A trader looking for patterns identified by a screening software or by not
reading the chart correctly may miss this critical point unless they
take the time to inspect price action beyond the pattern itself. Let's
examine a head and shoulders pattern. This is a very popular pattern
to signal trend reversal. Prices in an uptrend rally to a point and
correct, forming a left shoulder. Price rallies again to a higher high
continuing the uptrend before correcting once more. This has formed
the head. Finally, prices try to rally again, but are not able to
reach past the high of the head before starting to fall.
Most traders looking for the Head and shoulder pattern would trade this
pattern short as soon as prices break the neckline that connects the
two lows between the shoulders. You need to learn a couple chart
patterns and stick with just them.
In the case of the head and shoulders pattern, the right shoulder failing
to reach higher than the head gives the chart a lower high. While that
does not in itself break the uptrend, it is closer to the downtrend
definition. Once the neckline has been broken, a lower low has been
completed.
Luckily for the new traders, this stock did not retreat much
on the chart. In most cases, the large buying pressure from chasing
price ends abruptly and is followed by a large drop that stops out
most traders, or turns trades into big losers. Traders need to be
patient and realize that most breakouts do pullback at some point as
sellers take their profits.
This gives the trader a better opportunity to enter and more confidence
that the trade will work as they can see if the broken level will hold
in the other direction. So be patient and trade smart to find your way
to trading success. You need to keep a close watch on support and
resistance levels.
Chances are that this situation has transpired a number of
times before, which means that it has become a pattern that is
connected to a downloaded program prompting a story about you. When
this happens, you'll want to "interrupt the pattern." A good way to
interrupt the pattern is to use the tool: Stop, Challenge and Choose.
When you become aware of distracting feelings, interrupt the thought
pattern. You need to be serious if you want to make money trading.
Breathe deeply, count to twenty, lower shoulders and center your body you
need to relax. Check your posture and unclench any part of your body
that is tight. Begin to assume a posture of personal control this is
important to be successful. This will begin to relax and bring you
back into the present moment, putting distance between you and the bad
pattern. You can always take a small loss and learn from that loss.
Ask yourself three questions.
What must I be telling myself, or believing, to feel this way?
This question will begin to uncover the meaning thoughts, limiting
beliefs and the story that you are telling yourself. For instance,
"I'm going to lose and that is bad and that means I'm not a good
trader." Traders need to stay positive keep your emotions in check.
What is the objective reality? You need to follow your trading plan
and use stop losses.
Traders need to stick with chart patterns they are familiar with is the
price action is only breathing. Is there another possible
interpretation? Make sure to use different indicators. Just a couple
to many and it becomes confusing.
If my stop is hit, the stop has done its job to protect my capital.
Trades need to take some losses this is part of trading.
Choose a response most likely to line up with objective reality and is
most likely to produce your long-term desired result.
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