A:

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.

pricetarget.gif

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.

RELATED FAQS

  1. How do I implement a forex strategy when spotting a Pennant Pattern?

    Understand the basics of the forex pennant pattern and how to use this indicator to create an effective trading strategy, ...
  2. When should a company consider issuing a corporate bond vs. issuing stock?

    Understand when a company should consider issuing a corporate bond versus issuing stock, and learn about the underlying principle ...
  3. What is price-to-book ratio is typical in the electronics sector?

    Learn about the price-to-book ratio and how it is important for fundamental valuation analysis. What P/B is common among ...
  4. How does private placement affect share price?

    Understand what it means when a company does a private placement, and learn how this typically impacts the share price of ...
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  5. Asset Valuation Review (AVR)

    A process that establishes an estimate of the value of a failed ...
  6. Derived Investment Value (DIV)

    A valuation methodology used to calculate the present value of ...

You May Also Like

Related Articles
  1. Forex Strategies

    How do I implement a forex strategy ...

  2. Chart Advisor

    ChartAdvisor for May 29 2015

  3. Fundamental Analysis

    Online Gaming Industry Stocks

  4. Stock Analysis

    Invest In Cyber Security With These ...

  5. Charts & Patterns

    The 6 Most Profitable Grocery Stores

Trading Center