Should Traders Use Technical Price Patterns?

When used correctly Technical Analysis works very well. It should primarily be used to find entries and exits for trades.
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Technical Price Patterns

Just quickly getting back to two questions we had from both Steve and Rajeev, asking us whether we should use technical patterns when we reach certain significant support and resistance zones.

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Now, with our predominant focus being on the fundamentals, it can sometimes seem that we don’t deem the technicals as important. But we don’t really think of either one of the two methods as being better than the other. Both of them has the specific place in trading. And the important thing is just to implement both of them in the way that they were basically designed for. So in that regard, we use the fundamentals to tell us what to trade and when to trade it.

And then we use our technical indicators, whether that is candlestick patterns, whether that is chart patterns, other indicators like moving averages or all the other indicators that’s available to basically provide specific entry points and exit points on the price chart.

So the good news is that almost any type of technical indicator or technical pattern, etc, can be used to generate good entry and exit signals when you’ve already, we already know in what direction you should be trading based on the fundamentals.

So to be clear, we definitely use technical analysis ourselves. But because there are as many technical strategies and indicators and basically patterns as there are traders out there, we try not to overcomplicate the process too much and do try to keep things as simple as possible.

So looking at the two questions, the first one was talking or asking about candlestick patterns for better entries at important support and resistance zones. Now, this can be a very, very helpful tool indeed, when you see price reaching a zone where you expect reaction from.

Now, when you see a clear candlestick pattern, let’s say like an engulfing bar for example. So this was an engulfing bar from the M30. Let’s drop down to the M15 and see if we can get a better example of this one. Okay, there we go. So we knew that the zone was interesting for us from a support point of view.

Now, when price reaches the zone, that is a great opportunity for you to use any type of technical strategy, whether that is your candlestick patterns, whether that is any other technical indicators like a moving average for example.

Let’s, for interest say, let’s put in a moving average. Yeah, and see if we got, if we maybe got an entry from that as well. Let’s put in a 21, just normally the going option. Here we can see nice confluence with even a move or touch of the 21 as well.

So that’s a quick example of using the fundamentals to get the direction right and now we can use technical indicators or a technical chart pattern like a candlestick, to give us that confirmation that yes, it’s moving in line with, we have engulfing candle here, we’ve got a touch of the 21 EMA. That can be an opportunity to reengage the pair now to the upside at this level that we already like. So that’s definitely one of the options that you can use it for.

And also for the same when it comes to taking some profits at support resistance zones using that same patterns as well. Now, we also had a second question from Rajeev, which was about M and W patterns or double tops and double bottoms. Should we use them as reversal patterns?

Now again, the question isn’t whether we should use them as reversal patterns but whether we’re expecting the pair to reverse based on the sentiment or the fundamentals that’s currently in place.

So if we are expecting a reversal at a specific level, we could definitely use patterns like that to confirm our bias already. Also if we are in a trade already, so let’s quickly go out. Normally, those type of reversal patterns or double tops and double bottoms, as they call them, are more visible on the higher timeframes.

Okay, here’s a good example. So here we can argue whether that is a type of double top, and here we can argue that that is a type of a double bottom.

So knowing that that is going to be a reversal ahead of time, trading that as a pattern in itself isn’t really something that we would be interested in. We would want a specific fundamental and sentiment reason for the market to want to trade this pair lower.

 

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