Chart school · lesson 10 of 10

Putting it together: context, pattern, then the plan

A pattern on its own is trivia. It becomes useful only in an order: where the market is, what it just did, and what you would lose if you are wrong.

The 4 drawings Check yourself

The idea

The first nine lessons taught separate things. This one puts them in the order a careful trader uses them: context first, pattern second, plan third. The plan is the only part within your control.

Nothing here tells you to trade, or what to trade. It shows how the pieces relate, using one invented example: a rising market that pulls back to an old high.

10.1

1. Context: the trend and the level

The step: Before looking at any candle, answer two questions from lessons 5 and 6. Which way are the swings going? And is the price at a level where it has turned before, or in the middle of nowhere?
Why it comes here: Context decides what a pattern is worth. Here the swings are rising, and the price has come back to an old high that may now act as support. That is a place where a pattern would mean something.
A common mistake: Starting with the pattern. A hammer in the middle of a range, far from any level, is the same drawing with none of the meaning.

Lesson 5: Trend

10.2

2. The pattern, in its place

The step: Now read the candles, using lessons 1 to 4 and 7 to 9. In the example the pullback ends with a hammer whose wick dips through the level and whose body closes back above it.
Why it comes here: The pattern is one more observation that agrees with the context: rising swings, a known level, and a candle showing that lower prices were rejected there. Three things agreeing is still not a certainty.
A common mistake: Counting how many things agree and calling it proof. Several observations drawn from the same few candles are closer to one fact than to several.

Lesson 2: the hammer

10.3

3. Where the idea is wrong

The step: Every reading has a price that would prove it wrong. For this one it is plain: if the price falls below the hammer's low, lower prices were not rejected after all. A stop-loss order is how that price is written down in advance.
Why it comes here: Deciding this before anything else turns a hope into a test. The chart either reaches that price or it does not, and you know beforehand what each outcome means.
A common mistake: Choosing the stop by the amount you are willing to lose, and not by where the idea fails. And remember that a stop is an instruction, not a guarantee: in a gap or a fast market it can be filled at a worse price.

Stop-loss, in the glossary

10.4

4. What is risked

The step: The distance from the current price to the price where the idea fails is the stop distance. Position size multiplied by that distance is the money at risk. Fix the money first, and the size follows from the distance.
Why it comes here: This is the one part of trading that is fully yours to decide. The chart sets the distance; you set the amount; arithmetic sets the size. With leverage, margin determines how large a position you can open, not how large a position is sensible.
A common mistake: Choosing the size first and then moving the stop to fit it. Or risking so much on one idea that a normal run of losses ends the account. No pattern is reliable enough to justify that.

The position size calculator

SimulationEvery drawing is invented to show a shape as plainly as possible. None of them is a market, and a real chart is rarely this tidy. Educational information, not investment advice or a recommendation to trade.

To carry away

Lesson 10, in four lines.

01
Context first: the trend and the level. Then the pattern. Then the plan.
02
Know the price that proves the reading wrong before anything else.
03
Decide the money at risk, then let the stop distance set the size.
04
Practise the whole sequence on the demo account, with virtual funds and simulated prices, and keep a record of what you saw and what happened.

Check yourself

Three questions on this lesson.

Choose an answer and press Check. You can try each as often as you like. No answer is stored, nothing is sent anywhere and no score is kept.

Question 1 of 3
In what order does this lesson suggest reading a chart?
Pattern, then plan, then contextContext, then pattern, then planPlan, then context, then pattern
Question 2 of 3
Where does the price that invalidates a reading come from?
From the amount you are willing to loseFrom the nearest round numberFrom the chart: the price at which the reading is shown to be wrong
Question 3 of 3
Position size multiplied by the stop distance gives what?
The money at risk on the ideaThe margin requiredThe expected profit

An explanation for study. It is not advice, a recommendation or a forecast. No pattern is reliable on its own, and a shape described here says nothing certain about what a price will do next.

Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose.

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The idea of this lesson

Lesson 10, in four lines.

Three questions on this lesson.

The idea of this lesson

Lesson 10, in four lines.

Three questions on this lesson.