Pattern trading can be sometimes very profitable. However, first you should be well conversant with the different chart patterns. There are basically two types of chart patterns. One are the chart patterns that generally represent price consolidation and include patterns like triangles, flags, pennants, wedges, rectangles and the head and shoulder pattern among others. Pattern trading may be considered one form of breakout trading.

For the most part, these chart patterns are traded when a breakout of one or another kind occurs. Now dont confuse the head and shoulder with the name of a shampoo. It is a chart pattern that you must be familiar with if you want to continue reading this article otherwise first make yourself clear about these chart patterns and then continue reading this article.

Now it should be clear which chart patterns constitute a continuation pattern and which chart patterns are considered reversal patterns when we talk of pattern breakouts. The second type of chart patterns that are the Japanese Candlestick patterns! Candlestick patterns are not tied as closely with breakout trading.

Trend reversal means a breakout and a profitable trading opportunity. What chart patterns constitute a trend reversal? The most common chart patterns found on the currency charts that are generally considered to be reversal formations include double tops/bottoms, triple tops/bottoms and head and shoulder tops and bottoms.

The most common chart patterns that are generally considered to be continuation patterns include flags, pennants, triangles, wedges, rectangles and others. When a continuation pattern approaches breakout on the side of the pattern that would denote a continuation, technical traders patiently wait for a breakout.

This type of trade is treated as a breakout trade with similar type of entry and stop loss placement as with standard support/resistance breakout trades. One benefit of pattern trading lies in the precise profit targets.

A good example is that of the head and shoulder pattern. The traditional signal for the trade is after that price breaks the neckline. Profit target is derived by measuring the height from the top of the head to the neckline then projecting that height from the neckline breakdown for the profit target.

Similarly the height of the rectangle is projected up or down to derive the profit target after the breakout in case of the rectangle consolidation pattern. Triangles, flags, pennants and other chart patterns also have convenient build in profit targets.

Candlestick patterns are most often used as important trade confirmation tools in conjunction with other technical indicators. Candlestick patterns in themselves are not usually considered as sufficient trading signals.

For example, the hammer candlestick pattern occurs after a steep well defined down trend. But it should not be taken as a reversal signal to buy low. However, if this hammer candlestick pattern occurs right at a well established support level, the hammer candle may be taken as a strong signal that a potential long trade may be profitable.

Mr. Ahmad Hassam is a Harvard University Graduate. Try This 1500 Pips A Day Forex Signal Service from heaven! Learn These Candlestick Patterns!