There are many benefits to applying chart patterns in trading and investing for a trader or investor.
The 7 benefits of using chart patterns are:
- They can help to understand potential future price movements
- They can offer clear entry points for buying or shorting a market
- They can offer clear stop-loss points for managing risk in the market
- They can provide clear and concise price targets
- They can offer a high reward-to-risk ratio on trades
- They can offer logic and clarity to the price action in a market
- They can help traders to capture the beginning of new price trends in the market
Below are these benefits and advantages discussed in more detail.
1. Chart Patterns Can Help A Trader To Understand Potential Future Price Movements
Chart patterns can help suggest the future price movements of a market based on historical price data.
While chart patterns are not 100% accurate, they can help traders enter into higher probability trades.
Knowing that certain chart patterns offer higher probabilities is beneficial to traders because:
- It helps put the odds of trades in the trader's favor
- It helps traders to focus on higher probability trades and to stay away from trading lower probability trades
2. Chart Patterns Can Provide Clear Entry Points For Traders
Chart patterns can help provide a trader with specific entry points when trading these patterns.
This helps provide a trader with exact entry points when buying or shorting a market.
Knowing the exact entry point that chart patterns offer is beneficial to traders because:
- It avoids confusion on where to enter into a market when buying or shorting
- It helps a trader to be patient and wait for the price to reach the entry point
- It keeps traders out of choppy and volatile markets as they wait for the entry point price to be reached
- It can help traders to stop overtrading as they wait for the price to reach the chart pattern entry price instead of constantly trading in and out of positions
These entry point benefits that chart patterns provide assist traders in narrowing their focus to ideal points to buy and short.
3. Chart Patterns Can Provide Clear Stop-Loss Points For Traders
One of the most important benefits of chart patterns is they provide a clear area to set a technical stop-loss when trading the patterns.
Knowing the exact stop-loss level to set that chart patterns can provide is beneficial because:
- It helps with managing risk when trading as traders will know the exact level they are stopping out of a trade when it's a losing trade
- It helps with setting position sizes on trades i.e. how much size of a position to take
- It provides clarity on the exact price level when a trade is wrong
Every chart pattern identifies an area where stop-losses should be set. This is very important to know especially for new traders who are unsure about where to set stops.
4. Chart Patterns Offer Clear Areas To Set Price Targets
Chart patterns can help traders to identify areas to set technical price targets for trade positions.
Typically, chart patterns will provide a clear area to set price targets on both buy trades and short trades.
Knowing the exact price target point that chart patterns offer is beneficial to traders because:
- It helps set reward to risk calculations on a trade
- It helps traders to hold onto a trade based on a plan rather than holding onto a trade based on emotions
- It helps traders identify where the price of a market may reverse
5. Chart Patterns Can Offer High Reward To Risk Ratios
Chart patterns are beneficial because they can offer potential trade signals with a high reward-to-risk ratio.
Typically, a chart pattern will offer a minimum of $2 reward for $1 risked.
Knowing the reward-to-risk ratio offered by chart patterns is beneficial because:
- It helps a trader to plan which trades to take and which trades to avoid
- It allows for traders to be profitable even with a lower win rate percentage if the reward-to-risk ratio is high
6. Chart Patterns Can Provide Logic & Understanding To The Price Action In A Market
Chart patterns are useful in helping traders to understand the price action and market environment.
For example, a cup and handle pattern can help a trader to understand that a potential new bullish trend is about to begin if the price breaks out from the pattern.
A bear flag can help a trader to understand that a bearish trend may continue and the prices will decline further if the pattern breaks down from the support level.
Chart patterns can help provide clarity and understanding as to what is going on in the market.
7. Chart Patterns Can Assist Traders With Capturing New Price Trends
Many chart patterns are beneficial because they can help traders to capture the beginning of new bullish or bearish price trends.
Knowing when a new trend will begin is beneficial because:
- It helps traders to capture new trends from the very beginning of the movement
- It prevents traders from trading before the breakout in choppy and volatile markets before the new trend begins
Frequently Asked Questions About The Benefits Of Chart Patterns
Below are some frequently asked questions about the benefits of chart patterns.
Are Chart Patterns Beneficial For Trading?
Chart patterns are beneficial for trading depending on the individual trader and the discipline they have.
Chart patterns help traders in many ways including finding entry points, placing stop-losses and setting price targets. The patterns can also offer low-risk entry points with potentially higher reward returns if the price of a market successfully breaks out or down from a pattern.
How Beneficial Is Trading Chart Patterns?
The benefits of trading using chart patterns will range from one trader to the next.
Some traders have seen huge benefits to trading using chart patterns including millionaire traders Dan Zanger and Mark Minervini.
However, it should be noted that every trader is different and one traders results may not be replicated by another.