Understanding a couple of things can shave months, or even years, of your learning curve. One of those things is figuring out your Trading Timeframe Personality and the other is figuring out your Chart Pattern Personality (CPP).
When you understand these two things, it makes it much easier to select trading strategies that match you and gives you a higher likelihood of success in Forex trading. Luckily, there are only three types of Chart Pattern Personalities.
Yes, you might be naturally good at two or all of these types of chart patterns. But in the beginning, just choose the ONE that you are best at and perfect a strategy around that chart pattern type.
You need to do this because people's brains are generally best at spotting one type of pattern and it will help you focus on methods that are more likely to bring you success.
Just because a trader tells you that one type of pattern is the best, it doesn't mean that it will work well for you. They mean well, but you have to experiment for yourself, to find out what is best for you.
I'll show you how you can do that at the end of this post.
But first, let's take a look at the three chart pattern types.
Trending Chart Patterns
The first chart pattern type is a trend. I'm sure that you have heard the saying: “the trend is your friend.”
Not if you and trend trading don't get along.
Some traders are really good at it. However, if trend trading does not suit you, then you will struggle at it for a long time…and wonder why.
As with any other type of chart pattern, there are different ways to define a trend. Some trading systems use moving averages, others simple price action cues.
The actual system is irrelevant. You have to find out if you are good at trading with the trend and riding it to your exit point.
Take this chart, for example. Are you comfortable buying at the arrows?
This is more of a “bargain hunting” trend trading technique.
…or does that totally freak you out?
Another way to trend trade is to buy on new highs. In this example, you would buy at any of the orange lines. It's more of a momentum trend entry strategy.
Are you comfortable with that?
If either of those entries appeal to you, then you might be cut out to be a trend trader. This type of pattern works well for traders who like to see results right away and feel good riding the wave of buying or selling.
Countertrend Chart Patterns
Other traders are better at spotting turning points in the market. If you like to be a contrarian in your daily life and enjoy proving people wrong, then countertrend trading might be for you.
There are a few different ways that you can be a countertrend trader. One way is to trade against the price action into a support or resistance zone.
For example, on this chart…as price moved up into the orange line, would you be able to take a short position?
Of course, it's easy to say “yes” in hindsight. But imagine that you can only see price action before it hits that line.
It looks like it will keep going up!
But if you have tested your strategy and you know that it has a good probability of reversing, then you will have the confidence to take this trade.
…and if your personality matches this chart pattern you will be more likely to keep trading it, even when you are in a drawdown.
Breakout Chart Patterns
The last type of chart pattern is the breakout.
I'm personally not great at trading breakouts, so I avoid them. But it certainly works for some traders.
Here is a pure breakout from a price range. I say pure because some people trade a breakout and retest of the channel as an entry signal and I see that as more of a trend trade.
As you may have experienced in the past, the biggest difficulty with trading breakouts is that there are a lot of false breakouts.
Like this one…
That can be tough to stomach, unless you know the probabilities.
Breakouts are in a separate category because it's the only type of chart pattern that doesn't take into account the previous price action. You are simply looking for a consolidation, then a breakout of that holding pattern.
How to Figure Out Which of the Chart Pattern Personalities Matches You
Now that you know the three basic types of chart patterns, the next step is to figure out your Chart Pattern Personality. In other words, which chart pattern type do you trade best?
In order to get this information, there is no way around it…
You will need to do some work.
First, select one trading method from each of the three categories above. Right now, don't get caught up in if the strategy actually works or not.
You are trying to figure out is which type of pattern you prefer trading, not the exact method.
There are many places that you can get trading systems. You can dig up courses you have taken in the past or choose a system from one of the free forums out there.
If you want to keep it simple, you can just trade price action.
After you understand which type of pattern you gravitate to most, then you can start searching for specific trading methods that work. More importantly, you can start to build your own unique trading method by combining different elements of similar trading systems.
Again, figuring out your CCP may not be easy.
But if you put in the time to understand this first, it will save you a ton of time later.
This was a quick introduction to the three main types of chart patterns and why it is important to identify which one you resonate with most.
To get a list of commonly traded chart patterns, read this post.
Of course, there are different variations of each pattern. But when you examine tradable chart patterns, they basically boil down to these three types.
You may resonate with more than one. But choose one and stick to it until you figure out a specific strategy that works for you.
Otherwise, you can get stuck on the Trading Silodrome.
…and once you get on, it's very difficult to get off.
Also remember to figure out your Trading Timeframe Personality. It goes hand in hand with your CPP.
Now get to work!
If you have any questions about chart pattern types, leave a comment below.