Traders worldwide know that chart patterns are one of the most significant tools in terms of how to understand what’s happening in the market. Not all chart patterns, however, can be verified as offering a legitimate trading advantage. Many frustrated traders mistakenly identify which patterns look great on paper but hold little promise for success in giving consistent profits. Without learning by professional instruction, most of these traders waste valuable time and capital chasing setups that simply don’t pan out to results.
In the trading world, there are professionals, such as Lance Breitstein—a very successful proprietary trader who brings in eight-figure amounts—who know how to make the distinction between profitable and unprofitable patterns.
This article will use the insights and techniques of Lance Breitstein to identify and trade profitable chart patterns. It will touch on fundamental strategies and help traders identify key setups that commonly do well. Understanding the study of patterns in context, including how to filter for volume, multiplies a trader’s chance of closing a profit many times over.
What Are Chart Patterns?
Before delving into advanced configurations, let me first introduce what chart patterns are. Chart patterns are graphical illustrations of price movements in the form of time. These patterns are an exhibition of market psychology and the general behavior of buyers and sellers. Through them, a trader forecasts future price actions by past trends.
There exist two primary types of chart patterns:
- Continuing patterns: An indication that the market likely has to continue moving in that direction.
- Reversal patterns: An indication that the market may reverse this trend.
Why Chart Patterns Work
Chart patterns are very potent because they reveal the underlying psychology in the market. Formation of the price patterns happens when buyers and sellers reach agreement or disagreement points in relation to the price. For example, a breakout from a flag or pennant pattern often signals that the traders are ready to press the price up higher after consolidation, potentially giving opportunities for profitable trades.
How to Identify Profitable Chart Patterns
Lance Breitstein stresses that while other traders focus merely on pattern recognition, the actual edge lies in knowing which patterns are corroborated by verifiable conditions such as volume, news catalysts, and market context that critically enhance their probability of coming to fruition.
1. Volume Capitulation: The First Important Indicator
Volume is the lifeblood of any chart pattern. One of the more telling signs of a pattern’s strength comes down to volume capitulation, where there is this huge surge in buying or selling activity, said Lance. That surge will alert everyone, including market participants, that they are fully committed to that price movement, thus creating one of the most powerful trading edges possible.
For example, in the DJT Truth Social breakdown by Breitstein, he points out a large volume spike as the stock price gaps up. The fact that it fails to hold that level but continues at high volume indicated a shorts’ backside opportunity. It is in this regard that smart traders were able to advance on the move as the stock broke through key support levels.
2. News Catalysts: Adding Weight to the Pattern
Chart patterns alone make no compelling case to themselves. Breitstein teaches that there are other, sometimes more important, variables playing in the price action: namely, news or catalysts beneath the chart pattern. A good chart setup paired with negative news can amplify a downside move: like company filings indicating financial instability or other negative revelations that hit just the right ear. Positive news reverses all the resistance and can enhance an upward breakout.
For instance, stock NVAX (Novavax)—a lot of volume with price action decisively higher after a licensing deal news event—makes Lance wary of the longer-term viability of the stock. The trader combining chart analysis with news flow would be much better positioned in terms of judging the potential of that stock with fewer bogus signals.
3. Backtesting and Context: The Database of Setups
According to Breitstein, good traders do not just look for patterns; they continuously compare and backtest setups to find the best risk-reward ratio. A good mental or digital database of past patterns can, then, constitute a person’s roadmap for future trades.
For example, Lance has instructed traders to look at similar patterns and watch how they behave over time. Did the breakout pattern experience a strong continuation? Did volume confirm the move or fade shortly after? Continually reviewing those patterns helps the trader refine their edge by avoiding those that fail to meet any criteria for success.
Strongest Chart Patterns with Proven Success
While there are hundreds of chart patterns, a few stand out for offering consistent profitability. Here are three key patterns worth mastering:
1. Head and Shoulders (Reversal Pattern)
This reverse pattern, which dates back to antiquity, indicates the possibility of changing the trend. It has three peaks: head and shoulders, where the higher peak is separated by two lower peaks, shoulders. After the price falls below the “neckline,” traders wait for the breakdown. Lance says that adding volume analysis may increase the edge of this pattern: low volume in its formation and high volume at the breakdown increases the chances of a good trade.
2. Bull Flag (Continuation Pattern)
The bull flag is a continuation pattern after having started with an initial sharp movement to the upside, followed by consolidation. The consolidation takes the form of a flag, and once the price moves upward and breaks through above the flag, it is probable that the move will continue upwards. Traders who apply this pattern should be viewing volume that drops off during the time of consolidation and a volume spike at the breakout.
3. Double Bottom (Reversal Pattern)
The double bottom is a reversal pattern where a stock touches twice the lowest price level and then breaks out to the upside. This pattern shows that the sellers have been fully exhausted and the buyers are coming in. Lance stresses how one of the most critical factors in making money with this pattern is volume confirmation, namely, higher volume on the breakout.
Tools to Enhance Your Edge
While most traders manually look for chart patterns, tools can help make the process less burdensome. Breitstein writes that software such as StockFetcher.com will allow a trader to filter by any daily chart pattern and set up a back testing system in order to determine its effectiveness so that a trader can find and test setups without spending an hour sifting through the market.
The following are also useful tools:
- TradingView: A charting platform using real-time price action and other available technical analysis tools.
- Finviz: A tool which helps a trader in filtering for specific patterns according to some specific volume, price, or technical indicators criteria.
Conclusion
More than just recognition of chart patterns, it takes understanding of market context and volume analysis, news catalysts, and advanced tools in filtering and backtesting. By following this advice from respected traders such as Lance Breitstein, you can gain a verifiable trading edge that separates you from the crowds in markets.
From trading heads and shoulders, bull flags, or double bottoms, here are the keys to succeeding: prepare, practice, and execute with discipline. So begin to learn, test, and apply these patterns today and grow your trading account towards reaching your financial goals.