Lesson 2 of 9
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Using patterns (8)

Phillip Konchar

Using price patterns to trade

Like all technical analysis price patterns are not going to guarantee the price will react in a certain way, it is an indication. We are making the assumption if a price pattern plays out then, on the balance of probabilities, the price will react in the same way it has done before with the pattern. It is not always going to behave in the way expected.

However, for a price pattern to first be valid three things need to happen.

There must be a trend
Price patterns need to be found in a trend. If found in a sideways, consolidating, market and they don’t tell you anything. There must be a bullish or bearish trend there in the first place for it to continue or reverse.
Size matters
The height, width (duration) and volatility of a price pattern are important – the bigger, longer and more volatile the better and the more weight we place on it in our analysis. This is relative to the size of the trend and how previous price patterns formed in the market you are trading.
Note: Price patterns can be found in short and long timeframes – you’ll be able to identify them on 1 minute through to monthly charts. The duration relative to the timeframe is the important point here. We want to be seeing price patterns play out over dozens, even hundreds of periods.
Confirmation is key
The pattern is not valid unless it is confirmed and traders shouldn’t trade it assuming it will confirm. This is normally a price breakout but we’ll go through how each pattern is confirmed when introducing them.

Key Learning Points
  • Price patterns are not a guarantee, they are an indication.
  • For price patterns to be valid there must be a trend, size matters and confirmation is key.

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