by Kwasi Kisiedu

How To Ace Price Action Trading

One fine day while I was sifting through comments from readers in reaction to my various posts, one caught my attention. This comment came from a reader who simply called himself diet band wandwagon(same name as his youtube channel). He loved my What is Price Action Trading? post so much that he said,”Very energetic post. I liked it a lot. Will there be a part 2?” I thought to myself, “Do I really need to do a part II to this post.

But then I thought “Yeah it makes sense to do a part II to the original post. After all, you do need to know how to perfect your craft as a price action trader right?And besides, most movies have sequels these days.So I have come to the conclusion that my original post deserves a sequel “How To Ace Price Action Trading”. I think it’s an appropriate name for a sequel because you need to really hone your skills as a price action trader if you want to separate yourself from the chaff so to speak. So I’m going to share with you a few tips to help you be the perfect price action trader that you can be- or at least close to perfect. . So Mr diet bandwagon, this is for you.

Focus On The Hills and The Valleys

Focus on the hills and the valleys is my streetwise way of saying focus on the highs and the lows. It’s not for nothing traders say the trend is your best friend. The hills and the valleys provide valuable information about trend strength and market direction that you’d be crazy to ignore. And they can even drop clues on the trends losing momentum and impending trend reversals.

Here are a few things to consider when analyzing the hills and the valleys

Do the hills and the valleys establish a wavy pattern with small pull backs?By that I mean do the hills and valleys establish protracted trend patterns with small pullbacks?If that’s a case this has all the makings of a strong trend, not to mention a huge opportunity to cash in.
However, when price barely clears the scales making higher highs and higher lows, that should tell you that the bulls are losing momentum and that the bears have started bearing their teeth.
If you see pervasive volatility or longer candlestick wicks while price generates new highs and new lows, be very worried. This could be a slippery turning point where the trend loses momentum.
Another attention grabber you ought to pay attention to(for want of a better term) is where price fails to make a higher high on an uptrend. That should also tell you that the bulls are losing momentum. You can be sure the bears are salivating at this development.

Now let’s take a look at the EUR/USD. highhigh-highlow

The EUR/USD graphic is a classic illustration of the highs and lows that we’ve been discussing above. Higher highs and lows can be valuable when looking for signs of trend strength.If you’re not sure of your trend trading, refer to my Trade Trends With Price Action Analysis post.

Pick Trades That Have High Probability Of Success

You’d be better off to pick trades that have a high probability of success. Even if you spot the juiciest price signal you do your profit chances a world of good by only taking trades that have a significant probability of profitability. In other words, these trades should be located in zones considered important and meaningful. It does not make sense picking price signals,regardless of where they occur, and then wonder why they have such a low winning rate.

Some of you are probably wondering “How Do I detect trades that have a higher probability of success?” Well,you can start by drawing support and resistance levels on the chart.Then wait for price to touch those levels;and only take a price when a price signal lights up at your pre-marked price areas. Not only does this spare you from pulling your hair out, but the quality of your trading improves significantly. Let me show you an illustration of what I’m talking about.

forex-location

This is an example of a trade with meaning. You have resistance levels that are well-defined. Once the price touches these levels, that should be your queue to enter your trade. If you want to know how to identify support and resistance levels, see my Identify Support and Resistance Levels With Price Action Analysis post.

Put Trades in Proper Context

If you want all your hair still in one piece, put your trades in their proper context. It flies in the face of trading common sense if you go on some candlestick treasure hunt to fit some template you’ve designed or just satisfy some candlestick criteria you’ve created for yourself. One thing you must understand about price action trading, is that the price action you see on your screen is relative in relation to what happened previously. In other words, there is a link between past,present and future.

For instance you may run into a situation where you find multiple pin bars. The first two pin bars may be tiny compared to the previous price action. Since these pin bars don’t tell you much with regards to trading signals,they eventually fizzle out. Let’s take a look at the NZD/USD graphic.

As you can see from the uptrend,there are multiple pin bars. But the first two are midget in size, and since their trading signals are mere whimpers,they just evaporate like meteorites. Notice how the pin bar at the very puts on a strong rejection and yet it was bigger than the previous candlesticks. Samesituation goes for the bears . They also have midget pin bars that don’t giveyou much to gon.Eventually,they also fizzle out. So if you see pin bars that look like they’re famished, FLEE!

If you want to know what price action trading is all about look up What is Price Action Trading Analysis? And If you want to know how to trade pin bars. Visit Pin Bar Strategy – How To Trade It.

Four Clues of Candlesticks and Price Action

There are four clues candlestticks you have to instantly recognize when trading with price action. Remember when I said you need to act like a sniffer dog when trading? You need to put on that mentality in this situation.You have to put the pieces together to avoid blowing your account into smoke. Lookout the following hints to avoid making disastrous and dangerous blunders.

Long Wicks

Long wicks spell danger and uncertainty.

This so happens especially when the market is congested.In other words when the market is going sideways.

forex-congest

The long wicks in this graphic illustrate the danger that I’m referring to. They’re the skinny ends of candlesticks. Even worse,is the congestion in the graphic. This happens when the market is going sideways or where there is lack of clarity in the market. Unless a break out happens, DON’T TRADE.

Bullish vs Bearish Wicks

Anytime the bears generate long hicks going downhill, it suggests rejection and failed bearish attempts. failed-bearish

As you can see from the AUD/CAD graphic, there has been a major bear rejection resulting in a false break of some sort. You’d be wise not to fall for such a deception.

Position of Candlestick Body

You need to ask yourself whether the position of the candlestick body is closer to the top or bottom of the candlestick. Bodies that close near the top suggest strong bull activity-especiallyif the candlestick has a long wick.

candle-body

The blue candlestick illustrates what I’m talking about. If it closes at the top, it means the bulls are on top, If it closes at the bottom, the bears are in the neighborhood. If you want to know about candlestick action refer to You Need To Know Ten of These Candelstick Patterns.

Ratio Between Body and Wicks

The ratio between the candlestick body and the wicks speaks huge volumes about who is on top at the market. Candles with large bodies and tiny wicks suggest humongous strength. Whereas candlesticks with a small body and tiny large wicks spell indecision among the trading actors. Let’s take a look at this ratio.

candlestick -ratio

The black and white candlesticks(representing the bulls and the bears respectively) with long bodys and tiny wicks reflect the overwhelming strength of both the buyers and the sellers. notice the the two black and white candlesticks to the left of their larger brethren. Their small bodies and longer wicks reflect significant indecision on the part of the bulls and the bears.They’re losing serious moment and are not sure whether to buy or sell. They both looked famished if you ask me.

Keep The Noise Out Of Your Market Selection

I f you want to keep your winning streak going as a price action trader,you have to keep the noise out of your market selection at m You need to pick currency pairs that have the highest probability of making you a decent profit. This means cutting out all that congestion, consolidations and narrow trade ranges which bring you nothing but misery. Just sit down and come up with about 6-8 currency pairs that can ring your cash register on a regular and consistent basis.

Not only is it important that you adopt effective market selection,but you also need to select markets that can give you clear cut price action You want to stay away from markets that give you nothing but volatility and a nervous break down. You want straight out consistency and a healthy account. Also don’t get too stuck on specific pairs. I know we all have our favorites but please! Let’s have some variety here – rotate the selection and have some fun with your trades.

highprob-trade

This is a classic illustration of a price action set up. You don’t see any congestion consolidation, or any other confusion. This is clear and unadulterated price action,and it is a high probability trade too. It’s a simple uptend with the bulls break through the resistance and heading for the hills as usual. You can’t miss on this setup!

If you want to learn how to spot trades that are straight forward and less noisy,don’t and make a lot of noise, refer to the following: Trading Chart Patterns Part I , Trading Chart Patterns Part II , and How To Spot High Probability Trades.

That’s a wrap on “How To Ace Price Action Trading.” Mr Diet Bandwagon, I hope this sequel was to your liking.On a serious note though, this post should arm you with enough ammunition to profit profusely from price action trading. With straight forward high probability price action setups, your forex account should put a permanent smile on your face. Just make sure you’re able to recognize these setups of course.

Til next time take care.

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04.17.17

by Kwasi Kisiedu

How To Trade Forex Chart Patterns Like A Sniffer Dog Part II

Hello people,

Last time we touched on the first of our two-part series on trading chart patterns –How To Trade Chart Patterns Like A Sniffer Dog. This week we cover the second and final part , How To Trade Forex Chart Patterns Like A Sniffer Dog Part II. Like I said last time,you can make a killing trading these patterns. You just have to put on the mentality of a sniffer dog where you spot the explosions before they actually happen.

People,we have lots of exciting patterns to cover today. We’ll look at several profit-making patterns that can ring your cash registers(forex accounts) several decibels over.Hopefully you’ll be so excited about these patterns that you can’t wait to trade them on the market.

First pattern is:

Double Top Pattern

A double top pattern is a reversal setup that comes about when there is an extended uptrend. This is where the bulls have the run of things up the hill. Peaks are formed when price hits a level that can be penetrated- thus the name “tops”. Once price hits this level, price ricochets ever so slightly, and then returns to test the level again. It’s like a fighter jet dropping a bomb on a target, and then moments later it comes backs to drop another bomb on the same target again. If the price launches off that level again,you guessed it, a DOUBLE TOP is born!Let’s ta

ke a look at a double top in living color.

Double-Top-Forex-Chart-Pattern

Now as you can see from the chart,the two red bears encircled in red represent the double tops. Like intimated earlier,the two peaks came about after a strong surge up the hill(or uptrend).You see how the second top was not able to top the high of the second top?This is because a reversal is about to take place. The reversal is occurring because the bulls buying power is diminishing

So How Do We Trade The Double Top?

Place your entry order below the neckline(or resistance level) in anticipation of the reversal of the bulls trip up the hill(or uptrend). Now let’s watch the price break through the neckline

doubletop-break

It’s a good thing we decided to place our entry level below the necklineWhy? Because as you can see,the bears’ reversal is in full swing with the bears breaking the neckline and ‘slaloming’ towards the bottom of the hill. Keep in mind that double tops form after the strong surge upwards loses momentum and reverses.So be on the look out for this development.

As you can also see, the height of the bear drop is equivalent to that of the double top pattern.You’d do well to keep a note of that in your mental registry as it will coming very handy when setting your profit targets.

Next in Line is:

Double Bottom Pattern

Just like the double top. the double bottom pattern is also a trend reversal. Except unlike the double top,the double bottom is formed at the bottom of the hill. The double bottom comes into being after a long period of bear domination,(or extended downtrend). Two valleys or “bottoms” are then formed as a consequence of this long period of bear domination. Let’s take a look at a double bottom in action.

doublebottom

The EUR/AUD chart show two classic illustrations of double bottoms . The two sets of circles symbolize the double tops . Whenever you see two sets of engulfed candles at the bottom of a trend, remember DOUBLE TOPS. The two valleys that you see on the chart came about because the bears had reached the end of their rope.They’d lost their momentum.

Wanna know why the first double bottoms couldn’t top the second double bottoms? This goes back to what I said in the previous paragraph about the bears losing momentum. Their selling capacity has pretty much fizzled out,which can only mean one thing -REVERSAL.

How Do We Trade The Double Bottom?

As the labelling recommends,place your entry order a few pips above the neckline in anticipation of the reversal. Nothing more, nothing less. Now let’s take a look at the reversal.

doublebottom-breakout

You see why it’s important never to go against your better judgement? As you can see, the bulls break through the neckline and head for Mount Everest. If we hadn’t put the entry order above the neckline, our account would most definitely have been barbecued. Also notice how the bull surge is about the same height as that of the double top formation.

Just remember that double bottoms only take shape after a strong bear slalom(or downtrend). So be on the lookout for that while weighing your trade options.

Next in line is:

Head and Shoulders Pattern

the head and shoulders pattern is also a trend reversal just like the others. But this reversal is a weird one. It is formed by a series of peaks with a peak(shoulder) followed by a higher peak and then a lower peak(shoulder).Yea I know some of you think you’re dealing with highs and lows of a typical trend.NEWS FLASH! It’s not! This is a different kind of animal. A neckline is then created by connecting the two troughs. The slope is usually either up and down(makes for a pretty wild ride.Doesn’t it?). However, if you’re looking for a reliable trade signal, choose the downward slope. Let’s take a look at head and shoulders

Head_Shoulders

This, my friends is the head and shoulders pattern. The left and right shoulders form the initial peaks, while the head is the highest point of the mountain(I mean pattern). Although the shoulders are peaks in their own right, they don’t shoot past the height of the head. It’s called the head for a reason.

How Do We Trade Head and Shoulders

Just place your entry just below the neckline in case you’re caught by surprise by an unwelcome reversal. If you have a juicy profit target you want to reach, just measure the high point of the head to the neckline. This distance measures how far the price can push down the hill once it breaks through the neckline. Let’s see the price break through the neckline.

headshoulders-break

As you can see the price has broken through the neck line and is sliding down the hill with reckless abandon like someone going skiing forthe first time.. Notice the way the beas have even surpassed the profit target. And like, like I mentioned earlier, the size of the breakout is similar to the size of the distance between the head and the neckline. Now some of you are probably thinking” More Pips In The Bank After The Target.”Well, do so at the risk of getting your account blown to smithereens.”

Next comes head and shoulders sibling:

Inverse Head and Shoulders Pattern

Like I mentioned earlier, the inverse head and shoulders is the direct sibling of the head and shoulders pattern. In fact,it is also a head and shoulders pattern, except that it’s upside down.Ouch! Talk about standing on your head all day. Anyways, the formation kicks off with a valley(shoulder) followed by a much lower valley(head),and finally another valley (shoulder). The inverse head and shoulders comes about after a long slalom down the slope. Let’s see the inverse head and shoulders in action.

inversehead-shoulders

This, ladies and gentlemen is the inverted head and shoulders pattern. This pattern comesinto being after an extended downtrend As you can see, it’s doing a great head stand with the head and two shoulders forming two valleys. Price, represented by the bulls, pushes through the neckline past the profit target and heads for the mountains.

How Do we Trade Inverse Head and Shoulders?

Just place your long entry order above the neckline. And just like the head and shoulders, you calculate your profit margin by measuring the distance between the head and the neck line- which is approximately the distance that the price will push up after it cuts through the neckline. Now let’s watch the price slice through the neckline

inverseshoulder-break

Just watch the bulls bulldoze their way through the neckline as if it’s a rag doll. They look like they’re shooting past the profit target also. is(The profit targets are blue shaped looking like the letter’I’). a Speaking of which,if they happen to hit your profit target, more grease to your forex account.Just remember that you can exit with some of your profits and still keep your trading position open.I’ll show you how later.

Next up we’ll be looking at three triangle patterns-starting with:

Symmetrical Triangle Pattern

A symmetrical triangle pattern takes place when the slope of the price’s highs and the slope of the price’ lows come together to form something resembling a triangle. Basically, this formation suggests that the market lower highs and lower lows.And it also reveals a war of attrition between the bulls(buyers) and the bears(sellers). They simply do not want to push the price high enough to establish a definitive trend. In boxing lingo, you’d call it a draw. And just to remind, it can be considered a consolidation also, as they’re taking a breather to protect their stock.

Let’s take a look at the symmetrical triangle in action.

symmetrical-triangle

This, people, is a symmetrical triangle at work. The upward line(higher lows) and the sloping line of the lower highs converge to form something resembling a triangle. And, as you can see from this graphic, both the bulls and the bears don’t want to budge.And when that happens, you get higher highs and higher lows. And when the two slopes inch ever so closely together,it can only mean one thing – BREAKOUT! You’ll have to be Houdini to guess which direction the breakout is going to go.But we know one thing: Something has got to give. Both parties can’t continue hogging the lines forever.

I guess the next question is:

How Do We Trade Symmetrical Triangle?

Fairly straight forward. Place your buy order above the slope of the lower highs, and then place your sell order below the slope of the lower lows. So now that we know the bulls will break out and head for the hills, Just enjoy the ride on the carousel. Now let’s watch the bulls breakout of the gates.

symmtriangle-break

As you can see the bulls are shooting high up like cruise missiles. You can take advantage of their jail break by placeing your order above the the slope of the lower highs,and you’ll be riding high all the way to profitability. You then place your sell order on the slope of the higher lows,but please cancel the order and head for the exit the moment your order takes a hit. You’d be doing your account a huge favor,if you take this advice.

Right after the symmetrical triangle is:

Ascending Triangle Pattern

The Ascending triangle pattern takes shape when a resistance level and a slope of higher lows come into view. What’s happening here is that the bulls initially are face strong resistance from the bulls. But they gradually regain the initiative through the higher lows. Let’s see the ascending triangle in action.

Ascending-triangle

The red resistance line and the dark looking slope make up the ascending triangle. As you can see from the graphic, the bulls are starting push up the hill through their creation of higher lows. The growing pressure the bulls put on the resistance level creates the perfect conditions for them to break out of the resistance level.

The question now is “Which direction does the breakout go?”Well the history books suggest that the bulls always win the breakout battle nine times out of ten. but there are times when the bears develop an attitUde and say “NO WAY JOSE!”It is the their way of putting up a strong rearguard action at the resistance level. Also it may be that the bulls just do not have enough cash to make that final push.

The moral of the story is do not pull your hair out over which direction the price goes. But you must have your ears on the ground which ever direction the price goes.

I guess the question plaguing your minds is:

How Do We Trade The Ascending Triangle?

Set your buy order above the resistance triangle and your sell order below the slope of the higher lows. Now let’s look at an illustration of the scenario we just described and the ascending triangle trade in action

ascendingtriangle-pricedrop

NEWS FLASH! The bulls lose out to the bears. Naturally, the price takes a massive nosedive,which is music to the bears ears. So you see why I said the bulls don’t always win in these breakout scenarios?Also notice that the price drop is the same height as the triangle formation. And if you had placed the sell order below the bottom of the the slope like I asked, your forex account will have you to thank.

The opposite of an ascending triangle is:

Descending Triangle Pattern

The term descending triangle pretty much speaks for itself. Doesn’t it? With descending triangle patterns, you have a bunch of lower highs forming a high line, Then you have the support level serving as a lower line – a line that the price is doing everything in it power to penetrate,but without success. Now let’s take a look at the descending triangle in action.

descending-triangle

As you can see the bears(sellers) are making up lost ground against the bulls(buyers) through the lower highs.

Remember when I said in the ascending triangle presentation that often times the bulls win the breakout tussles, but sometimes they don’t? The same situation applies to the bears in the descending triangle. History also favors price as far as penetrating the support line and heading for the valley goes. But some times, the support line turns into a wall concrete,forcing the price to ricochet and head on up in the opposite direction.

Then again, who cares which direction the price goes? At some point the price is bound to end up somewhere right? Your job is to be on the alert when the price decides to make its move.

In light of this revelation:

How Do We Trade The Descending Triangle

Just place your buy order above the lower highs, and your sell order below the support line. Now let’s see the trade in action. descendingtriangle-trade

See how the bulls shoot up like cruise missiles, after breaking out of the top of the triangle? Not only that but they conspire to to climb even further by the same vertical distance as the triangle formation. With such a clear-cut uptrend, just place your buy order at the top of the triangle – shooting for the skies as high as the triangle formation. You can’t go wrong with such a setup.

Til next time take care.

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04.06.17

by Kwasi Kisiedu

How To Trade Chart Patterns Like a Sniffer Dog

This week we’re starting a two part series on trading forex chart patterns. Let me let you in on a secret. You’re going to have a lot of fun with trading chart patterns.Why? because you will be able spot huge moves on the market before they happen and get that chi ching effect from your cash register.. Think of you trading chart patterns as a sniffer dog sniffing explosives. You will spot the explosives before they explode.

So what we’re going to do? We are going to learn a bunch of chart formations and how to trade them. But before we get started, I have a little suggestion to make. If you’re here and you happen to stray in on this post with absolutely no idea what price action trading is all about, but would still like to learn, I humbly suggest you refer to the following posts:

These four posts are what I call my Forex 101 session. You need to read these four posts in order to gain a foundational understanding of price action analysis. Your understanding of these posts are absolutely crucial in your grasping of my other posts, including this current series on chart patterns.

Now on to our chart patterns. The first continuation chart is:

Falling Wedge

Now what really is the falling wedge? It sure isnt a cliff rock falling of a cliff;I can tell that. Actually a falling edge acts as both a continuation single and a reversal signal. Now a continuation signal is an alert that a trend is about to resume.Basically traders take a break from jostling for position on the market.Once they’re done recharging their batteries, they resume the trend. Whereas reversal signals suggest that a current trend is about to do a 360. If a reversal forms during an ap uptrend, expect the price to head downwards. Conversely if a reversal forms during a downtrend, the price heads up.

Before we continue with the falling wedge, let’s see examples of the continuation and vertical patterns-starting with the continuation pattern.

falling_wedge_reversal_strategy

This is a continuation chart pattern in a downtrend. The bears breaking through the support level suggests a resumption of the downward trend.

Now let’s look at the reversal chart pattern

Reversal

This is an illustration of a reversal pattern. Notice how the reversal starts right at the uptrend. The bulls dominated with the uptrend,but the price does a 360 after the bears refuse to buy at the price the bulls were offering them.This sets off a trend reversal with the bears heading for the valley.

Now back to our initial discussion on the falling wedge. Like I mentioned earlier, the falling wedge acts as both a continuation signal and a reversal signal. When it takes the form of a reversal signal it takes up residence at the bottom of the downtrend.. This suggests that an uptrend is about to start,with the bulls heading for the hills. However, when the falling wedge switches to a continuation signal, it forms during an uptrend, meaning that the upward price action will resume after the bulls take a breather from jostling with the bears. The falling wedge is considered a bullish pattern because of its upward stance.

Let’s look at illustrations of of the falling wedge as a continuation signal and reversal signal , starting with the reversal signal.

fallingwedge-reversal

This is a falling wedge as a reversal signal in action. The reversal signal starts at the uptrend and is characterized by lower highs and lower lows. Notice the steepness of the lower highs compared to the lower lows.

Next we look at the breakout

grade7-falling-wedge-reversal-after2

Now this is where the reversal takes flight. Notice that it starts at the bottom of the downward trend with price making a strong surge upwards at a height equal to the wedge formation.

Next up is an illustration of falling wedge as a continuation signal

fallingwedge-consolidate

In this scenario, the price consolidates after a strong surge upwards. In this scenario, the bulls are taken a breather and gearing for another surge upwards.

Now let’s look at the break out

grade7-falling-wedge-reversal-after2

After the bulls catch their breather,they resume their journey up up and away. See how they drive the price to the top side and climbed even further.

How To Trade Fallen Wedge

Using the same graphic above, place your entry order above the red falling trend line. Your profit target should be the height of the of the fallen wedge formation.

Next up is:

Rising Wedge

When I mention the rising wedge, I’m not talking about a plant shooting out of the ground. The rising wedge is the sibling of the falling wedge,but that’s where the resemblance ends. You see unlike the falling wedge, the rising wedge unfolds between upward support and resistance lines. In this scenario,the high lows form at the speed of light than the higher highs. When prices consolidate,word gets around that a major event is about to take place. Expect a breakout to happen either at the top or the bottom.

If a rising trend forms after an uptrend,it’s highly likely a bearish reversal. And you what that means? The bears will drive the price down and head for the valley. But if this same rising wedge forms during a downtrend,it could signal a continuation of the reversal. Like I said,a continuation signal flashes after the main players take a breather to recharge. Either the way,the important thing to note is that when you see such a formation, get your entry orders ready. Let’s see a rising wedge in action.

rising-wedgebefore

The slope of the support line seems steeper than that of the resistance. The steepness of the slope is reflected by the speed with which the higher highs form compared to the higher lows. And the formation of these highs and lows give risetothis wedge-like formation.

Now let’s take a look at the breakout

risingwedge-breakout

See the price break through the resistance line and head downwards. It suggests a desperation by bears to go short(sell) than go long(buy). They’re basically dragging the price down to trigger a downtrend And just like the falling wedge, the price movement is equal in height with the rising wedge.

Now let’s look at the rising wedge as a bearish signal

risingwedge-continuationsign

As you will have noticed by now,the price starts of on a downtrend,and then consolidates as traders decide to catch some air. Then the bulls seize the momentum as they map out higher highs and lows. This is the bearish continuation signal for you.

Next in line is:

Rectangle Chart Pattern

Now a rectangle chart pattern takes shape when the price is caught between support and resistance levels. And as usual, a period of consolidation ensues with both bears and bulls caught in a war of attrition. Then the price drives at the support and resistance levels kamikazi style before eventually breaking out for freedom in the trend’s direction of the break out, be it an uptrend or downtrend.

rectangle-example

It is pretty obvious from the above graphic that the price is swinging between both support and resistance levels. It’s only a matter of time before one of these dams breaks l and heads for the hills or valley,depending on the strength of the trend.

Now that we’ve gotten the introduction out of the way,we’re going to look at two types of rectangle chart patterns. The first rectangle pattern is

Bearish Rectangle

Whenever I see the word bearish, the first word that pops in my head is consolidation. Because that is exactly what happens with the bearish triangle. The bearish triangle takes shape at the downtrend where price consolidates for a while. here the bears take a breather from jostling with the sellers, and once they done recharging their batteries, they resume to drive the price down further.

Let’s take a look at an illustration of the rectangle chart pattern.

rec-chattern

See the way the red bears break the bottom of rectangle chart and continue on their downward slalom. If you’re thinking of making a nice profit just place a nice order to go short(sell) just below the support level and you’ll be laughing all the way to the bank.

Now let’s watch a scenario where the bears drive the price down about the same height as the rectangle formation

price-height

Here the bears drive the currency pair beyond the level of support. And, as you can see the price dip is about the same height as the bearish triangle. Also notice the way the bears have driven the price beyond the target(labelled in blue). tThe possibility of racking up huge pips and converting theminto profits are massive.

Bullish Rectangle

Just like its bearish counterpart, the bullish rectangle experiences consolidation. Except that this takes place on the uptrend at the level of consolidation. And just like the bears, the bulls also take a breather from jostling with the bears(The bears can’t have all the fun)before resuming their upward climb.

bullish-rec

As I mentioned earlier,the bulls are taken a break after jostling all day with the bears. Once they catch their breath they then continue with their upward climb. Now let’s see what happens with the bullish breakout

bullish-breakout

The bulls are really going for it. Aren’t they? They’ve really broken above the rectangle pattern(labelled red)and are heading for the mountains.

With such a well-defined uptrend, just put in a long order(buy) above the resistance level and you should laugh all the way to the cash register. And just like its bearish pattern brethren, The bullish breakout is the height and size as the bullish rectangle formation.

And finally the last two chat patterns are,you guessed it,bullish and bearish pennants. But please, if you’ve strayed in here dreaming of World Baseball Series pennants, you’re on the wrong blog. We’re talking forex pennants here. But first:

What’s a Pennant?

Well, just just like rectangle chart patterns, pennants are birthed after significant movement on the forex market. the bulls(green)and the bears(red) take a timeout after jockeying position while the currency pair moves upward or downward.Once they’re down with the timeout,they resume to work the currency pair along the same directional path. This constant pushing of the currency pair by both parties causes the price to consolidate( a situation where the bears and the bulls are locked in a standoff) and results in the pennant’s triangular formation.

While both sides are still undecided, newly recruited bulls and bears take advantage of the standoff by riding on the coattails of the trend of the day. This sudden burst of excitement by these new recruits forces the price to bust out of the pennant formation and head for freedom.

Now we’re going to look at two types of pennants – bearish pennant and bullish pennant.But first:

Bearish Pennant

The bearish pennant takes shape after a very steep downtrend precipitated by a huge drop in price.This causes serious division in the bear camp with some bears opting to close their trading positions to save whatever profits they have left. While the other bears decide to hold still on the trend. This war attrition,of course causes the price to consolidate. In othewords, both sets of bears are at loggerheads.

Let’s take a look at an illustration of a bearish pennant’s break and consolidation

pennant-break

This steep vertical downtrend reflects a sharp drop in price. Immediately a herd of bears decide to jump on the trend’s band wagon and send the price on a wild slalom below the bottom of the pennant. The red triangle represents the price’s brief consolidation. This is a result of the bears taking a breather to resume their slalom. This consolidation is what creates this triangular contraption called the pennant.

Now let’s take a look at the downtrend’s resumption after the breakout bearishpennant-resume

Once the bears are done with their breather, they resume their downward slalom This causes the price breakout to the bottom. If you’re having any fantasies of making serious mullah from this pattern, just go short(sell) at the bottom of the pennant. However to avert the possibility of the market faking you out just slowly put a stop loss above the pennant.

And finally our last chart pattern for today is:

Bullish Pennant

When you see the word bullish,it can only mean one thing – The bulls are about to head for the hills again. The bullish pennant is formed as a result of them making a sharp vertical climb. After a period of respite(consolidation), they resume their rock climb to drive the price higher which they eventually succeed in accomplishing.

Let’s look at an illustration of the formation of the bullish pennant

bullish-uptrend

The bulls head for the hills, courtesy of the uptrend..They then take a breather inside the triangle to recharge to continue the upward climb.The triangle of course reflects t Now let’s look at the bull’s breakout and eventual continuation.

bullishpennant-continuation

As expected, the bulls break out of the triangle and head for Mount Everest . And just so you know, the size of most breakouts in pennant formations around the height of the previous moves, or the same size of the previous moves. Pennants may be small, but make no mistake: they can make you tons of money.

How To Trade Bullish Pennant

Go long above the pennant and place stop order at the bottom of the pennant to protect yourself from hugely embarrassing fakeouts by the market.

That’s a wrap for “How To Trade Chart Patterns Like a Sniffer Dog” As I’m sure you’ve gathered by now, you can make a giant killing trading chart patterns if you keep your eyes wide open to the trading opportunities these chart patterns present. Next time we’ll look at How To Trade Chart Patterns Like A Sniffer Dog Part II.

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