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WHAT ARE TRADING PATTERNS: Beginner’s Guide

No trading strategy would be complete without knowing how to profit from your trade. Not only will you need to know what models are on the market, but you will also need to develop entry criteria and a solid profit strategy.

To understand when to profit from stocks, let’s take a look at the bigger picture of how stocks work.

HOW DO STOCKS WORK?

Stocks work in a price cycle.

You can think of it in terms of steps to simplify things. We will examine it in a moment.

First, to understand how stocks work, you need to know that large market players are no different from a large retail company. Just like a retailer, some stakeholders in a stock want to create a marketplace for their product: corporate stocks.

To do this, they first buy as many shares at a low price. Then, with their portfolio (warehouse) full of stocks, they need the demand for the increase in shares. This can be done through public relations campaigns, innovative ideas, products, a new CEO or any other new idea that could generate interest in the company.

Once the question is set, the price markup begins. This is phase 1 and the beginning of phase 2.

Eventually, as the stock price rises and rises, more investors want to buy stocks. Meanwhile, stakeholders begin to download (distribute) their original shares once their profit targets are met. They take advantage of demand to sell their shares: step 3.

Once they sell, the price is down (step 4) until they have a chance to refill their warehouses at a lower price. Rinse and repeat. That’s how actions work.

WHAT IS STOCK PROFIT?

Profit in stocks can be one of the hardest things to master. Everyone wants to time the top, but it’s really, really hard to do. We suggest some strategies to make profits in our post on this topic. Our favorites are:

  • Trend breaks
  • Channel exchanges
  • Models of candlesticks

For trend breaks
, ride a headline until it breaks the trend on climate action. An example would be a parabolic race. This is your signal that stakeholders are coming out.

On the other hand, one could take profits on the internal breaking of a trend. 

For channel trading, you’ll need a solid trend with channel markers, but also knowledge of reversal candlestick patterns (which we’ll discuss in a moment). Because a title bounces between the sides of the channel, it can give you the opportunity to go long or short along the edges.

How do stock taxes work?

About profits. It goes without saying that you will have to share those profits with Uncle Sam. Most traders may not need a lot of accounting work, but if you’re a good day trader who does a lot of trades every day, you’ll need a trading accountant.

Short-term trades will get you into the short-term capital gains bracket. You must hold stocks more than a year to qualify for long-term capital gains. There are some elections that you can choose with the help of your accountant, such as mark-to-market, that can help you offset some of your trading fees. However, it can be a difficult thing to accomplish depending on how you trade full-time.
Just know that unless you’re set up as a company and have been trading for many years, you’ll probably only pay short-term capital gains. That said, you won’t be able to clear much, if anything, for your trading losses. So don’t expect much in the way of tax write-downs unless you treat it as a business. For centuries, the market has shown the same characteristics, over and over again. After all, it’s about buying and selling, supply and demand – human emotions drawn on a chart in ticks and candles and lines and bars.

To that end, the more you
learn about these repeatable patterns, the more insights you’ll have. It is very similar to learning a new language. At first glance, everything seems very confusing. For this reason, it is the trading patterns that give charts their meaning.

TRADING CHART TEMPLATES

Trading patterns are often referred to as chart patterns. They are a way for traders to invoke repeatable price action in an attempt to capitalize on a likely outcome.

As we show above in our options trading cheat sheets, pennants, flags, wedges and double funds are all examples of typical trading chart patterns. They represent the accumulation or distribution within a definable trading range.

The advantage of these models is that they give traders an idea of where the price can go next, up or down.

Good traders do not play, they take educated assumptions based on historical data. Such data may be implicit or explicit. Regardless of what it is, chart templates are the best way to achieve consistency in the markets. Otherwise, every opportunity you find in the market would be unprecedented.

DAY TRADING PATTERNS

The great thing about trading models is that they usually work on any type of asset class or time period. Day trading models are no exception. We have written extensively about some of the patterns you can find in day trading, such as the Opening Range Breakout, the Head and Shoulders Pattern and many more.

The difference between day trading models and swing trading models is that day trading models take place much faster, of course. You’re not holding positions overnight.

Usually, the best day trading patterns occur at high volume, intraday momentum. Without enough volume, it can be more difficult for these models. It is also important to know that most day trading patterns occur on stocks that can be less manipulated.

As a general rule, larger caps generally react well to classic day trading patterns. However, penny shares will also have their own repeat patterns.

Head and shoulder trading model

One of the most recognizable patterns in all of trading is the head and shoulder model. It is a reversal trading strategy, which can develop at the end of bullish or bearish trends.

Often referred to as an inverted head and shoulder pattern in downward trends, or simply the stock pattern of head and shoulders in upward trends, the model predicts slowdown momentum in both directions as the stock is unable to put further ups or downs.

Traders love to trade head and shoulder patterns as price targets are very predictable and the training has a high overall success rate.

Since the model is easy to see, it is also easy to execute. You can initiate a position as soon as you see the shape of the right shoulder or at the breaking of the “neck”. Your stop-loss order would be just above your right shoulder.

To display it on a stock chart, here’s an example with the CEI symbol. Note that you have an early entry neckline and a standard neckline. Often, traders can take the first entry.

TRADITION SHEET WITH TRADING MODELS

There are many different trading models and no single model will be perfect. For this reason, we suggest you try as many as possible. Study the ones you connect with and recognize most often.

Better yet, you’ll want to look at the market to find your models. It may be that he finds something new, or something that has been discovered before. Regardless, it will be important for you to understand the models well enough to trust your crafts.

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