Technical chart patterns such as
ascending triangles,
head and shoulders and
double bottoms have rapidly grown in popularity among individual investors, but the biggest challenge when using these patterns is deciding when to exit an existing position.
Many different
targets can be used when using technical chart patterns, but the most popular method is to measure the height of the pattern and either add it to or subtract it from the
breakout price.
Let's look at this chart as an example: a trader who is able to identify this ascending triangle will set his or her target near $25. This target price of $25 is calculated by taking the height of the pattern of $2.60 ($22.40 - $19.80) and adding it to the entry price of $22.40.
You can also use the height of the pattern to calculate the
target on patterns that predict a downward trend, such as a head and shoulders pattern; the only difference is that the height is subtracted from the entry price rather than added to it. Many conservative investors use the height of the pattern to calculate their maximum target, but often choose to close out their position earlier, ensuring that they lock in their profits.
To learn more about various chart patterns, see
Price Patterns - Part 1 and our
Technical Analysis tutorial.
