That human behavior operates in recognizable patterns is an unarguable biological fact.
This is as true for trading patterns in the markets as it is for human behavior in any other area of life. The markets are full of the same trading patterns repeated over and over again as investors react to news and events in a familiar way.
This means that day traders who can recognize these trading patterns are able to reliably predict future price action according to how these patterns will naturally play out.
However, it can be difficult to determine when you are seeing an actual trading pattern play out and when you are just trying to put a shape to random noise.
• What time frame should you use when seeking out trading patterns?
• How close does a pattern need to fit before it is usable?
• How can you tell one trading pattern from other similar ones?
These questions and more can make it difficult for new day traders to understand how and when to use the right trading patterns for their day trading strategies.
Practice Makes Perfect
While it is absolutely possible to develop a reliable day trading system based on using familiar trading patterns to predict future price action, it is not something that can be learned overnight. A good place to start implementing patterns and developing strategies is eSignal.
The best means of learning to reliably use trading patterns is to start day trading on a practice account and use an online trading course as a resource for information and a place to have your questions answered by other experienced day traders.
As you progress in your day trading, you will quickly find that you develop an internal grasp of how and when to apply trading patterns to market activity.
While trading patterns rely on the science of human psychology, applying them in trading is still more of an art form that relies on the intuitive knowledge and experience of the day trader.
Variation on a Theme
To correctly apply trading patterns to price action and reliably forecast future price moves, day traders need to understand that all trading patterns are ultimately just variations on a few core themes.
For example, after a major move in the markets a security’s price tends to go through a period of consolidation, where bulls and bears test the limits of the new price area. Consolidation periods that trend up tend to lead to upward price breakouts, whereas consolidation periods that trend down tend to lead to the opposite.
There are a variety of different trading patterns based on consolidation periods, but all of them operate on the same central theme of the market adjusting to new highs or lows after a major shift in prices.
Once a day trader understands the underlying mechanics behind all trading patterns, identifying the right pattern for each occasion becomes much simpler.
13 Trading Patterns Every Day Trader Should Know
While there are a large number of trading patterns, there are 13 that every day trader should know and understand.
Once you are comfortable with these 13 trading patterns, all other patterns are merely variations on these core 13.
• Head and Shoulders Top
• Falling Wedge
• Bearish Symmetric Triangle
• Double Top
• Flag Continuation
• Rounding Bottom
• Bullish Symmetric Triangle
• Inverse Head and Shoulders
• Descending Triangle
• Triple Bottom
• Ascending Triangle
• Cup and Handle