Most popular chart pattern trading strategies
The forex market is a vast market and every single day millions of dollars are being traded in this vast online market. Traders all around the world use different trading systems and techniques in order to execute a high-quality trade in the market. Starting with an indicator-based trading system and ending with the most complex trading strategy, you literally have a wide range of options to master the art of trading. Despite all the trading strategies, most of the professional traders prefer chart pattern trading systems, since these allow them to catch the big moves of the market with a great level of precision. Today we will learn more about the two most traded chart pattern trading strategies in the forex market.
Head and shoulder chart pattern
This pattern is often known as the reversal chart pattern in the forex market. The professional traders use it to identify the end of an established bullish trend in the market. Though the pattern is extremely reliable, expert traders always suggest to use it in the higher time frame for a better trading result.
Formation of the head and should pattern: The formation of this pattern is very simple and this pattern is usually identified near the key resistance level of the market. Let’s see a graphical representation of the head and shoulder chart pattern, for a better understanding.
Figure: Trading the head and shoulder chart pattern
In the above figure, you can see that the head and shoulder pattern is formed with three peaks in the market. The first peak is known as the left shoulder, where the price rises for the first time. The second peak is the highest peak and is known as the head of this pattern. The third peak is the right shoulder, which completes the formation of this pattern. The professional price action traders cautiously wait for the market for a valid break of the neck line. As soon as the price breaks the neck line of this pattern, the aggressive traders execute their short orders in the market with a stop loss just above the neck line. However, those who love to trade the market in a conservative way, always trade the breakout of the neckline with bearish price action confirmation signal. Most of the time the market tends to retrace back to the neckline resistance, before continuing its movement in favor of the newly formed bearish trend.
Though head and shoulder chart pattern trading is very much popular among professional traders, you must remember that it’s basically trading against the long term trend. If you trade the market in the lower time frame by using this pattern, chances are very high that you will lose a huge amount of money. Try to place your take profit level in the nearest key support zone when your trade gets triggered. Some traders often set their stop loss just above the high of the right shoulder to save themselves from the unwanted market spikes, but in such cases you will want to make sure that you are not trading with a high lot, since you will be using a wide stop loss. But if you can master the price action trading strategy, there is no need for you to wide stop loss.
Triangle pattern trading
Triangle pattern trading is very much popular among all level of traders. Most of the time the market forms a triangle-like structure once every three months, in other words, it takes generally three months to form a valid triangle pattern in the daily chart.
Let’s see a triangle chart pattern:
Figure: Formation of triangle pattern in the financial instrument
In the above figure, you can clearly see how the triangle pattern is formed during the price movement of the live assets in the market. Most of the time the price tends to cease its movement at the end of this triangle pattern and the professional traders cautiously wait for the breakout of the triangle support or resistance zone. When the breakout occurs you can aggressively trade in direction of the breakout or wait for the price action confirmation signal to play safely in the market.
Stop loss and take profit level
Some traders often struggle to set their stop loss and take profit level while trading the triangle chart pattern. But to be honest, this is really simple. Most of the time the market movements are equal or greater to the base range of the triangle chart pattern. In the case of a bullish breakout, the experts set their stop loss just below the triangle support zone and in the case of bearish, they set it right above the triangle resistance zone. But if you know the reliable candlestick pattern or price action trading strategy, you can easily use the much more precise stop loss just by using the formation of the Japanese candlestick pattern. When you trade the triangle chart pattern, you best make sure that you are not risking more than 2 percent in any single trade, since no trading strategy is 100 percent perfect.
When you trade the triangle chart pattern in the forex market, make sure that you are trading in favor of the trend. 90 percent of the time, the breakout occurs in favor of the long-term prevailing trend. So it’s highly imperative that you know how to find the existing trend of the market since it will increase your winning edge. In triangle chart pattern trading, we have many different formations of the triangle pattern, such as ascending triangles and descending triangles, but all of them are traded with the same principle. When you trade the symmetric triangle chart pattern, it is a little bit easier to make a profit since the breakout favors the long-term trend. As a professional trader, you should also know the schedule of high impact news releases while the pattern completes its formation, since the breakouts are triggered by high impact news releases.