We agree with the line of thinking that trading mere chart patterns alone is a losing strategy. Many traders start out with what I call indicator fascination and delve into advanced analysis methods that can confuse them and often times discourage them from continuing trading. So today, I’m going to show you a few basic day trading chart patterns that should get you started on the right track.
It’s similar to the triangle pattern but has a slightly wider channel range and typically slopes down a bit more.
Notice how low the risk level can be when the bars before the breakout are consolidating and have a tight trading range; these are the type of patterns you want to isolate for day trading.
SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. When I started out trading I was under the impression that the more difficult trading methods would produce bigger winners or higher probability of winning trades. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. However, for the most part most financial instruments respond best to daily chart analysis to begin with. In this case the triangle breakout continued upwards momentum and closed near the high of the day. In day trading the profit potential is limited because the market is only open for a limited amount of time.
With chart patterns, given the same principle and initial conditions, different phenomena may emerge, for example an uptrend, a downtrend, sideways action or any combination thereof. I would use a simple MOC (market on close) order to liquidate the position at the end of the day. Flags are congestion patterns that tend to explode with good momentum once the congestion phase comes to an end.
Unfortunately, day trading does not provide opportunity for huge profits because you are limited to how much time your position has to develop. You need to maximize your profit potential by picking simple trading patterns that make sense to you. I want to wait for the initial breakout to occur so that I can day trade if the stock continues momentum after the breakout.
What I like about triangles is the inherently limited risk due to lack of volatility while the pattern is setting up. Usually after a tight symmetrical triangle, the stock is very wound up and is ready for strong momentum that should last 2 to 5 days. This is one of the reasons why triangles are good low risk high reward patterns for beginners.
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