Chart Patterns

The trend reversal chart patterns appear at the end of a trend. If you see a reversal chart formation when the price is trending, in most cases, the price move will reverse with the confirmation of the shape.

In other words, reversal chart patterns indicate that the current trend is about to end, and a new contrary move is on its way! The most popular reversal chart patterns are double (or triple) top/bottom, head, and shoulders, reversal wedges, ascending/ descending triangle.

Evaluating the risk/reward ratio of the forming signal

Chart patterns have a defined formation and expectation of the potential future price behavior. This means that when a chart pattern forms, the subsequent price action determines whether it is a valid or invalid opportunity to trade or hold a position. There are defined rules for every chart pattern, and this helps in determining the risk/reward ratio beforehand. For instance, when a head and shoulders pattern forms in an uptrend, the initial target for the expected down movement is equivalent to the distance between the ‘neckline’ and the top of the ‘head.’ A stop-loss can be placed just above the ‘shoulders.’ With this information beforehand, traders can evaluate whether any trading opportunity that arises is worth trading.