Another great tendency that price has is that it form patterns in regular cycles to the extent that you can use these patterns to help with your trading decisions.
Again I am not trying to tell you that price patterns are the key to your trading success rather to just let you know that they can be very powerful when incorporated into your system and used alongside the core ethos explained earlier.
It’s also important to note that the couple of examples included here are not a finite list nor are they the absolute best patterns that you can get but they are merely to show you that if you know how to spot a chart pattern they can be a very useful tool as part of your system as a whole.
The first price pattern that we will look at is what is known as the head and shoulders pattern.
This is quite a powerful reversal pattern and usually appears before a drop in the price.
The picture below demonstrates how this pattern looks:
As you can see it’s quite a simple reversal pattern but it is also quite powerful and all you need is a peak followed by a higher peak which in turn is followed by a second shorter peak.
If you see this pattern emerge on your chart, one thing that you can do is start looking for some good reasons to try and sell that pair.
Remember, this pattern alone is not enough but it can be used as a catalyst for you to start searching out good shorting opportunities based on your particular system.
Remember before you take any trade you must have a confluence of reasons in agreement.
Another really good pattern which you can use in a very similar way is the double bottom formation.
A double bottom is a really simple set up that involves the price hitting the same level of support twice and bouncing up off it both times.
The chart below gives a good visual illustration:
You can see that this is also a really easy pattern to spot on a bare price chart, but at the same time it is also very powerful, when you combined it with other reasons to buy.
The premise is simple, when you see a double bottom pattern form the market may be looking to go up.
Notice how after the second bottom the price doesn’t just shoot straight up instead it goes up in waves so there is plenty of opportunities here to perhaps plot your Fibonacci and look to enter at nice confluences of support as the market pulls back on its way up.
Again it’s important to realize that this is only a suggestion, as there are many ways to trade using the principles and tools that I show you here.
Next: Average Daily Range