Traders use chart patterns to help determine which direction the price is going, and potentially how far it could go.
Chart patterns like head and shoulders, triangles, cup and handles, double/triple tops and bottoms, flags pennants, rounded bottoms, and wedges all provide entry points, stop loss levels, and profit target estimates, making them almost complete strategy. To trade these patterns as a complete strategy, traders incorporate the patterns into their trading plan and will also determine the proper position size to take on each trade.
Gaps may be used as entry or exit points, depending on whether the gap signals a continuation of the trend or a reversal, but also may be used for analysis purposes. The insight gained from watching a chart pattern, or gap, unfold may lead to taking advantage of another trade based on a different strategy.
What Can You Learn from Chart Patterns?
Chart patterns show how prices move, and even over short lengths of time it is highly likely at least one of these patterns will show up in the price action of almost any asset.
Chart patterns are not limited to one time frame or asset. They are seen throughout the financial markets, regardless of how short or long-term a trader's focus is.