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:
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.
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
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.
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
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
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
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:
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.
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
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
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.
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
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.
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
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.
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.
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
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:
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
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
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:
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
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.
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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