Chart patterns can be divided into 3 categories: bullish - bearish - Neutral
A neutral figure is always a figure of continuation, and involves an extension of the current trend.
A channel is a combination of two parallel lines that border the price. These two lines are usually trend lines. Prices fluctuate in a range. More the price will touch the border of the channel without breaking it, more strong the channel will be and an extension of the movement can be hoped. The channel is thus a tool of charts analysis very powerful.
How to trade a channel:
You will buy the bounces on the lower line of a bullish channel;
You will sell the corrections on the higher line of a bearish channel;
In a horizontal channel, you will buy on the lower line and sell on the higher line, but when the price exit the channel, you buy or you sell according to the trend.
The other type of trades ,like sell on the higher line of a bullish channel or but on the lower line of a bearish channel is not something to do, because the movement is without any power and it’s very risky.
Be careful to exit of channels!
Although a figure of continuation, the channel can also detect reversals. If we are in a bullish channel and the price goes out of the channel (from below), then cut your long position and short. This terminal will change in use. If the terminal was used as support, it now serves as a resistance, and vice versa. We often seen the price to exit a channel by a strong movement and get back to the terminal to get stronger before continuing the reversal. All scenario are then possible: - back in the channel (which implies that the exit was false) – creating of a new channel just above or below the previous one (the support of the former canal becomes resistance of the new one for bullish channel and vice versa)
construction :
The channel is the easiest figure to detect. It is sufficient most of the time to draw a line connecting two high points, to copy it and to paste on one of the lowest. You will then notice that by chance, others lower make a rebound on this line.
Example of bullish channel (Conversely for bearish channel)
The bullish channel is not perfect because we exit it from the top(but it is bullish channel, and in this type of channel, we sell only if the terminal support is broken...). You will notice that the exit has been difficult to do: in the first place we stuck just below the support, and this is only at the second red candlestick of the descent that the exit of the channel can be validated and we can short. (Especially when we break a previous lowest. (Dow method))
Here's why we should not buy on a resistance in a bullish channel or sell on a support in a bearish channel:
It begins like this: (bearish channel here)
Then:
We are forced to reduce the size of the scheme because the movement is too much violent. (Notice that the exit from the bottom of the bearish channel, the former support played the role of a resistance next ...
Example of horizontal channel
This is the USD / CAD daily chart between the end of 2007 and August 2008.
We see on the chart that there were several entrances and exits to make in this range. Not easy to see that this is a horizontal channel that shaping. (Easier after, of course!) But the most important entrance was the last. This is the one that should not be missed. If you have the channel but you do not want to trade the range, wait for the exit. (And pay attention to false exits: two here, the first one sell and the second one buy)
Following of the trade in the horizontal channel:
Here is a typical example of a return on channel (here, the former resistance become a support). Following is a dream if we work with a moving stop...
The flag is a figure of continuation. It occurs when the price needs to take a break before resuming its movement.
The flag has a parallelogram shaped angled in the opposite side of the trend. Thus, if the price is in an uptrend, it will form a descending flag. And if the price is in a downtrend, it will form a ascending flag.
The potential of extension of the movement is the size of the former movement that preceded the formation of the flag.
Triangles graphically reflected an uncertain movement. The price evolves in a range between two lines that converge to the exit.
The price target for an exit from the triangle is calculated by using the height of the triangle at the beginning of its formation at the exit point.
Three types of triangle can be formed:
- The ascending triangle, which is formed by a horizontal line of resistance and an ascending line of support. It allows you to anticipate an increase at the exit.
- The descending triangle, which is formed by a horizontal line of support and a descending line of resistance. It allows to anticipate a decrease at the exit.
- The symmetric triangle, not formed by a horizontal line, just by two converging lines. The exittakes place mostly in the side of movement preceding the formation of the triangle. It remains a neutral figure continuation.
Example of ascending triangle:
EUR/USD DAILY CHARTS from the end of 2007, to 2008
Example of descending triangle:
Example of symmetric triangle:
At the exit, the movement continues in the same side that before the formation of the triangle.
The pennant is very similar to the symmetric triangle, but its characteristics are not the same. It usually appears as a result of sudden movement. Its exit can occur much more quickly; A pennant usually do not run more than a few weeks.
The pennant is a figure of continuation. If the movement before the formation of the flag was upward, at the exit, the movement become upward again(and vice versa); The price target is calculated in the same way as the triangle.
The double bottom is an bullish figure in a shape of a W. Two bottoms will succeed, reflecting an important support (below in green). This marks a reversal will. This figure may also be in WV. We will speak about a triple bottom. For the double bottom below, the area of support will allow the price to rebound twice. The first one will determine the neck line (here in red), evidenced by the highest between the two bottoms. Thereafter, the price will get back to the support. The magnitude of the two bottoms is normally the same (as in the case below), but it may happen that the first bottom is lower than the first. This configuration reinforces the validity of the figure because it reflects a breathlessness of the selling movement. A second rebound will then occur, but it is the breaking of the neck line that will validate the bullish reversal. Once the neck line broken, it may happen that the price get back to it (this line becomes support), then increased again. The potential of increase is determined by the difference between the beginning support and the neck line (represented by black arrows).
The double top is a bearish figure in a shape of a M. Two tops will succeed, reflecting an important resistance (below in red). This marks a reversal will. This figure may also be in Mn. We will speak about a triple top. The first correction will determine the neck line evidenced by the lowest between the two tops. Thereafter, the price will get back to the resistance. The magnitude of the two or three tops is normally the same (as in the case below), but it may happen that the first top is higher than the first one. This configuration reinforces the validity of the figure because it reflects a breathlessness of the buying movement. A third rebound may occur, but in all case, it is the breaking of the neck line that will validate the bearish reversal. Once the neck line broken, it may happen that the price get back to it (this line becomes resistance), then decreased again. The potential of decrease is determined by the difference between the beginning resistance and the neck line (but we can go further as it shows in the scheme below).
The descending bevel is formed by a resistance and a support normally bearish. This figure marks the breathlessness of the selling movement. This one is characterized by a gradual reduction in the magnitude of the waves. The highest reached during the first bounce on the support of the bevel will form the resistance. A second wave of decline will then occur, but with a lower magnitude, signal of weakness of sellers. Thereafter a third wave is formed but the price is less and less decreasing at the contact with the resistance. The volumes are lowest at this time and decrease at each wave. The movement has then almost no selling force and that induces the will of a bullish reversal. The price target is equal to the highest reached at the first contact with the resistance of the bevel. Generally, more the trendlines of the bevel are sloping, more the upward movement will be violent. The retracement of the decline is normally two times faster than the formation of the bevel.
The ascending bevel is formed by a resistance and a support normally bullish. This figure marks the breathlessness of the buying movement. This one is characterized by a gradual reduction in the magnitude of the waves. The lowest reached during the first correction on the resistance of the bevel will form the support (below in green). A second wave of increase will then occur, but with a lower magnitude, signal of weakness of buyers. Thereafter a third wave is formed but the price is less and less increasing at the contact with the support. The volumes are lowest at this time and decrease at each wave. The movement has then almost no buying force and that induces the will of a bearish reversal. The price target is equal to the lowest reached at the first contact with the support of the bevel. Generally, more the trendlines of the bevel are sloping, more the downward movement will be violent. The retracement of the increase is normally two times faster than the formation of the bevel.
The figure head and shoulders is a figure of change in trend. It marks a will to make a bearish reversal. It is formed by three tops that will succeed but of different heights. The first and third ones are approximately at the same height. We say that they formed the shoulders. The second top is higher than the other and represents the highest point. This is the head. The lowest reached between each shoulder and the head form the neck line (below in red) which is a support. This is the break of this support that validates the figure of reversal. The price target is equal to the height of the neck to the top of the head. This figure is often well known by investors and that is what makes his success.
The figure head and shoulders reverse is a figure of change in trend. It marks a will to make a bullish reversal. It is formed by three bottoms that will succeed but of different heights. The first and third ones are approximately at the same height. We say that they formed the shoulders. The second bottom is lower than the other and represents the lowest point. This is the head. The highest reached between each shoulder and the head form the neck line (below in red) which is a resistance. This is the break of this resistance that validates the figure of reversal. The price target is equal to the height of the neck to the top of the head. This figure is often well known by investors and that is what makes his success.
The top saucer-shaped is a figure of bearish reversal. The figure has a shape of "n" and marks a progressive change in the trend. At the beginning of the figure, the upward trend is strong, with high volumes. Then, gradually, the buying movement becomes breathless and that’s the indecision which dominates. Buyers still have the hand on the market. The top is reached. Then slowly the market will take a bearish trend but still in low volumes. This waiting area can be compared to an area of accumulation. This is the return of volumes that will allow the market to find a clear trend, a bearish trend. Sellers take back the advantage on the market and the bearish movement will accelerate to cause a violent drop of the price. The fall is often at the same force as the rise that preceded it. The movement is gaining strength after the break of the neck line (here in black). The price target is the last low point reached before the rebound that led to the top of the top saucer-shaped (this is the case in the figure below). In this type of configuration, the phases of rising and falling have approximately the same length (on the chart, around a week). To be valid, the bottom of the top saucer-shaped should not be completely regular.
The bottom saucer-shaped is a figure of bullish reversal. The figure has a shape of "u" and marks a progressive change in the trend. At the beginning of the figure, the downward trend is strong, with high volumes. Then, gradually, the selling movement becomes breathless and that’s the indecision which dominates. Sellers still have the hand on the market. The bottom is reached. Then slowly the market will take a bullish trend but still in low volumes. This waiting area can be compared to an area of accumulation. This is the return of volumes that will allow the market to find a clear trend, a bullish trend. Buyers take back the advantage on the market and the bullish movement will accelerate to cause a violent rise of the price. The rise is often at the same force as the drop that preceded it. The movement is gaining strength after the break of the neck line (here in black). The price target is the last high point reached before the drop that led to the bottom of the top saucer-shaped (this is the case in the figure below). In this type of configuration, the phases of rising and falling have approximately the same length (on the chart, around a week). To be valid, the bottom of the bottom saucer-shaped should not be completely regular.
A bearish diamond is a figure of reversal. This figure is formed by two symmetrical triangles juxtaposed. It has the shape of a diamond. The first phase of the formation of a bearish diamond is the violent rise of the price. Several technical corrections will occured, but the trend is still bullish. A higher will be reached. This higher will define the end of the first symmetrical triangle and will be the start of another triangle. This is only after this high that the trend will reverse. Sellers will take control on the market but buyers will not give up and the market will be confronted to several rebounds. The levels reached by the price during these movements will be less and less high and that marks a breathlessness of the bullish movement. In the figure, volumes are generally low. It is at the break of the symmetrical triangle that the bearish movement will accelerate and volumes will become important. The decrease is usually as fast as the increase occurred earlier. The price target is equal to the height of the diamond. This type of figure is unusual.
A bullish diamond is a figure of reversal. This figure is formed by two symmetrical triangles juxtaposed. It has the shape of a diamond. The first phase of the formation of a bullish diamond is the violent drop of the price. Several technical rebounds will occurred, but the trend is still bearish. A lower will be reached. This lower will define the end of the first symmetrical triangle and will be the start of another triangle. This is only after this low that the trend will reverse. Buyers will take control on the market but sellers will not give up and the market will be confronted to several corrections. The levels reached by the price during these movements will be less and less low and that marks a breathlessness of the bearish movement. In the figure, volumes are generally low. It is at the break of the symmetrical triangle that the bullish movement will accelerate and volumes will become important. The increase is usually as fast as the decrease occurred earlier. The pricetarget is equal to the height of the diamond. This type of figure is unusual.
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