There are 2 main types of candlestick patterns that you can trade with namely reversal and continuation. Reversal patterns are used to signal a possible reverse in trend. As for continuation patterns, they are used to signal a continuation in trend after a period of consolidation.
There are a lot of continuation patterns that you can learn but for this post, I will talk about triangles. Triangles are practically good and easy to spot type of patterns that you should always use.
Here are the 3 types of triangles
1) Symmetrical Triangles Pattern – The symmetrical triangle is formed when you are in a period of consolidation. When you are in an uptrend and you see the forming of a symmetrical triangle, there is a high chance that you will see a continuing of the uptrend once the market breakout of the triangle. The same applies when you are in a downtrend and you see the formation of this type of triangle.
2) Ascending Triangle – The ascending triangle is formed when you see the triangle forming higher lows. For this type of pattern, you should be waiting for the price to break upward before you enter a trade.
3) Descending Triangle – In contrast to the ascending triangle, the descending triangle is formed when you see the price making lower highs. To trade this pattern, you should be waiting for the price to break below the triangle.
The reason why I say that the triangles are easy to trade with is because they give you a very distinct recognition pattern and they also provide you with a level to place your stop loss and take your profit.
Triangle Price Projection
You can roughly estimate how far the price will move to when you trade the triangles. All you have to do is to measure the length of the back of the triangle and then project it through the place where the price breakout from.
Stop Loss Position
For the stop loss placement, you should place it above the bottom of the triangle if you enter a SHORT trade. If you are going for a LONG trade, you should place the stop loss below the top of the triangle.
Things To Take Note
Although the triangles are easy to spot and trade, you still have to be careful of the possible trap that this pattern always have: Fake out.
There will be a number of occasions where you will see the price breaking out of the triangles making you think that it is a breakout. After you enter a trade, you will see the price reverse and move back into the triangles causing your position to be stopped out.
One of the way you can locate a fake out is through the use of the MACD indicator. If you are looking to go SHORT, you should see the MACD histogram flipping to the downside before you enter a trade and vice versa.
Take sometime to go through your chart history and then try the above projection on the triangles that you find to see if it works.
Make sure you add this pattern into your lookout list and profit from it.