The 2 Best Chart Patterns For Trading

Chart patterns, who doesn't love a good wedge or triangle to get the trading day started. There are tons out there today that many of us can use.

I am going to talk about some great trading patterns and how I trade them. This article is more tailored to the newbie so if you are more advanced, you might want to skip ahead to another article or read about my own trading story.

I'll also give up to date examples in the stock market of these patterns in action. There are tons of them.

These patterns are great for newbies getting started or even veterans alike. I love them because they are so simple to implement, just the way it should be.

So lets get started...

The Triangle Patterns

Ascending Triangle 

Simply put, this is a chart pattern that indicates buys signals when it breaks out of the triangle. I  use this pattern a lot in my trading today.Again, simplicity is key for me.

 

chart patterns Ascending triangle chart pattern

A recent example of an ascending triangle in the Nasdaq on the Daily Chart. There are tons of these patterns out there if you study through the charts.

As with everything in trading, they are not the holy grail and fail just as much as they work out. The key as always is to manage your risk when wrong and have a multiple of your risk when you are correct.

Rinse repeat over and over again...

On paper, it sounds so easy but us humans are a complicated species and love to complicate things.

You can use these patterns intraday too if you prefer. Some great traders use this pattern to this day in their strategies and if it works for them, it most certainly works for me.  I'd much prefer use something that works for the big guys as opposed to re invest the wheel.

Don't get me wrong, I wouldn't mind my own special chart pattern that worked for me but I just haven't found one. People (myself included) once believed their was a secret formula or the big guys know something us normal people don't.

Working in prop, I learned that was nonsense and we all have the same tools and learning resources available to us. It's how we use that information that separates us.

To summarize lets look at the pros and cons

Pros

  • Easy to learn & implement
  • Eliminates subjectivity (to a point)
  • Top traders use it in their strategies meaning there is use for them
  • Not many variations so no confusion on what constitutes a triangle pattern and what doesn't

 

Cons

  • Can have a high failure rate (especially on lower timeframes)
  • Only works best in trending markets
  • Can be chopped and whipsawed attempting to buy the breakout at the right time

 

There is lots of free software out there today to automatically find these patterns in the market but I'm a bit old school and prefer to look through the charts manually.

 

 

Descending Triangle

Simply put, this is a reverse to the ascending triangle in that we go short when price breaks out of the triangle pattern to the downside.  This is a great pattern for bear markets.

chart patterns Descending Triangle Chart Pattern

Here is a recent example of a descending chart pattern in the EUR/USD on the daily timeframe. A great shorting opportunity when it breaks support.

Just like with the ascending triangle above, this chart pattern is not a holy grail but when used correctly with good risk reward can generate steady profits over time.

The important part is to manage your discipline and defined rules of your strategy to get anywhere with these patterns.

 

Pros

  • Easy to use & implement
  • Limited scope for subjectivity ( to a point)
  • Top traders implement it
  • Not many variations of this pattern so misinterpreting isn't a major issue

Cons

  • Can be a nightmare for timing the short correctly.
  • Getting stuck in a bear squeeze can be problematic with poor risk management
  • Higher failure rate in choppy, sideways markets.

 

Like the ascending triangle chart pattern, its important to emphasize how this is not a holy grail pattern and the deciding factor is you, the individual.

Good sound rules coupled with great risk management makes this a powerful pattern when used correctly.

The great thing about these patterns that I love is how they can be used in multiple timeframes. One great trader that does this is Trader Stewie

My next favorite chart pattern is the Wedge. This pattern looks similar to the triangle with slight differences as will be seen below.

 

Wedge Chart Patterns

Bullish Wedge

The bullish wedge is a chart pattern to buy once price breaks out of the defined areas. This can be a great entry technique in any market that the pattern sets up in.

bullish wedge chart pattern wedge chart pattern

Here is a recent example in Visa of a bullish wedge pattern. There are lots of these patterns around on all timeframes so if you do some digging, you can find plenty to study.

Furthermore, its not the holy grail and needs to be managed with strict risk management.

Pros

  • Simple to learn & implement
  • Great for defining buy and stop points
  • Plenty of  thee patterns in the market so an abundance of opportunities

 

Cons

  • Has high failure rate in choppy markets
  • Can take multiple attempts to get the timing on the break out
  • Small losses from being whipsawed can add up fast

 

Like the triangle patterns, there is software out there that scans for this pattern but I much prefer to manually go through charts myself.

 

Bearish Wedge

This is a reverse to the bullish wedge in that you enter a short when price breaks down through the defined levels as can be seen below.

wedge chart pattern Wedge Chart Pattern

Here is a recent example of a short trade on the Vix. Again timing it can be tough but once you get it correct, your profits can add up.

Like all the patterns outlined here, there are lots of them available and the trick is to find what you perceived to be the highest probability.

 

Pros

  • Easy to find these patterns
  • Entry and Stops are easy to place
  • Can work great for short trades

Cons

  • Can be tricky in a choppy market
  • High failure rate means strict risk adherence
  • Works best in trending bear markets

 

A lot of top day traders use these simple chart patterns on lower timeframes and have perfected their approach over time with it.

It must be said again that without proper risk management, you can really be chopped up in these. Timing is crucial and can be very hard in this context.  But like I always say, simplicity is key.

And these are exactly that, very simple to implement.

You may have noticed I only included two chart pattern types. Well, I know there are lots out there but these are the 2 types I have had most success with. You may prefer bull flags or head and shoulders and thats great too.

Whichever works best for you, great!

So, I urge all of you to look through your charts and see can you spot any of these patterns? Study them all and see how they would have worked out if you had taken the trade signals they generated.

 

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