Analyzing chart patterns: pennants

Let me continue my series on chart patterns in the post. Last time I wrote on flag patterns and now I want to discuss about pennants. In the same fashion as flag, a pennant is a continuation pattern. It means that when a pattern is broken you will most often see a thrust in the direction of a previous move. While a flag is a rectangular in shape a pennant resembles a triangle. It should not be confused with triangle as its duration is much shorter and it actually is a short respite before current trend resumes itself. Triangles tend to be longer in duration before they are broken. 

As it is a triangle in shape a pennant has two converging trendlines. This shows that prices are consolidating after a previous move and now the range inside the pennant is narrowing putting pressure for price to go out of the pattern and continue the trend. A pennant will have a pole that would end at the top or bottom of the pattern (depending whether the pattern bullish or bearish) and it marks the point of the first trendline that we expect to be broken. As the prices starts consolidating the second point is made that marks the point from which the second trendline is drawn that will probably not broken and hold counter trend moves. 

Bullish pennants

Bullish pennants are bullish continuation patterns that break out in the upward direction when the consolidation of the pattern is over. A break of the upper trendline is a sign that current trend will resume itself after a short break. One should be ready to jump into a trade at the break of the upper trendline. 

How to trade a bullish pennant

You can look at gbp/jpy chart above to see how the bullish pattern looks like and where you can enter your long trade. After a strong move upwards gbp/jpy started consolidating and formed a bullish pennant in a period of four days (from 27^th of December 2012 till 31^stof December 2012). The breakout point was marked by 139.28 level which the pair reached and retraced a little. So, you should have bought the pair at the break of the above mentioned level. Our stop level was a few pips below the retracement at 138.87. As you may see the pair broke the level and rallied around 350 pips before reversing and forming another pattern: bullish flag. You could exit your position in portions at even numbers (if you had two or three positions) or move your stop loss order by placing them below 4 hour candle clusters till your stop loss was closed when prices reversed. 

Bearish pennants

Bearish pennants are bearish continuation patterns that break out in the downward direction when the consolidation of the pattern is over. A break of the lower trendline is a sign that current trend will resume itself after a short break. One should be ready to jump into a trade at the break of the lower trendline. 

How to trade a bearish pennant

You can look at Gold chart above to see how the bearish pattern looks like and where you can enter your short trade. After a strong move down xau/usd started consolidating and formed a bearish pennant in a period of five days (from 15^th of February 2013 till 20^thof February 2013). The breakout point was marked by 1600.00 (per ounce) level which the security reached and retraced a little. So, you should have sold Gold at the break of the above mentioned level. Our stop level was ten bucks above the retracement at 1610.00. As you may see the pair broke the level and collapsed around 45 bucks before finding support. You could exit your position in portions at even numbers (if you had two or three positions) or move your stop loss order by placing them below 4 hour candles till your stop loss was closed when prices reversed. It may have been around 1563 area. 

Conclusion

A pennant is a continuation pattern that might help you to enter extra positions in the direction of the trend or open your first one if you accidentally missed the initial move. The pattern indicates that the security is in a stage of rest (consolidation) and the prices will move pretty soon. In forex market pennants often last five days or even less and present you with great trading opportunities. 

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.

Related posts:

Analyzing technical patterns: flags

Wedge technical pattern

How to do technical chart analysis

Six key elements of technical analysis

Triangles

Head and shoulders

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Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

How to make money in trading breakouts

Breakout trading strategy is probably one of the best known in financial community of technical traders. When used properly it can increase your chances of making significant amounts of money on a monthly basis. This trading system is in my trading arsenal on a regular basis and I recently made some nice cash by trading a breakout in Gold. Various breaks happen quite often even daily in various securities. We, however, want to find the best opportunities that can give us the biggest rate of return with the smallest amount of risk. Let us look today at the way one can trade breakouts. 

What kind of breakouts to trade?

Breakouts happen daily on various time frames: weekly charts, daily charts, hourly charts and most often on various minute charts. The smaller time frame the more false breakouts you have. Therefore, I tend to avoid minute type of breakouts and concentrate on breakouts on daily charts. Of course, you can clearly see those on 4 hour or 8 hour charts too. I like to go through various time frames at the end of the day to see whether some securities are ripe for a breakout or I need to concentrate on other ways to trade the markets. 

Necessary condition for a breakout

Breakouts occur when price move out of �congestion areas�. These are very tight ranges with prices moving within very limited range for a couple of days or a week. These congestion areas are often formed when security loses momentum after some prolonged swing or a short term trend and the move stalls. In these kinds of ranges we look at the low and the high of prices and mark these as possible breakout areas. When broken after some news or simply technically one can expect a strong move and should be ready to place buy or sell orders depending on whether the breakout occurs upwards or downwards. 

These kind of breakouts are sometimes corrections of a prevailing swing or trend and the price often moves against the trend that had previously been pushing prices. I dare to trade these breakouts against the prevailing trend. Although one should concentrate on a prevailing trend and trade in the direction of it, there are choppy trends that can provide you with both opportunities to trade with the trend and against it. 

Breakouts in GOLD

The most recent examples are from my two trades in GOLD. The first breakout occurred in the direction of a prevailing trend (downtrend). In the beginning of February (1^st through 11) Gold got into a congestion area of 1684-1661per ounce. By looking at shorter time frames I understood during the weekend that the break low will occur probably on Monday and I entered a short order below 1663 level (a little above than the low of the congested area) as I did expect the collapse will get momentum falling even before the low of 1661 was reached. Any time the price rose trying to go through the upper level of the congestion it was met by strong bearish pressure, which can be clearly seen from 4 or 1 hour candles of that period. Bulls got weaker and weaker and for any experienced technical analyst it must have become clear that the path of the least resistance in GOLD at that period was DOWN. Unfortunately, I expected the commodity to stay in its� �then� range and bounce from 1630 level. This did not happen as the price of the metal collapsed through the floor and went as low as 1555 level. So, I took my profits at 1.6550 level (13 bucks per ounce profit). Well, what a move (extra 100 buck down) missed! However, I still made nice cash. I saw the congestion, bet on its� break and was rewarded for successful speculation. So, can you!

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The second congestion occurred on March 1-11 as GOLD was 1587-1564 range. Looking at the congestion on 4 and 1 hour chart and inspecting the price action it became quite clear that the commodity found strong fresh buyers and GOLD would run up soon. Now, the chart below is not really what I have on my trading platform. Below you can see the price going through the resistance level and falling back on the 7^th of March. It did not really happen until the 12^th of March (check other charts I cannot upload the one on my platform as it does not have copy function). So, the price stayed within the cage of the above mentioned boundaries till the break up on Monday of March 12. 

Study 4 and 1 hour candles and see how falling to the lower part of congestion area bullish candles emerged indicating that strong buying picked up. Trust this kind of price action as it often shows that bigger move is coming. In the second situation the break upwards was short lived, but it was still a nice move and I significantly increased my account by trading the breakout. I exited a few bucks before the critical 1600 level as I saw price stalling. 

Exits

The standard take profit area can be measured by calculating the height of a congestion area and adding the amount to the breakout area. However, from time to time the target is not reached and you can trail your stop by moving it below/above (depending on which direction the market goes) 1 or 4 hour candles until you knocked out of your trade. Alternatively you can open a few trades and close the first one as soon as it shows some profit and leaving the second one to go with the market till your stop is knocked out (it maybe below/above 1, 4 hour or 1 day candles). If the move is very strong you can stay longer in the market. I missed it with my first trade. Anyways, do not allow your profits to become losses in any of your trades. 

So much for breakout trading strategy! Hope to write soon on the subject as we have a pretty interesting week ahead of us with FOMC rate decision and a few other very interesting risk events.

Ok. 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.

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

11 reasons you should buy gold

If you seriously study financial markets: futures, stocks, currencies, bonds and etc. you will notice that there are cycles in those and they are repetitive. Just by understanding this one can use opportunities to invest into securities that start on a bull market and sell those that enter a phase of a bear market. 

There has been a lot of talk (more and more) about gold and urgent necessity to invest into this commodity. A lot of what has been said has been fluff and I do not agree with much what has been said. Some people are simply crazy about investing into gold and say this is the only one and it has been the best one for a long time. It is not true. Since the financial monetary system taken a path of fiat (paper) money gold hasn�t been an asset for a long time and it stagnated for decades while other securities were rising. This choked off many investors from owning gold. 

It wasn�t logical to invest into the commodity twenty years ago. The commodity went nowhere. So, we must admit that it hasn�t been the best place to invest all the time. However, as I have said there are various cycles in markets and just before gold went into stagnatory phase in 1980s it had experienced a huge bull market (the era of brother Hunts cornering silver market). Those that invested then had created fortunes for themselves and those they invested for. Those that did not get out in time lost a lot of money though. 

Another important rally in gold took place 2005-2008 and 2011 up to now. There were some corrections along the way, but the security has awakened and seems to be ready to continue climbing upwards. We are in a major bull cycle for commodity and it will definitely continue in year 2012-2013 too. Let us try to look at the reasons for that in the article. 

1. Printing of money

Somehow most central bankers facing crisis of 2008 and seeing other problems in economy chose the path of solution by means of printing money. You should understand that by doing this they devalue money. When there is a significant increase of money in the market money starts losing value. Your money starts losing value. Maybe you do not like the idea, but it is true. You go to the shop and you see how prices are rising. Why? One of the reasons is that printing of money has done its� ugly job and what you have in your hand can buy much less that it used to. 

Since the establishment of FED (kind of American central bank) the printing of money has been on the rise. So has been inflation. Since that time US has seen less and less deflation and more and more inflation. Deflation has been non-existent since 1973 (the time when US abandoned Gold standard) when printing of money sharply accelerated. Two last chairman of FED board have been notorious inflationists. Ben Bernanke would probably be number one of all times. Always ready to print as much money as necessary. 

That of course, enters economy with interest attached to it. And this ends up with more inflation.

Now, what do smart investors do when they see that their money buys less and less of valuable things? They put into places that preserves and creates their wealth. For thousands of years (since the times when Roman emperors inflated their money) it has been gold. 

Don�t you believe those that present statistics on inflation. It is all wrong. Look at real inflation that happens in daily products and services you pay for on daily basis. That�s where real inflation is. And it is big! Good reason to buy gold!

2. Turmoil in currency markets

We see that debt loads of the nations are on the rise too. This causes currency markets to become more volatile than before. All the commotion about Greeks sent Euro to hell and it has hard time of getting out of there. So, if you own Euros and start travelling around the world you see that it has immensely lost value. The same happened to other currencies. Commodity currencies: AUD, CAD, NZD seem to be doing better, but for how long? If uncertainty prevails in some market investors start getting out of it and investing elsewhere. Gold seems to be a good choice. 

3. Global imbalances in the world

If you look around the world you see a lot of chaos, turmoil and insecurity. Some countries experiencing revolutions: Syria, Egypt, Libya and etc. This creates a lot of problems for businesses and investments as these countries become a problem to travel to. Other geopolitical conflicts and tensions: Iran, Venezuela, and etc. add to the tension as these countries are big exporters of oil and if war conflicts start in the area the world could see serious disruption of oil supply and this as you may understand would push the price of oil to the sky. 

I do not have to explain what will happen to inflation if that happens. That is another good reason to put your money to gold and to protect yourself from money devaluation. 

4. Oil prices are rising

Oil is often regarded as a global currency. It has direct effect on prices you see in your stores. Most industries use oil and the higher the price of it becomes the more production of goods costs, the more you start paying for services. You start seeing domino effect in practice. Everything becomes more expensive. How do you protect yourself? Investing into gold (and possibly oil)! 

5. Giving money to the wrong guys and taking it away from the right guys

The last crisis of 2008 saw an unprecedented event. Well, it had been done before but on a much smaller scale. Governments of the world were trying to save banks and companies that found themselves on the verge of bankruptcy. They took tax payers� money and gave it to those who were not able to do business properly. Who�s problem is it that you are on the verge of bankruptcy? It is your problem. And the right type of capitalism should allow people to go bankrupt. 

Why everybody should suffer, because of some irresponsible top managers (or share holders) were doing their business recklessly. Why take away money from good guys who were working hard, saving and give it to those who are not able to manage their businesses! Nobody puts good money and puts it together with bad money. This is a crucial investing mistake. This is perverting economic and financial principles. This is perverting market. It will have serious consequences long term. But this has been done and putting your money into gold is another way to preserve it from inflationist governments and reckless short sighted corrupt politicians. 

6. It will never go bankrupt

Have you ever thought about it? Any company (even the best of the best), government (the best of the best) can go bankrupt. This would mean you would lose all of your investments if you did not manage to get out of your position in time. Companies come to stock exchange and they go out of it. It takes a lot of time to do an individual company analysis to verify whether it is good to invest in or not. 

Gold, on the other hand, will never go bankrupt. It is a commodity that we will always need. The only possible negative scenario is that we can consume all of it and there will be no more of it left on the planet earth. It may happen at some point. However, we still have it and the price of it is going north. 

7. Demand for gold as well as for other commodities is growing

For over four or five years demand for gold has been surging. Suppliers are not able to satisfy the demand. They have orders for months ahead and it is becoming more and more difficult to order large amounts of bullions or coins and get it fast. 

Emerging markets: China, India, Brazil and others are buying gold in huge quantities. Chinese have a huge stack of US dollars hanging on their shoulders and they do not feel secure about it. Therefore, government of China has been encouraging its� citizens to buy precious metals to protect their wealth. 

India has also been importing fabulous amounts of gold over the years. Most of it goes to jewelry production, but it is also used as a source of investment. 

You might wonder why the price has been stalling for so long if the demand for the commodity is so high. Banks have been selling �paper gold� for 

8. Gold mining is decreasing

Gold mining is becoming more and more difficult as old gold mines are being depleted and new ones are not found. It is becoming more and more difficult to extract and produce gold at such conditions gold miners are today. If you dug deeper into subject you would see what I am talking about. 

The same can be said about oil. Arabs used to take it from the surface of the earth very easily. Now, they have to go deeper and deeper. It requires better technology and not everybody has it these days. So, it is becoming more and more expensive to take gold out and this causes production of gold to decrease. Now, with a great demand and weak supply you will definitely have gold prices surging sooner rather than later.

9. Global economic collapse is coming

Recent events in Europe (Greece, Spain, Italy, and Ireland) cause serious concern for most investors. There have been a lot of talks about Greece default. If you dig deeper into the question you will see that quite a few nations of the world are sitting on the threshold of default. It is only the question of �when�, not of �if�. 

Look at Greece. They were given money more than a year ago. Where are they know? In much deeper problems then they were before money was given. You cannot solve the problem of debt with more debt (imagine solving a problem of adultery with more adultery). If you want to get out of a pit, stop digging. However, governments did just the opposite. They decided to get out of the pit by doing more digging. Ok, now they will have to dig more and faster! The end is clear. 

Economy will collapse and some countries may start coming back to their regional currencies rejecting Euro. The change will be very painful as the governments will have to devalue their money to get rid of debts. Who will suffer? Ordinary people! Gold will be the safe haven for most. The sooner one understands that the better it will be. 

The second wave of crisis is on its� wave and it will probably happen this autumn (Fall). Hope we will not be found unprepared. 

10. Trust in gold is coming back

If you browse internet and even listen to mass media you will find that more and more people get interested in other type of safe investments than governmental bonds or share of such huge corporations such as Microsoft. Even very famous investors such as Jimmy Rogers or Marc Faber are talking about diversifying your portfolio with gold and silver. 

Seeing that you should not doubt about your long term choices as far as safe investments go. Gold should be number one on the list. 

11. It is not overbought yet

You may hear a lot of voices about �bubble� in gold. There cannot be any sound reason for a bubble. If we take into account annual inflation and the peak of gold that was made in 1980�s we could clearly say that the price of gold should be around 5000 dollars per ounce and it would still not be a �bubble�. The price of it has always been suppressed. And it still is by huge market whales that manipulate financial markets. It is not a bubble. It has not reached its� real value in terms of inflated dollars yet. 

Conclusion

So, as you may see there are a lot of reasons to buy gold. It does not mean you will always carry a profitable trade, but in times like these you will surely protect your capital and in the long run you will preserve and create wealth. Good luck in making your own investment decisions. Hope the article was helpful. If it was I would be grateful if you tweeted it, liked on Facebook or any other social media. Thanks for reading.