When it comes to deciding which stocks you should invest in, a trader’s best tool is learning the patterns that can help predict what’s coming next. After all, building a diversified portfolio takes plenty of patience, discipline, not to mention research, to weigh the price, volatility, and the analyst recommendations. Here’s a peek at five ubiquitous trading patterns and the plays you can make to turn a profit when trading.
Symmetrical Triangle Pattern
This pattern is one of the most reliable indicators in technical analysis and can help you return a profit significantly if you make your plays right. When a stock’s price is moving up and down regularly, it converges on a single point. These back and forth trading patterns will become smaller and smaller until they reach that point. Watch a symmetrical triangle pattern closely to help you decide if you should buy or hold off. Sideways movement indicates a rest period before the stock will experience a breakout. Set your target price before executing a trade following this pattern and execute it no matter how far you think it could run. Sticking to your original strategy is always your best bet.
Ascending & Descending Triangles
The ascending and descending triangle is often known as the bull or bear run, depending on the direction it is headed. These patterns indicate that a stock is experiencing high or low demand and once the stock reaches the breakout point, you can expect a slide. Ascending and descending triangles are the favorites of short-term investors like day and swing traders, as they allow you to make money on how the market is performing at that exact moment. This pattern usually forms over a period of weeks.
Head & Shoulders Pattern
The head and shoulders pattern looks just like its namesake, two low points that encapsulate a high point on the chart. The two-neckline support on this pattern shows that the demand for the stock is weakening. It may experience a bounce back when investors buy thinking the stock is undervalued but drops off significantly after the second shoulder due to investors believing the stock has run too high. This pattern is best for short sellers who want to make quick gains by selling stock at its lower than market value and reaping profits from reselling when it bounces back up.
Double & Triple Bottoms
This pattern resembles an M or a W, depending on the direction it is headed. These patterns are a sign of a stock reversal, so keep a close eye on them. Price increases as much as 10% will form a steep peak that you can play either up or down, depending on your pattern.
Minimize Risks with Tight Stop Losses
Each of these four patterns comes with inherent risk, since you’re betting on the pattern with your entry and exit points. Setting a tight stop loss will help you avoid losing more than you intended when choosing to invest. Most traders set their stop-loss trigger for around 3% to prevent the trade from eating more capital should things go south.