Another way of picking your spread betting trades is to look for patterns on the price chart. Actually, there are two main ways that this is done in technical analysis – one is using the overall shape of the price line, and the other is looking for particular candlestick patterns which can be taken as signals. We will look first at the conventional price shape patterns, and their usual interpretations.
When we see certain shapes on the price chart, they can indicate what will follow. Unlike the technical indicators, patterns are subject to interpretation and are therefore not so clear-cut in the message that they are giving. You will seldom get a “perfect” pattern shape, so you will have to decide whether you think what you see is significant or not. In this respect, you need to do some study, looking at historical charts, seeing how you would interpret them, and observing the actual results.
The main use of patterns is to anticipate price reversals, and be prepared to place a trade as soon as it happens. What you don’t want to do is trade in anticipation of a reversal, as you may find that you are “jumping the gun” and the reversal doesn’t occur. But if you wait until you see clear signs that the reversal has started, you will be in the trade quickly and make the maximum gains.
There are some basic guidelines to interpreting patterns before we consider particular configurations.
- Before you can have a reversal pattern, you need to have a trend to be reversed. The reversal pattern means nothing if it occurs when the market is drifting sideways, or if there is a trend in wrong direction for the particular pattern.
- If the pattern is large, then the move that follows will also be large.
- The reversal of an uptrend is usually quick, and the reversal of a downtrend can take some time.
- Volume of trading can add more significance to the move, and is usually more important for rising prices.