Trading Price Patterns with the Trend

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When looking for price patterns on your chart, it is important to take note of the context in which the patterns appear.

The most important context is probably the trend.

In an uptrend, you want to be looking for continuation patterns, which will give you a good opportunity to get onto the trend, whereas if the trend has been going on for a long time, and you feel that there is a high chance it might be coming to an end soon, then you will want to be looking out for reversal patterns.

For example, if you see a weak reversal pattern (eg. pattern is small relative to the trend) in a strong trend that is relatively new, the odds of a successful reversal are rather slim, so it would be more prudent to continue observing before diving into the trade, or even wait for the reversal pattern to fail and use it as a chance to enter the trend.

Looking at the chart example above of a triangle pattern, although the pattern is technically neutral and can break out in either direction, the odds favour an upside breakout because of the prior uptrend.

Hence when assessing any chart pattern, we need to take into account the prior trend, as well as the context in which the pattern occurs.

 

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