout bar (after upside breakout) or sell order below the low of the breakout bar (after downside breakout). If this is a continuation pattern we can trade only if the first breakout is in the direction of the previous trend;
  • After the position is opened we place stop loss and profit taking orders according to our money and position management rules. The stop loss order could be placed below the low/above the high of the breakout bar.

False Break of the Chart Pattern

False Break

  • The pattern is formed and the support and resistance lines are touched at least 2 times by the price.
  • A breakout of the support or resistance line occurs but the price starts to consolidate near the broken line;
  • We place a buy order above the high of the breakout bar (after downside breakout) or sell order below the low of the breakout bar (after upside breakout). If this is a continuation pattern we can trade only if the first breakout is in the opposite direction of the previous trend. Also we can look for better entry point at lower time frame chart (e.g. consolidation or reversal candlesticks pattern);
  • After the position is opened we place stop loss and profit taking orders according to our money and position management rules. The stop loss order could be placed below the low/above the high of the breakout bar.

For many live exaples and real aplication of the chart patterns see our Forex Blog

Category: Trading Strategy | Added by: forex-market (2009-10-15)
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