Another interesting and common type of pattern is the triangle. Although in practice these patterns differ slightly, the general rule is that the price converges with highs and lows squeezing into a decreasingly smaller area.
In addition to the entry point that the head & shoulders provides, the triangle also gives information about stop and profit targets. The entry point for a position is when the price breaks through the triangle's boundary.
NZD/USD 15-Minute Easy-Forex Chart
In the example above, the entry point is a downwards penetration at the 0.86411 level and therefore an indication to sell. The stop limit is at the highest point of the pattern, in this case 0.86455.
A small calculation is needed for the profit target; it is the subtraction of the pattern's width to the entry price (0.86411). The width of the pattern is 0.86455 - 0.86247 = 208 pips. So the profit target in this example is 0.86411 - 208 = 0.86203, which was easily met and also exceeded.
There are a lot of chart patterns used as methods to find entry points, stop and profit levels. Simple chart patterns such as the head & shoulders can be easily spotted after a bit of experience and is an easy source of information for entry points.
Additional information for exit and stop limits can be provided by the triangle chart pattern, which also develops often. However, the chart pattern methods are not limited to this level, and as forex traders become more experienced they can combine two or more methods involving chart patterns to set up their own customisable trading method.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.