OKE FOREX

Head and shoulders pattern

Triangle pattern

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Disclaimer

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Sunday, 2 June 2013

Double bottom chart pattern

Today we continue analyzing various chart patterns and double bottom technical pattern is the topic of the post. You can find this structure on various time frames and it is pretty go indication that a trend is about to change. So, this particular pattern indicates a reversal. You probably remember that we either have continuation or reversal patterns. This is a bullish reversal pattern. It means that the bears will probably lose their fight soon and bulls will start reigning in a particular security double bottom is formed. Let us look at some necessary conditions that have to be that we might state that the picture we see is a valid double bottom pattern.

Key components in double bottom pattern

As it is a reversal pattern the first thing that there has to be is a previous downtrend. The security had to go down for some time in order for the pattern we are discussing to be formed. Depending on the structure the downtrend could have been from a few days (weeks, months) to a year and more.

There has to be the first sharp fall that marks the first spot in the bottom. It is known as the lowest point in the ongoing downtrend. At this point we cannot say whether the tendency has changed or not as there still isn�t any indication of a reversal and increase in demand.

The first rally! Reaching the first bottom the price of the security rallies upwards. It indicates that smart money assumes it is good time to accumulate the security and so buying ensues. After some time (hours, days or even weeks) the first top (or important resistance) is formed.

Back to the bottom! At some point inertia of the bears kicks in and they continue selling assuming that the downtrend is not over. So, the price of the security collapses to the first spot of support (bottom) and this time the spot becomes the second spot of a double bottom pattern.

The second rally! After hitting the first support (bottom) the security starts rallying, which indicates that there really is serious demand for the security at current prices. In most cases the prices will reach the first spot in resistance. In most cases the price after hitting the resistance will retrace a little.

Break of the resistance. The two points of resistance that were made as the security rallied after reaching the bottom is finally broken. That is the point where the double bottom pattern becomes a valid one.

Support becomes resistance. That is a classical rule of technical analysis. It is not a necessity, but a security sometimes comes back to test previous resistance (that is now support) and if the break was not fake the support will hold.

Traditional target for the exit of your long trade is the distance from the break point to the lowest point of the pattern added to the breakout point. That is the smallest distance that the price is expected to travel. It may go further, or it may fail to reach the expected target. However, if you need some guidelines where to exit this could be one of those. Additionally, you can move your stop below clusters of hourly or daily candles (depending on the strength of reversal).

Time frames

As I said, you can find the pattern on all time frames. The longer the time frames the more valid it becomes. There have been a few of those patterns (on smaller time frames) in various currencies. Let us look an example that happened on a small time frame.

gbp/usd example

After a prolonged move upwards gbp/usd pair started collapsing on the 9^th of May (2013). The downward move continued for about two weeks till the sharp move down ended on the 23^rd of May (2013) with a strong rally upwards. The rally continued for four days and formed the first peak or resistance on the 27^th of May at 1.5156 level.

The pair then retraced to its� previous bottom and failed to break it. On the 29^th of May the second point in the double bottom pattern was formed. On the same day it rallied to previous resistance and formed second high (resistance) at 1.5145. It then retraced and consolidated for a few sessions before breaking the resistance and rallying to 1.5240 on the next day. One had to place a buy stop above the resistance (1.5156) with a stop loss below the bounce after second rally�s high (at 1.5098) and take profit order around 1.5300 level.

According to our rules the exit target should be around 1.5300 level, so it has not been reached yet. The pair came to visit previous resistance (now support) and support held. The pair bounced from 1.5140 level.

This week will show whether gbp/usd will reach our target or not. Looking at technical price action we can see clear demand coming at previous resistance. So, let us be patient and wait for confirmations during European session whether we could add to our position or let the pair go down.

Conclusion

Double bottom pattern is a bullish reversal pattern that can be found on various time frames. The pattern can be found in various securities regularly. One should wait for a break of resistance to enter market with buy orders.

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts.

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

Inverted head and shoulders pattern

Analyzing chart patterns: pennants

Analyzing technical patterns: flags

Head and shoulders pattern

Triangle pattern

http://www.etoro.com/A41516_TClick.aspx

Disclaimer

Monday, 20 May 2013

Analyzing chart patterns: flags

This week I started a series of articles on chart patterns and I discussed a wedge pattern on Wednesday. Today I want to continue the topic and talk about flag technical patterns. I hope that you learned something from previous post and I expect you to learn from this one even more. Flags are among my favorite patterns and when I recognize them in the charts I start preparing for a big move as these often result in strong breakouts and consequently nice money (if I jump into a trade). So, let us look what flags are and how you can trade them.

Some tend to put flags and pennants into the same category, but I do not want to confuse you and therefore I will analyze pennants separately in my next post.

What is a flag pattern?

It is a trend continuation pattern that can be on various time frames and may last from a few days to a few months. It is rectangular in shape and can be formed in various angles. A flag indicates that a security is in consolidation pattern and market is searching for direction. Most often than not, when the pattern is broken the price will move in the direction of the prevailing trend. Flags are often formed after a very sharp advancement of prices and appearance of a flag merely indicates that the market is in the state of �rest�.

Now, the initial move from previous consolidation or range to the top of the flag is often called the flagpole. For a pattern to be valid there has to be another breakout of the pattern in the same direction as the previous one. We already know that the pattern is in the shape of a rectangle. The rectangle is �caged� by two trendlines (upper and lower). They might be more or less horizontal (flat) or falling (if the flag is bullish). That is not very important. What important is that the pattern should be followed by continuation of a previous move. (Of course, it is better when the trendlines that act as support and resistance would be slopping, not entirely flat).

Bullish flag

Bullish flag is a bullish chart pattern that usually results in an upward breakout of the pattern. It is formed after a strong move upwards and indicates that prices are consolidating before another move up.

The example above shows us two examples of bullish flags in gbp/jpy currency pair. As you may know Japanese Yen has been in a strong downtrend for quite a long period of time. Pound has been very strong against Yen. So, the first example shows us a bullish flag that was formed and broken in one week (from 19-12-2012 to 26-12-2012). After a breakout the pair rallied for about 600 pips. It formed a small bullish pennant in the middle of the move, but let us not concentrate on that today.

After the move stalled the second bullish flag started to form. The second flag wasn�t really longer in terms of time than the first one. It started on the 2^nd of January, 2013 when the top was formed and ended with a breakout upwards on the 10^th of January, 2013. This move wasn�t as strong as the first one. However, from the breakout point the pair rallied around 350 pips. Still nice move, huh?

How to trade a bullish flag

Coming back to the chart of gbp/jpy above you can see the point for long entries on both examples. You go long when the upper trendline of the flag is broken. So, by knowing this information you must have your long entry ready before the breakout occurs. In the first case it was 136.84 level (to buy the pair). Market opened with a gap after Christmas, so you had to readjust your position and enter a long with the first available price of 137.73. I usually place stop loss order a few pips below the low of the day market broke the pattern. In this case it was 136.26. Of course, you had to move your stop as fast as market progressed higher as this initial stop was kind of big if you are a day trader. It is ok for swing and trend traders though. What about exits? Nobody can give you the best way to exit the market. One way is to move your stops below daily candles or 4-8 hour candles, or support zones or simply calculating the size of the pattern and add the number to the breakout zone and exit the market when market hits the area. Another possibility is to exit at even numbers. So, in my opinion it is best to open a number of trades 3-4 and keep on exiting (at even numbers) as market progresses upwards.

Follow the same procedure with the second pattern to find out the best entry, stop loss and exit areas. Let it be your homework. You will be surprised how much you can learn from such a simple exercise as this.

Bearish flag

Bearish flag is a bearish chart pattern that usually results in a downward breakout of the pattern. It is formed after a strong move down and indicates that prices are consolidating before another move down.

The example above shows us two examples of bearish flags in Gold (XAU/USD). The first bearish flag formed from the 5^thof April (2013) to the 10^th of April (2013) when the pattern was broken. After the breakout down gold collapsed more than 160 dollars per ounce. Wow! It then regained some of what it has lost, but the gains were short lived and the commodity started going down after some horizontal range trading. On the 10^th of May it broke the horizontal channel and formed a bearish flag in a period of four days. On the 15^th of May Gold broke out of its� bearish flag pattern and collapsed around 80 bucks per ounce. Nice move, huh?

How to trade a bearish flag

We have to reverse the process of how we trade a bullish flag. We have to trade a break of a lower trendline of the flag. If you look at the first example you can clearly see that the break came at around 1576 level. Depending on your trading style you could have place your stop loss above 4 hour candle (1583) when the breakout occurred. Alternatively, you could have placed your stop above the highest point of the flag, which was 1591. Now, if you are not very patient you still would have got a very good risk reward ratio by simply waiting and placing your stop above daily candles and when 1540 level was broken you would have stayed till the end of the move by simply moving your stop above 4 hour candle. Check it out for yourselves.

Follow the same drill to find out how you should have traded the second bearish flag pattern in Gold. Let it be your homework assignment. Do it to make your trading better.

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts.

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day.

Vytas.

http://www.etoro.com/A41516_TClick.aspx

Triangles

Head and shoulders

Disclaimer

Sunday, 12 June 2011

Head and shoulders pattern

Head and shoulders is the topic of the post. Those who have any understanding about technical analysis definitely know what it is. Let me talk a little bit on the theme. I will give you a chart first and some theoretical and practical points later.

Head and shoulders definition

As you may see head and shoulders pattern is a reversal pattern that usually happens after a prolonged uptrend or a swing. It consists of three highs: left shoulder, head and right shoulder. The structure is joined by a neckline that constitutes support.

How is head and shoulders pattern formed?

This works best on longer term charts. Firstly, there should be an uptrend in place for the pattern to be as effective as possible. After a prolonged uptrend prices may start going kind of parabolic and suddenly collapse. This helps to form the left shoulder and the point for a neckline. Then uptrend resumes and prices go beyond previous highs (left shoulder). Then security collapses again and lands somewhere near previous support. Security rallies for the last time and finds resistance lower than the head is and collapses again. This time, it goes beyond support and a downtrend begins. If the security is not able to break the neckline, the pattern is usually distorted and the security either starts going sideways or resumes its� upward trend.

How to trade head and shoulders pattern on daily and weekly charts

On daily charts the pattern can be very big, stretching from three months to one year or sometimes even more. So, one has to be pretty patient waiting to see possible place of entry. In fact it is much better to spot those patterns on weekly charts (if we have in mind reversal that happens after a very long uptrend is finished).

To tell the truth one can never be sure if one is looking at a real head and shoulders pattern or simply a pattern which looks like the real one. Difference between real one and a fake one is not very big. The real one is fulfilled, the false one is not. The real one is fulfilled when the price after having formed the right shoulder collapses through the neckline. That the only way to know whether the pattern is the true one or a false one. You have to wait for a collapse through the neckline. So, the best way to trade it is to place a sell stop order below the neckline and go short when the prices go beyond the level.

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False breakouts in head and shoulders pattern

It might be a false break too and the prices can come back and go above the neckline. However, you have no other choice, either you risk and jump on the trade or you stand aside and continue waiting. In the latter situation you will be sure that it was the true head and shoulders pattern after the move down have gone so far that it is no longer useful for you to join it. So, you go short after the neckline is broken.

Head and shoulders after a swing

These kind of patterns happen all over the charts and on various time frames. They are pretty reliable when they happen in a range after a prolonged swing. I find four hour charts most reliable to identify the pattern and trade a reversal of a trend. The rules are the same as in the pattern on daily or weekly charts. You have left shoulder, head, right shoulder and a neckline. You go short below the neckline if it is broken and go with the swing down as long as it has momentum. Very often the break of the neckline may coincide with some economic news as it happened in the above example with eur/usd pair or eur/cad pair last Thursday. News from Europe pushed those two pairs below their necklines and we had a nice move down (which is not over yet).

That�s how you trade head and shoulders pattern. I hope to expand the post in the future adding more information and examples of the pattern.

Read related posts:

Inverted head and shoulders pattern

Analyzing chart patterns: pennants

Analyzing technical patterns: flags