- Trading
- Trading
- Markets
- Markets
- Products
- Forex
- Commodities
- Metals
- Indices
- Shares
- Cryptocurrencies
- Treasuries
- ETFs
- Accounts
- Accounts
- Compare our accounts
- Our spreads
- Funding & withdrawals
- Open account
- Try free demo
- Platforms & tools
- Platforms & tools
- Platforms
- Platforms
- Platforms overview
- MetaTrader 4
- MetaTrader 5
- Mobile trading platforms
- Premium trading tools
- Premium trading tools
- Tools overview
- VPS
- Genesis
- Education
- Education
- Resources
- Resources
- News & analysis
- Education hub
- Economic calendar
- Earnings announcements
- Help & support
- Help & support
- About
- About
- About GO Markets
- Our awards
- Sponsorships
- Client support
- Client support
- Contact us
- FAQs
- Quick support
- Holiday trading hours
- Fraud and scam awareness
- Legal documents
- Trading
- Trading
- Markets
- Markets
- Products
- Forex
- Commodities
- Metals
- Indices
- Shares
- Cryptocurrencies
- Treasuries
- ETFs
- Accounts
- Accounts
- Compare our accounts
- Our spreads
- Funding & withdrawals
- Open account
- Try free demo
- Platforms & tools
- Platforms & tools
- Platforms
- Platforms
- Platforms overview
- MetaTrader 4
- MetaTrader 5
- Mobile trading platforms
- Premium trading tools
- Premium trading tools
- Tools overview
- VPS
- Genesis
- Education
- Education
- Resources
- Resources
- News & analysis
- Education hub
- Economic calendar
- Earnings announcements
- Help & support
- Help & support
- About
- About
- About GO Markets
- Our awards
- Sponsorships
- Client support
- Client support
- Contact us
- FAQs
- Quick support
- Holiday trading hours
- Fraud and scam awareness
- Legal documents
- Home
- News & Analysis
- Trading Strategies, Psychology
- 5-point checklist for using chart patterns within your trading plan
- Home
- News & Analysis
- Trading Strategies, Psychology
- 5-point checklist for using chart patterns within your trading plan
News & AnalysisNews & Analysis5-point checklist for using chart patterns within your trading plan
11 April 2020 By Mike SmithChart patterns (e.g. head and shoulders, triangles, double bottoms/tops), are commonly used to assist in trading decision making. If using these as part of your entry approach, their use should be viewed as a specific strategy, amongst others you may use, and so merit a dedicated section within your plan.
This article outlines some of the key things to consider when writing and using such in your trading plan.
General rules with trading plans revisited
The statements within your trading plan serve two primary functions, as discussed in detail in previous articles. It is important that such statements are specific enough to more effectively perform these functions, namely:
a. Facilitate consistency in trading action e.g. in the entry and exit of trades, allowing the trader, and
b. Enable measurement e.g. within a journal, to make an evidence-based judgement on how well these statements are serving you through testing.With this level specificity, it is easier to ‘tweak’ components rather than throwing the “baby” of any strategy “out with the bathwater”. Often, many experienced traders discover the finer details can make a relatively big difference to trading results, rather than massive changes in approach.
Obviously, if there is a lack of consistency, originating from behaviours that move away from what you have planned, make it almost impossible to make any judgement on the success, or otherwise, of a strategy.
Using chart patterns adheres to all the above.What about trading chart patterns?
Chart patterns are simply a representation of potential changes in market sentiment. Often combined with other indicators and can be used to indicate a potential entry into, or in some cases exit from, a specific position.
Some patterns indicate a trend reversal (e.g. head and shoulder, double tops, triple bottoms etc), others a pause (congestion) before continuing in the direction of a previous trend e.g. flags, pennants, symmetrical triangles.
Patterns may occur on any timeframe but generally speaking are more robust (in terms of potential longevity of movement) on longer timeframes (although of course they cannot indicate with any accuracy how long that move may be).
As with any entry approach, there is a chance that a trading idea based on an identified pattern will fail and so, as always, appropriate risk management should be put in placeAnd within your trading plan?
Chart patterns are not easily identifiable with most general indicator systems and are often best “sighted” so there is an element of subjectivity. Logically this could suggest that this makes it even more vital to be robust in your description of how to use these in your trading.We have identified FIVE potential components to include within your written trading plan.
These are:
1. Your definition of the chart patterns you are going to use
2. When you are going to use them
3. Identification of when a pattern is completed
4. Other factors you may use to potentially decrease the chance of a false breakout from any chart pattern you are going to use
5. Your initial stop placement method#1 Your definition of the chart patterns you are going to use
Specify which of the chart patterns you are choosing to trade. Ideally, a description of what this pattern looks like on a chart will help lock this in. For example, if we were to describe a double top it could read:
• Reversal of upwards trend.
• Creation of two upwards prongs. Around the same price level forming a ‘M-shape’.
• Breakout below the ‘confirmation point’ (bottom of “prongs” confirms reversal.#2 When you are going to use them
There are two perhaps obvious, and yet important, factors to include:
a. On which timeframes you are going to use chart patterns
b. The proximity of impending economic data releases. For example, If trading a 30 minute chart you could specify “no relevant (define this e.g. specific to currency pair), significant (define this e.g. you may decide to actually state the data points) data due within the next 3 hours.#3 Identification of when a pattern is completed
Experienced traders always wait until a pattern is complete before acting. However, the incidence of false breakouts (i.e. when a trading idea fails after a pattern is completed) is worth taking steps to attempt to limit.
Let’s use the break of a neckline on a ‘reverse head and shoulders’ as an example. Clearly, price moving upwards through the neckline is the desire. However, you need to articulate what are you using to determine this.
E.g. At any time within a candle period or on candle close price; and/or is there a specific distance such as using 0.5 ATR, or perhaps number of pips/points, above the neckline?#4 Other factors you may use to potentially decrease the chance of a false breakout from any chart pattern you are going to use
The following may be considered:
a. Which other indicators e.g. moving average, volume
b. Intra-candle price action e.g. close within the top third of the candle if considering a long trade.
c. Agreement on other timeframes (although this may not be the pattern what constitute “agreement” e.g. price above 10EMA.
d. Minimum distance to next “key price point” e.g. next resistance price level if going long.#5 Your initial stop placement method
As the structure of each pattern is different then it is important to specific your initial stop placement methods for each.
So, to use the previous example, if trading the “idea” of a breakthrough a neckline, a pre-planned exit logically could be move back through that neckline may indicate a trade failure and necessitate a risk management exit (and so of course be a determining factor in your position sizing into that trade).
As with defining what constitutes a breakout, logically again, you need to specify whether you are using an anytime touch of a price for exit or a candle period close price, and/or is there a specific distance (an how you are going to articulate this) below the neckline.So now to action…
Depending on where you are now with you plan there are two potential actions.
1. If you are already using chart patterns use the above checklist to determine whether you have these components included, fill any gaps and that ensure they are specific enough
2. If you have not got part of your trading plan them this may help you get started in making it happen
Remember of course, the above is indicative suggestions only, it is YOU that must make the choice about what to include/not include and the specific parameters you are going to test and ultimately use.Ready to start trading?
Disclaimer: Articles are from GO Markets analysts and contributors and are based on their independent analysis or personal experiences. Views, opinions or trading styles expressed are their own, and should not be taken as either representative of or shared by GO Markets. Advice, if any, is of a ‘general’ nature and not based on your personal objectives, financial situation or needs. Consider how appropriate the advice, if any, is to your objectives, financial situation and needs, before acting on the advice.
Next Article
3 Game-Changing Questions You Could Ask of Your Trading Journal Data
In previous articles we have discussed in detail the merits of a trading journal in offering evidence for both: a. How well you are following a trading plan? b. How well your trading system is serving you? (assuming you are already following a trading plan) We have also outlined the importance of “closing the circle” and maki...
April 14, 2020Read More >Previous Article
OPEC and G20 Meetings Not Guaranteed
On 8 March 2020, Saudi Arabia initiated an oil price war with Russia, triggering a rout in the oil market at a time where the world is facing a pand...
April 8, 2020Read More >We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies. You can view our cookie policy here.Manage consentPrivacy Overview
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.Cookie Duration Description AWSALBCORS 7 days This cookie is managed by Amazon Web Services and is used for load balancing. cookielawinfo-checkbox-advertisement 1 month Set by the GDPR Cookie Consent plugin, this cookie is used to record the user consent for the cookies in the "Advertisement" category . cookielawinfo-checkbox-analytics 1 month This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics". cookielawinfo-checkbox-functional 1 month The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional". cookielawinfo-checkbox-necessary 1 month This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary". cookielawinfo-checkbox-others 1 month This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other. cookielawinfo-checkbox-performance 1 month This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance". elementor never This cookie is used by the website's WordPress theme. It allows the website owner to implement or change the website's content in real-time. PHPSESSID session This cookie is native to PHP applications. The cookie is used to store and identify a users' unique session ID for the purpose of managing user session on the website. The cookie is a session cookies and is deleted when all the browser windows are closed. viewed_cookie_policy 1 month The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data. _GRECAPTCHA 5 months 27 days This cookie is set by Google. In addition to certain standard Google cookies, reCAPTCHA sets a necessary cookie (_GRECAPTCHA) when executed for the purpose of providing its risk analysis. __cfruid session Cloudflare sets this cookie to identify trusted web traffic. Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.Cookie Duration Description CONSENT 16 years 3 months 17 days 20 hours These cookies are set via embedded youtube-videos. They register anonymous statistical data on for example how many times the video is displayed and what settings are used for playback.No sensitive data is collected unless you log in to your google account, in that case your choices are linked with your account, for example if you click “like” on a video. SPSI session This cookie is used for setting a unique ID for the session and it collects user behaviour on the website during the session. This collected information is used for statistical purposes. vuid 2 years Vimeo installs this cookie to collect tracking information by setting a unique ID to embed videos to the website. _ga 2 years The _ga cookie, installed by Google Analytics, calculates visitor, session and campaign data and also keeps track of site usage for the site's analytics report. The cookie stores information anonymously and assigns a randomly generated number to recognize unique visitors. _gat_UA-2467324-17 1 minute This is a pattern type cookie set by Google Analytics, where the pattern element on the name contains the unique identity number of the account or website it relates to. It appears to be a variation of the _gat cookie which is used to limit the amount of data recorded by Google on high traffic volume websites. _ga_9P2FTXTH5P 2 years This cookie is installed by Google Analytics. _gcl_au 3 months Provided by Google Tag Manager to experiment advertisement efficiency of websites using their services. _gid 1 day Installed by Google Analytics, _gid cookie stores information on how visitors use a website, while also creating an analytics report of the website's performance. Some of the data that are collected include the number of visitors, their source, and the pages they visit anonymously. _uetsid 1 day This cookies are used to collect analytical information about how visitors use the website. This information is used to compile report and improve site. Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.Cookie Duration Description IDE 1 year 24 days Google DoubleClick IDE cookies are used to store information about how the user uses the website to present them with relevant ads and according to the user profile. MUID 1 year 24 days Bing sets this cookie to recognize unique web browsers visiting Microsoft sites. This cookie is used for advertising, site analytics, and other operations. NID 6 months NID cookie, set by Google, is used for advertising purposes; to limit the number of times the user sees an ad, to mute unwanted ads, and to measure the effectiveness of ads. test_cookie 15 minutes The test_cookie is set by doubleclick.net and is used to determine if the user's browser supports cookies. VISITOR_INFO1_LIVE 5 months 27 days A cookie set by YouTube to measure bandwidth that determines whether the user gets the new or old player interface. YSC session YSC cookie is set by Youtube and is used to track the views of embedded videos on Youtube pages. yt-remote-connected-devices never YouTube sets this cookie to store the video preferences of the user using embedded YouTube video. yt-remote-device-id never YouTube sets this cookie to store the video preferences of the user using embedded YouTube video. yt.innertube::nextId never These cookies are set via embedded youtube-videos. yt.innertube::requests never These cookies are set via embedded youtube-videos. Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.Cookie Duration Description AWSALB 7 days AWSALB is a cookie generated by the Application load balancer in the Amazon Web Services. It works slightly different from AWSELB. DEMO_FORM_PCODE past No description geot_rocket_city session No description available. geot_rocket_country session No description available. geot_rocket_state session No description available. ms-uid 1 year No description available. SPSE session No description available. STYXKEY_geot_country session No description _uc_current_session 1 hour No description available. _uc_initial_landing_page 1 month No description available. _uc_last_referrer 1 month No description available. _uc_referrer 1 month No description available. _uc_visits 1 month No description available. _uetvid 1 year 24 days No description available. Please share your location to continue.
Check our help guide for more info.