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.

Related posts:

Wedge technical pattern

How to do technical chart analysis

Six key elements of technical analysis

Triangles

Head and shoulders

If you want to see and experience what real investing in financial markets such as Forex, stocks and commodities is all about I recommend trying innovative social investment platform of Etoro. Initial deposits are as low as a few hundred bucks. The best dealer I have heard of so far!

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

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.

Wedge technical chart pattern

I want to start a series of articles on various technical chart patterns. I do believe that if you learn them and start applying in your trading you will significantly increase your chances of making stable money in financial markets. I have recently finished one series on different market conditions: calm trend, calm range, volatile trend and volatile range and I would suggest that you read those very carefully at least once. You should find a lot of useful practical tips in each article. Now, this article will cover a pretty power technical pattern: wedge. I like trading this one as we usually have a very powerful breakout out of the pattern and prices move very strongly and fast when a wedge is broken. So, let us analyze what this pattern is and how you can successfully trade it. 

What is a wedge? It is a technical pattern with a narrowing range within two converging trendlines (that slant in upward or downward direction (depending on the type of a pattern: upward or downward)) and that usually indicates an end of a trend that can be traced in the pattern itself. It means that if you have a falling wedge (prices are going down) the breakout will most probably be upwards. Price moves between the two trendlines and the narrowing range builds pressure for an upcoming breakout. If you have a rising wedge (prices are going down) the breakout will most probably be upwards. Well, maybe the explanation was kind of difficult, but when you see the examples you will clearly understand what the pattern is like. 

Falling wedge

Falling wedge is recognized as a bullish technical chart pattern. You can clearly see converging trendlines in the pattern that has a downward direction. The range is narrowing towards the end of the pattern and most often than not prices break upwards starting a new trend or continuing a previous one. 

The example above in usd/jpy pair clearly shows us a nice falling wedge pattern. As the price was moving down and the range of the wedge narrowing increasing pressure and finally causing the pattern to be broken upwards with an explosive move. The pair moved around 600 pips when the upper trendline of the wedge was broken. That is precisely what you are looking for. You expect the upper trendline to be broken in a wedge. If it is not, the pattern is finally distorted and loses its� validity. 

How to trade a falling wedge?

You need to place a buy stop order above the closest point where the price hit the upper trendline and then retraced. If it failed to reach the lowest low (of the pattern) you place the stop loss a few pips below the retracement (from the upper trendline). In the example above you can see that the point for entry in usd/jpy was 93.68 level (a few pips above that) since that was the place where the price hit upper trendline and retraced. The price however failed to reach previous low and started rising again. The lowest point of retracement marked a level where we need to place our stop loss order. In our case that would be 92.71 level (a few pips below that). Open your chart to find out yourself entry and stop levels for the trade. You either exit your trades by moving stop loss as the price moves in the direction of the trend till the stop is hit or you exit your trade at a predefined level. In the latter case you still need to move your stop in order to protect your profits. 

Rising wedge

Falling wedge is recognized as a bearish technical chart pattern. You can clearly see converging trendlines in the pattern that has an upward direction. The range is narrowing towards the end of the pattern and most often than not prices break downwards starting a new trend or continuing a previous one. 

The example above in eur/usd pair shows an excellent rising wedge pattern. As the price was moving up and the range of the wedge narrowing increasing pressure and finally causing the pattern to be broken downwards with an explosive move. The pair moved around 900 pips (with minor retracements) when the lower trendline of the wedge was broken. That is precisely what you are looking for. You expect the lower trendline to be broken in a wedge. If it is not, the pattern is finally distorted and loses its� validity. 

How to trade a rising wedge?

You need to place a sell stop order below the closest point where the price hit the lower trendline and then retraced. If it failed to reach the highest high (of the pattern) you place the stop loss a few pips above the retracement (from the lower trendline). In the example above you can see that the point for entry in eur/usd was 1.3203 level (a few pips below that) since that was the place where the price hit lower trendline and retraced. The price however failed to reach previous high and started falling again. The highest point of retracement marked a level where we need to place our stop loss order. In our case that would be 1.3243 level (a few pips above that). Again, you either exit your trades by moving stop loss as the price moves in the direction of the trend till the stop is hit or you exit your trade at a predefined level. In the latter case you still need to move your stop in order to protect your profits. As you may see your stop loss was only 45 pips and the potential profit very big (900 pips). So, when you see a wedge forming next time get ready to take a trade.

Time frames

Some say that the pattern has to be three or six months in length and I could not agree less. You will notice those patterns on various time frames. If it is a continuation pattern and a wedge is formed in a counter trend move you would usually see it on hourly chart and that may last a few days. And then you have a nice breakout in the direction of the prevailing trend. On a longer term chart (lasting months and weeks) the pattern will probably signal a reversal and a change of trend. 

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:

How to do technical chart analysis

Six key elements of technical analysis

Triangles

Head and shoulders

If you want to see and experience what real investing in financial markets such as Forex, stocks and commodities is all about I recommend trying innovative social investment platform of Etoro. Initial deposits are as low as a few hundred bucks. The best dealer I have heard of so far!

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

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.

Forex news trading: BOA rate decision

Fundamental events always cause a lot of volatility in foreign exchange markets. Interest rate decision events are above the rest as they are key currency drivers both short and long term. Markets often stall and fall into ranges days before these key releases and right after they come out huge moves start. Be aware of that. Of course, general public might be wrong regarding interpretations of these pieces of news, so it is crucial to follow smart money and not be led by emotions of greed and fear. Anyway, if you know how to take advantage of the news trading you can make nice cash in the long term. Let us look at how you could have traded BOA (Bank of Australia) rate decision today and try to speculate whether it will have long term impact or not. 

Since I have moderated my trading news method slightly I did not trade the event. I did expect Australian dollar to rise after the release, but the Central Bank of Australia decided to surprise traders by cutting interest rates. Technically, yes you could see strong demand for British Pound, Euro and other currencies and strong supply of aussie all along. I guess that was the sign for technical traders that smart money knew what the BOA is up to and were buying into the event.

Although, I did not trade the event I want to quickly show you how you could have taken a trade (or trades) in gbp/aud and eur/aud made nice profits. I like these aussie crosses most as they are the most volatile and travel biggest distances when the breaks happen and big moves start. So, let us see how you could have taken a breakout trade in these two pairs.

First, eur/aud. Just before the news the pair was fluctuating in a small range of 1.2744-1.2777. This gave us an area for entry and exit. For a buy you would have placed a buy stop order a few pips above 1.2777 level with a stop below the range of 1.2744 (possibly 1.2740). That would be a stop of forty pips. You should have also placed a take profit target at previous high of 1.2885. I like exiting at previous highs when I buy and previous lows when I sell. So, the news came out and market exploded upwards and reached the target in 7 hours. A little bit over 100 pips of profit! I would say that is a very good risk reward ratio! 

Now, if you wanted to place a sell order just before the news came you simply had to reverse the above mentioned order. You had to place a sell stop below 1.2744 level and stop loss order above 1.2777 level. Then define a take profit target that would have been around 1.2600 level, possibly a little bit higher (1.2610 as I like exiting ten pips before even number). Since the market went up you simply had to remove your sell stop when your buy order was opened and concentrate on your long trade. 

Let us look at how you possibly could have traded gbp/aud pair during the event. Just before the news (3 hours) the pair was fluctuating in a range of 1.5189-1.5161. It means you should have placed  a buy stop above the high of the range (1.5189) with a stop loss below the low of the range (1.5161). What about an exit? One way was to exit at previous high (1.5233). Another one was to exit at mid-point number of 1.5250. Of course, you could still keep the trade, but as you may see you would have lost most of your profit by now. 

What if you wanted to place a sell order? Just reverse the process. Your sell stop order should have been at 1.5161 (a few pips below it) and your stop had to be a few pips above the high of the range at 1.5189 (possibly 1.5195). The most logical place to exit your trade would have been at an even number of 1.5100 (ten pips above that). When you saw that the news was bearish for aussie and your buy stop was triggered you simply had to remove the sell order and ride upwards with the market. 

Looking at the price action now you can also see that these kind of trades can have very short term impact and market may reverse in a few hours, possibly in a few minutes. However, I still find news trading a good way to make extra money with my swing trading strategies. 

Ok, I will finish on this happy note. Be sure to read related articles to learn more on my news trading method. 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.

If you want to see and experience what real investing in financial markets such as Forex, stocks and commodities is all about I recommend trying innovative social investment platform of Etoro. Initial deposits are as low as a few hundred bucks. The best dealer I have heard of so far!

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

Related posts:

10 essential rules for trading Forex news profitably

My top 3 Forex news releases

Short lived momentum reversal trading strategy

When market ignores the news

More on how to trade Forex news

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.

When market ignores the news

Hi, again. I am glad to be back from my short holidays and continue writing about trading. Today I want to continue talking on the topic of news trading. The post will not be long, but I do expect it to be useful. I want to talk about a phenomenon of �ignoring the news�. It is a regular behavior of market movers to ignore good news and continue selling or ignore bad news and continue buying. In a trend this is a sign of a strong trend. In a range it is a sign that market will go in the opposite direction than the news should push it to. 

Example with eur/cad and Canada GDP data release

Let us take an example, so that it would be easier for us to understand the behavior of market �sharks� that are not pushed by any news, but can deliberately push prices where they see them fit to go. On Tuesday, April 30^th (2013) Canada GDP was scheduled to be released at 12.30 GMT. The number was expected to be better than previous month. And it did come better. To tell the truth it came better than expected. Most currency pairs fell to Canadian dollar. However, Euro, Swiss Franc and British Pound resisted. In fact, after about 15 minutes eur/cad went up for about 50 pips and cad/chf fell the same number of pips. gbp/cad basically stayed at the same level. How do you interpret this?

Market ignored good data from Canada in European currencies, because it was ready to buy them against all other currencies across the board. Market wanted to push European currencies upwards and it did just that. Now, how do you know what market wants and what it doesn�t? Well, you look how it reacts to fundamental data. That is a general principle how you should evaluate the short term tendency that market may about to develop. The data that Canada released should have pushed all currencies lower against loonie immediately. If it failed to it against some currencies pairs it simply means those currencies are backed up at the moment and you�d better sell CAD against these pairs. 

You had some 10-15 minutes after the release to make up your mind how to do it. I already had a pre-defined place for my entry, stop and exit for both pairs. However, I decided to trade only eur/cad pair for the event. I did not want to double my risk by trading both eur/cad and cad/chf, so I took only eur/cad. It usually covers bigger distances than cad/chf and this is primary reason why I prefer it to Franc pair.

Why did I look at these pairs in the first place and why I was considering selling CAD, not buying it? I talked about the methods that I used to be bearish in my previous post. I tend to look at technical structure of a currency pair before the news. If it looks bearish I only place a sell order. If it looks bullish I only place a buy order. I believe that smart money always knows where it wants to go and it positions itself for any kind of news good or bad and trades accordingly. So, it may sell on the good news and buy on the bad. This is how financial markets work. 

I saw bearishness in Canadian dollar in eur/cad and cad/chf pairs. eur/cad was lingering near support prior to the news and cad/chf was doing the same stuff near resistance. Cad had already rallied against the two for about two weeks. I noticed that under these circumstances you better look for a reversal rather than continuation of the move. And that�s exactly what happened. Canadian dollar fell against Euro and Franc. I was selling the loonie (and I am still on the short side with a small position). 

How? Look at the 15 minute eur/cad chart below to see that. You should see 123 reversal pattern there. The pair went to form a bottom at 1.3203 (that is 1), it then rallied to form a short term top at 1.3234 (that is 2). It then went to visit previous low and failed to break it at 1.3205 (that is 3) and then the pair broke 1.3234 level 10-15 minutes after the news was released. I went long together with smart money. I tend to exit before even numbers, so I exited my trade at 1.3290 level (ten pips before even number (as usually)). The good part about this trade is that market gave us time to place orders and run together with it. At other times you simply have to place your orders (or just one order in one direction) 2 or 1 minute before the news comes out. And if you are right you might make really nice cash on your news trade. 

Ok, I will finish on this happy note. Be sure to read related articles to learn more on my news trading method. 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.

If you want to see and experience what real investing in financial markets such as Forex, stocks and commodities is all about I recommend trying innovative social investment platform of Etoro. Initial deposits are as low as a few hundred bucks. The best dealer I have heard of so far!

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

Related posts:

10 essential rules for trading Forex news profitably

My top 3 Forex news releases
Forex news trading BOA rate decision
More on how to trade Forex news 

Short lived momentum reversal trading strategy

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.