Chart patterns are another way to spot and trade a fakeout that can really harm our trades.
There are two basic patterns that are usually occurring when fakeout trading is in session. It is so familiar to us head and shoulders (no, not the shampoo) pattern and double top/bottom pattern.
Head and shoulders might be easy to spot… but only if we ARE talking about shampoos here. For the newbies spotting head and shoulders in the charts is a pretty difficult task. It takes time and determination to learn how to spot them. And I highly recommend training your eye so that it can see this pattern on time – it is pretty nifty.
Head and shoulders is the pattern that signals about the price reversal – to bullish on downtrending and to bearish on the uptrend. Head and shoulders is pretty good for traders who use stop loss (which is something that you should always do).
Look here. The price started to go up after the right shoulder, but in the end there was no price movement. We just see a consolidation here. In case you didn’t put a stop loss here and the price goes against your direction, it is important to remember that stop loss prevents your pips from running away from you.
SO – the rule in trading fakeout head and shoulders is – ALWAYS USE STOP LOSS! Although that is a general rule for traders anyway.
Financial markets are very risky and that market is the only thing that can form the rules here.
Double top and bottom is the easiest-to-spot pattern. It is similar towards head and shoulders as it is also traded through stop losses.
It is easy to mistake double tops or bottoms for a reversal pattern, but it is not always the case, as we have learnt already. Sometime the chart is just messing with us. That is exactly the time for us to take precautions against the market.
So, what have we learnt? Well, that financial markets are very risky and that market is the only thing that can form the rules here. There is nothing else that can as powerful and as controlling as the market itself.