Chart patterns are often the very first introduction that traders have to charting the markets. There is something inherently familiar about chart patterns, and because of this, there is a comfort level to trading these common shapes. Triangles, rectangles, wedges, channels, and more—these are the patterns that are often identified on a chart, and through these patterns, key decisions can be made as to how and when to enter a trade. In that way, I believe chart patterns are a tremendous anchor to what we know as we venture into the unknown waters of trading for the first time.
My trust in charts begins with my belief that the news is built into price. I’d have to say that much of my success in the trading game comes from separating news from price. Knowing what has been discounted into the markets can come from chart patterns because price analysis is an effective way of taking fear and greed out of your trading. It’s easier to absorb news and reports when you have a measuring stick by which to gauge the public response. That’s the key benefit of being a chartist!
I started charting in high school. I didn’t really know I was charting but it was the only way I could track the rise and fall of my one and only stock, IBM, and my two mutual funds. As my interest in the market grew, so did my formal education into charting and also technical analysis. It was through charting and chart patterns that the movement of the market began to take shape and make sense to me.
Fast forward almost two decades, and I’ve taught the same strategies and market approach to thousands of people around the world. I’ve noticed that something curious often happens after a trader discovers chart patterns: They leave them behind. Most often, it’s in the pursuit of finding something more sophisticated or more advanced.
Somewhere along the line, we’re brainwashed into thinking that chart pattern analysis is not enough. In some ways, that is both right and wrong. There are specific questions any trader can learn to ask to confirm that the pattern is a quality pattern. Without having checks and balances for “grading” patterns, there is a high likelihood that a trader will enter too many sub-standard formations and begin to lose trust in not only their own pattern identification, but also the confidence to act on specific pattern triggers.
But chart patterns can be traded in any market and on any time frame. For that reason alone, there is a lot of benefit to learning how to identify them. A picture is worth a thousand words, and if you ask me, a chart is worth even more.
We will examine a number of charts together and the main goal of this in-depth discussion is to begin training your eyes to notice the nuances within patterns. Another key to trading chart patterns is to understand the building blocks of the patterns. The building blocks of all chart patterns are trend lines, support, and resistance. All patterns are some sort of combinations of uptrend lines, downtrend lines, and horizontal support and resistance levels. If you can identify the “lines and levels” on a chart, then you can begin putting these patterns together because you—most importantly—understand how to find the building blocks of the patterns.
Think about it this way: What is a symmetrical triangle other than the intersecting of a downtrend line and an uptrend line? An asymmetrical triangle is simply the combination of one horizontal level and one trend line.
