Hello everyone, welcome to today’s class! In today’s session, we will be continuing from our last discussion on trend lines. We previously talked about how trend lines are formed, how support and resistance are identified, and how to trade based on breakouts or breakdowns.
Now, sometimes, it's not just one trend line that forms; there can be multiple trend lines in the market, both on the upside and on the downside. In today’s session, we’ll be focusing on profitable trading patterns. These patterns are not necessarily something completely new; they are essentially variations of simple trend lines. When both an upper and a lower trend line are drawn on a chart, they can form specific patterns that we recognize and give names to, like triangles. So, these patterns are simply trend lines that appear in a specific formation on the chart.
The idea is not to think of these as unique concepts but rather as extensions of trend lines that can guide our trades. Today, we’ll discuss the most profitable patterns, their formation, and how to trade them. By the end of this session, you’ll not only understand these patterns but also how to apply them practically on the charts.
Understanding Patterns and When to Trade Them
We’ll start by understanding which patterns are most common and how they form in the market. We’ll look at the scenarios when these patterns occur and how we can make trading decisions based on them. I’ll show you examples on the charts to give you a clear visual understanding of each pattern. This session is aimed at giving you a comprehensive guide on how to trade these patterns effectively.
The First Pattern: Symmetrical Triangle
Let’s start with the first pattern, the Symmetrical Triangle, which is one of the most commonly seen and profitable patterns. The name may sound complex, but the key is to understand how the pattern forms and how to trade it.
When you see a symmetrical triangle on a chart, it indicates that the market is narrowing. After a big move, the range of the market begins to shrink, and neither the highs nor the lows are breaking through. Essentially, the market is consolidating in a tighter range.
How it Forms: In a symmetrical triangle, the trend lines converge as the market moves. The highs and lows get closer and closer, but they do not break. Eventually, when the price breaks either the upper or lower trend line, a breakout or breakdown occurs, signaling the next move.
How to Trade It: The trade setup is simple—once the market breaks above the upper trend line, we enter a buy (breakout trade). If the market breaks below the lower trend line, we enter a sell (breakdown trade). Always wait for a confirmation candle to solidify the breakout or breakdown before entering.
The Second Pattern: Ascending Triangle
Moving on to the second pattern: the Ascending Triangle. This pattern is characterized by a constant resistance level but an increasing low. Here’s the key difference:
How it Forms: The price keeps forming higher lows but faces resistance at the same level. This indicates that buyers are becoming more aggressive and pushing the price higher, while sellers are still holding their ground at the resistance level. The market is showing upward pressure, making it likely for the price to eventually break the resistance.
How to Trade It: In an ascending triangle, once the price breaks the resistance level, we enter a buy trade. The idea is that the higher lows indicate increasing buying strength, and once the resistance breaks, the market is likely to continue upward.
The Third Pattern: Descending Triangle
Next, we have the Descending Triangle, which is the opposite of the ascending triangle. Here, the price is forming lower highs while the support level remains constant.
How it Forms: In this pattern, the market is facing resistance at lower levels, but the support remains at the same level. This shows that sellers are pushing the price lower while buyers are trying to hold the price at a constant support level.
How to Trade It: In a descending triangle, once the price breaks below the support level, we enter a sell trade. The idea here is that as the market makes lower highs, it indicates that sellers are gaining control. Once the support breaks, the price is likely to continue moving lower.
Rising and Falling Wedge Patterns
Finally, let’s discuss two more patterns: the Rising Wedge and Falling Wedge.
Rising Wedge: In this pattern, the price forms higher highs and higher lows, but the range starts narrowing. The market is pushing upwards, but the narrowing range suggests that the upward momentum is weakening. This pattern often signals a potential reversal to the downside once the trend breaks.
Falling Wedge: The opposite of the rising wedge, the falling wedge forms when the price creates lower highs and lower lows. The narrowing of the range signals that the downward momentum is weakening, and the market could reverse upwards once the pattern breaks.
Both of these wedge patterns can be powerful signals, and they work similarly to triangles in that once the trend line breaks, a trade setup is confirmed.
Conclusion
To summarize, in this session we covered various chart patterns that help in profitable trading, such as the symmetrical triangle, ascending triangle, descending triangle, and rising and falling wedges. These patterns are essentially extensions of trend lines, but they form specific shapes on the chart that give us clues about potential breakouts or breakdowns.
Remember, the key to trading these patterns successfully is to wait for confirmation, either with a breakout or breakdown, and then enter the trade in the direction of the breakout.
I hope this session gave you more clarity on how these patterns work and how to apply them to your trading strategy. In the next part of the session, we will take a look at live charts to see these patterns in action and analyze when and how to enter trades based on these formations.
Let’s continue with chart examples now!
To truly master chart patterns and trendlines, you need to practice. The more you practice, the clearer things will become. Initially, you may feel like you need constant guidance, but over time, you'll start recognizing the connections yourself. The beauty of self-learning is that you will realize you can draw these lines with ease, without needing someone to show you every step.
However, this journey requires effort. You need to work with the charts and draw trendlines and patterns on your own. This hands-on practice will not only improve your skills but also help you better understand market behavior. As we show you more examples, you'll understand the application of these patterns, but the key is to practice on your own. The charts won't draw themselves; you must take the initiative.
When you practice drawing these lines and patterns yourself, you'll get better clarity. In the future, as new chart patterns emerge, you’ll be able to recognize and draw them with ease. Try it out yourself. Draw on multiple examples and practice as much as you can. We’re sharing various charts and patterns, but remember, there are thousands of stocks. The more you explore and draw on different charts, the better you will learn.
Take at least a month to focus on learning and practice. Dedicate your time to mastering these techniques. Take notes, observe different chart patterns, and draw them. Over time, you will see the connection between patterns and price movements more clearly.
Let's talk about a specific example, like the trendline in future charts. When the market comes close to a trendline you’ve drawn, you’ll notice that it often holds its relevance. This is the power of practice: the more you draw and observe, the more expert you become. We didn't learn all of this overnight; it took time and consistent effort. The faster you recognize patterns, the quicker you'll act on them.
For example, let’s look at a chart pattern in DMart. You’ll notice that the highs are occurring at almost the same level multiple times, while the lows are increasing, forming higher lows. This type of pattern is known as an ascending triangle. You’ll see that the market eventually breaks out either to the upside or downside. When such a breakout happens, it is usually followed by a significant move. Why? Because the market was in a range for a long time, and once it breaks out, momentum builds up in one direction.
In the case of DMart, the share was around ₹2500 and it moved up to ₹4000, showing a clear and profitable breakout. This is the power of pattern recognition. By consistently practicing, you'll learn how to identify such breakouts and capitalize on them.
Let's also look at the descending triangle. Here, the lows are forming at almost the same level repeatedly, and after several tests, the market breaks down. The trendlines in this pattern are acting as resistance and support. The break below the support level signals a potential downside move, which can be profitable. For example, the stock may fall from ₹17,200 to ₹16,800, offering a solid downside trade opportunity.
Then we have the rising wedge, where the price moves slowly upwards within a range. The market moves up, but the highs and lows continue to tighten, forming a wedge shape. When the price breaks out upwards, you can trade the breakout. This pattern was seen in Apollo Hospital’s chart, where the market moved within a rising wedge and eventually broke out upwards, offering a profitable rally.
Similarly, the falling wedge is the opposite of the rising wedge. In this case, the market falls within a narrowing range, and when the price breaks out, it signals a potential downward move. Again, you trade based on the breakout direction.
These are just a few of the most common patterns you’ll encounter. The important thing is to understand that patience is key. Don’t rush to make trades. Wait for confirmation before you enter. If a trendline breaks and a confirmation candle forms, then you can make your move. Remember, there’s no need to take a random trade. Only enter when you're confident that the pattern has played out and the breakout or breakdown is real.
So, as you learn and apply these patterns, keep practicing. Patience and discipline are essential. Focus on learning, practice drawing trendlines, and observe how the patterns develop. With time, your ability to spot profitable trades will improve significantly.
By recognizing patterns in real-time, you’ll be able to apply them across various timeframes – whether it’s a 5-minute chart or a daily chart. As you progress, you’ll start seeing the bigger picture and making more informed decisions. And remember, trading isn’t about taking every opportunity – it’s about being patient and waiting for the right moment to act.
Your learning journey will pay off. Keep practicing, stay disciplined, and soon you’ll be able to draw patterns and spot trends like a pro!
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