The CORRECT way to trade chart patterns - Head & ShouldersSimplified psychology of chart patterns:
Traders learn chart patterns but are to impatient to wait for them to show up in the right places. The point of learning to spot patterns is to be in a position to enter a reversal before price takes off. The KEY to trading chart patterns is to only trade them when inside a channel. The attempt to enter into a position should be up against the top or bottom of a channel (selling the tops, buying the bottoms).
UNDERSTAND HOW PRICES MOVE:
Prices move in levels, creating new levels above or below a current level. These levels can be formed sideways or diagonal. It will do this on every time frame until it reaches a point it can't break through. When a breakout of a channel occurs, price will continue in a given direction until it forms a new top or bottom, which creates a whole new level. Price will continue to trade inside this newly formed channel (from top to bottom) until enough momentum is created to push price OUTSIDE the level. The same process will restart.
UNDERSTANDING HOW TO ENTER A TRADE:
The higher time frame trend should be the direction a trader intends to enter. Once channels are identified, a trader should be watching for well known chart patterns to form on lower time frames AT THE CHANNEL'S top (if trend is down) or bottom (if the trend is up). THE EXIT STRATEGY should be approached similarly. For example, if the entry was LONG (at the bottom of a channel), then the trader should anticipate selling half of the position at the TOP of the current channel once a newly forming chart pattern paints a picture of weakness.
CONCLUSION:
Chart patterns are only useful within identifiable channels/levels. The highest probability to win a trade is entering into a chart pattern that is formed at the tops or bottoms of these channels.
Exiting portions of the position should be approached the same way, in anticipation of chart patterns being formed on smaller time frames at tops/bottoms of channels/levels.
