Last time we touched on the first of our two-part series on trading chart patterns –Trading Chart Patterns Part I. This week we cover the second and final part ,Trading Chart Patterns 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 take a look at a double top in living color.
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
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.
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.
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
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.
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.
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
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.
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.
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.
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
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.
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.
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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