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How to Trade the Head and Shoulders Pattern 2

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In yesterday’s lesson we looked at the head and shoulders pattern and the reverse head and shoulders pattern; two reversal patterns that you look for at the end of up trends and the end of down trends to signal their reversal. In today’s lesson we are going to look at a specific strategy with entry and exit points for how to trade those chart patterns. So let’s get started.

Let’s start by looking at the strategy for trading the head and shoulders pattern. There’s our head and shoulders pattern that we looked at in the last lesson and the basic strategy here is we’re going trade the break of the neckline. If you remember from our last lesson, once the neckline is broken the pattern is said to be in place. And if you’re looking at an uptrend there and you see that then there’s a good indication there on the break of that neckline and the formation of the head and shoulders pattern that that trend is going to reverse. So we’re going to look to enter short on the break of the neckline.

The target for the trade we are going to get by measuring the distance from the head of the pattern to the neckline, then we’re going to project that down from the break point of the neckline. So after entering the trade on the break, we are going to place our stop-loss just above that right hand shoulder there which is considered the closest resistance.

So, you can see there how we are trading the break of support and then we’re placing our stop-loss just above the nearest resistance level. So let’s look at it here. So we get 430 points by measuring the distance there. We project that downward. After entering on the break, 430 point target there.

We place our stop-loss just above the right hand shoulder. For further confirmation that this is a good trade or a good pattern to enter on, traders are going to look at two things. Firstly, they are going to look for a downward sloping neckline that you can see here.

We have in this pattern as this is further indication that the market is reversing. If that neckline was upward sloping than that would be a sign that this might not be a good pattern to trade this time but since its downward sloping, it looks like it’s a good one to trade.

The second thing they are going to look for is declining volume on each of the rises up. So volume on the head should be lower than volume on the first shoulder. And volume on the right hand shoulder should be lower than the volume going up into the head.

Lastly, traders are going to look for increasing volume on that break of the neckline to verify that that’s a valid break of the support line there. OK, the reverse head and shoulders is basically the mirror image of the opposite of the head and shoulders.

We also are going to get our projected target by measuring the distance from the head to the neckline. We enter on the break there of the resistance this time since we’re flipped upside down.

Project our 610 point target from the break of the resistance line or the neckline there. And then put our stop-loss just above the right hand shoulder there as that is considered the nearest support level.

You can see how that’s sort of a flip or a mirror image of the head and shoulders pattern. Similarly to the head and shoulders pattern, on the reverse head and shoulders pattern traders are going to look for decreasing volume going into the head and then decreasing volume again going into the right hand shoulder.

And this time instead of a downward sloping neckline we are going to look for an upward sloping neckline to indicate and give us further confirmation that the pattern is in place and this might be a good pattern to trade.

Also similarly to the head and shoulders pattern we are going to look for increasing volume on the break of the neckline as further confirmation that that is a true break there. So that’s our lesson for today.

You should have a good understanding of the head and shoulders pattern and the reverse head and shoulders pattern as well as the strategy for trading each of them.

In our next lesson we are going to finish up on reversal patterns by looking at the rising wedge and falling wedge patterns and then we are going to move on to continuation patterns after that.

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The 4th lesson in a series on charting patterns which looks at how to trade the head and shoulders pattern and the reverse had and shoulders pattern for daytraders.

How to Trade the Wedge Chart Pattern Like a Pro

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In our last lesson, we looked at specific strategies for trading the head and shoulders pattern and the reverse head and shoulders pattern, two patterns which can be considered reversal patterns when they show upon a chart. In today’s lesson, we’re going to look at something which is known as the wedge pattern, which is unique in the sense that it can be considered either a reversal or a continuation pattern depending on the shape of the pattern and whether it occurs in an uptrend or a downtrend. So let’s get started.

We’re going to start this one out by looking at the falling wedge pattern which is characterized by a pattern which forms when the market makes lower lows and lower highs, with a contracting range. When you find this pattern in a downtrend it’s considered a reversal pattern as the contraction of the range indicates the downtrend is losing steam. When you find this pattern in an uptrend, it is considered a bullish pattern as the market becomes narrower into the correction, indicating that it is running out of steam and the resumption of the uptrend is in the making.

You see here a chart of the dollar index. And you see the downtrend in place there. You can see the falling wedge in place there. And you can see the two lines, the two trend lines coming together as the pattern or the market continues into the downtrend, indicating a contraction of the range and a potential reversal there — which we did actually get, in this instance.

On the opposite side of that, you see the uptrend on the left hand side of the chart here. You see the falling wedge there. You see the contraction of the trend lines on one another, indicating the correction narrowing into the bottom there and indicating a potential continuation of the uptrend. So the market corrects then turns back around into the original uptrend. So you can see why it’s considered a continuation pattern there.

The rising wedge pattern, on the other hand, is characterizes by a pattern which forms when the market makes higher highs and higher lows with a contracting range. When you find this pattern in an uptrend it’s considered a reversal pattern as the contraction of the range indicates that the uptrend is losing steam. When you find this pattern in a downtrend it’s considered a bullish pattern as the market becomes narrower into the correction, indicating that the correction’s running out of steam, and the resumption of the downtrend is in the making.

See here rising wedge. See the start of the downtrend to the left of that. See the break below in the continuation of the downtrend on that. You see the contraction of the two lines together, two lines coming together there. Contraction of the market trend indicating it’s losing steam or that the correction is losing steam and a resumption of the downtrend.

Here we have the uptrend in place. On the left hand side of the chart we see the rising wedge. At the top of that indicating that uptrend is losing steam. And we see the reversal actually coming into play there, as well on this one.

So that’s our lesson for today. You should now have a good understanding of the falling and rising wedge patterns in situations which they’re considered a reversal pattern and continuation pattern.

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The 5th lesson in a series on charting patterns which goes over the rising and falling wedge patterns.

How to Trade the Flag/Pennant Patterns Like a Pro 2

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In our last lesson we looked at the flag and pennant chart patterns, two patterns which can be considered continuation patterns when they show up on a chart. In today’s lesson we’re going to look at specific strategies for trading each of these patterns complete with entry and exit points. So, let’s get started.

When you spot a flag pattern in an up trend, this is a bullish sign as the market consolidation which forms the flag is seen as a pause before a resumption of the original up trend. As this is the case when traders spot flags in up trends, they’re going to commonly look to enter a long position.

The point at which they’re going to look to get long is going to be the break point of the upper resistance line of the flag and then the target for the trade is calculated by measuring the flag pole or the distance between the high point of the run up and the low point of the run up that forms the flag and then projecting that distance upward from the break of the top resistance line, alright? The stop is then placed just below the bottom support line of the flag.

We’ve got our chart of rim up from last lesson and we have our bull flag there that we looked at in last lesson. And, we see the break here of the upper resistance line. So, that’s where we’re going to look to get long.

The target for the trade is being calculated by measuring the distance between the top of that pattern there or the top of the run up and the bottom of the run up. You can see it starts there at the bottom with the flag pole and then you can see the top candle there in the middle of the flag.

So, we get 27 points there by subtracting 53, the low, from 80, the high. And, that’s our target for that buy. And then, we place our stop just below the support line there, OK. The strategy for trading the bull pennant is exactly the same as trading the bull flag with one exception and that’s where the stops place. So, let’s look at this.

We have our pennant here. Same thing here as far as we’re looking for a break of the upper line of the pennant just like we did with the flag we have that there. Then we look for the distance between the high point of the move up and a low point and we subtract the low point from the high point, we get three points on the move there.

That is our target for the trade. And then, the stop this time is placed just below the closest troth in the pennant pattern. So, that’s what’s considered the nearest support level there since you have the two conversing trend lines there. So, an important distinction.

OK, the bear flag strategy is similar to the bull flag strategy, it’s just flipped upside down. So, we have our bear flag here. We measure the distance, or sorry, we have the break of the bear flag to the down side, so we’re looking to get short there.

We measure the distance from the top of the move down to the bottom. And we subtract those, we get 15 points. And, that is our target from the break point down when we get short, and then we place our stop just above the resistance line. The bear pennant strategy is exactly the same as the bear flag strategy with the stop being the only exception there again. So, let’s look at this.

We have our bear pennant here. We have the break there to the down side of the pennant, so that’s where we’d look to get short. We measure the distance of the move there, that move downward that’s several candlesticks long. We get seven points is the distance there. So, that’s our target for our short trade. And then, the stop is placed just above the closest peak to the end of the pattern there.

A couple other things to keep in mind here, just as we learned in some of our other lessons, that traders often use volume for confirmation, and this is no exception. Traders like to see volume diminish as the flag and pennant patterns mature and then like to see volume increase on the break of the support or resistance line depending on whether we’re looking at a bull or bear pattern for additional confirmation that this is a good pattern to trade.

You should have a good understanding of how to recognize flag and pennants on a chart and then how to trade each of those patterns. In tomorrow’s lesson we’re going to look at another continuation pattern which is known as the triangle which is similar to the flag and pennant.

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The second lesson in a two part series on trading strategies for trading the flag and pennant chart patterns.

How to Trade the Hammer Hanging Man Candlesticks

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In our last lesson we learned about the bullish and bearish engulfing candlestick patterns. In today’s lesson I’m going to look at two more reversal patterns, which are known as the hammer and the hanging man candlestick patterns. So let’s get started.

The spinning top and doji, which we’ve studied in previous lessons, the hammer candlestick pattern is made up of one candle. The candle looks like a hammer as you can see here, as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for the candle to be considered a valid hammer, most traders will say that the lower wick must be at least two times greater than the size of the body portion of the candle. And the body of the candle must be at the upper end of the trading range.

When you see the hammer form in a downtrend, this is a sign of a potential reversal in the market as the long lower wick represents a period of trading where the sellers were initially in control. But the buyers were able to reverse that control and drive prices back up to close near the high for the day. Thus the short body at the top of the candlestick there.

After seeing the pattern form in the market, most traders will wait for the next period to open higher than the close of the previous period to confirm that buyers are actually in control of the market. That’s pretty much true with any pattern that’s one candlestick. Most traders are going to wait for confirmation on the next period of trading before taking any action as a result of the pattern.

Two additional things that traders are going to look for on this one is, like some of the other patterns we’ve looked at, a long lower wick is going to increase the significance of the pattern. As well as an increase in volume on the period that forms the candle is also going to increase the significance of this pattern.

So let’s look at a chart here. You’ve got a chart of research in motion here, and we see we have a downtrend in the market. Then we have the hammer, which we can see formed here. Then we have increase in volume. On the day that formed the hammer we have the next candle, which opens higher than the close of the candle that formed the hammer. Then we do have a rally that comes after that in this specific example.

The hanging man is basically the same thing as the hammer, but instead of being found in a downtrend it’s found in an uptrend. Like the hammer pattern the hanging man has a small body near the top of the trading range, little or no upper wick, and a lower wick that is at least two times as big as the body of the candle.

Unlike the hammer, however, the selling pressure that forms the lower wick of the candle and then the candle closing in the upper end of its range is indicative more so of a sign of a potential reversal to the down side because the selling pressure is not anticipated in the uptrend.

The hammer, the selling pressure that forms a lower wick is expected because you’re in a downtrend, here the selling pressure is not expected, which forms the lower wick of the hanging man. So that’s a warning sign that there is selling pressure in the market. Especially if you’re in an overbought condition, those types of things you may start looking for a reversal there.

As with the hammer and as we said with most one-candle patterns, we’re going to wait for confirmation or most traders are going to wait for confirmation that selling pressure has in fact taken hold by watching for a lower open on the next candle. Traders are going to place additional significance on the pattern when there’s an increase in volume during the period that the hanging man forms as well as when there’s a longer wick.

Let’s take a look at an example of a chart here. We’ve got the uptrend, and then we have overbought conditions. You can see the market ran up there pretty significantly. We have the hanging man there. We don’t have an increase in volume on this one, but we do have the lower open on the next candle and an increase in volume driving that candle down lower really significantly.

A reversal pattern in play there, and obviously hindsight is 20/20 on this one. We may have missed out on that one had we been trading it live, but you can see a good example of a situation where the hanging man formed there.

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How to trade the Hammer and Hanging Man Candlestick Chart Patterns for active traders. Like the Spinning Top and Doji which we have studied in previous lessons, the Hammer candlestick pattern is made up of one candle.

The candle looks like a hammer as it has a long lower wick and a short body at the top of the candlestick with little or no upper wick. In order for a candle to be a valid hammer most traders say the lower wick must be two times greater than the size of the body potion of the candle, and the body of the candle must be at the upper end of the trading range. When you see the Hammer form in a downtrend this is a sign of a potential reversal in the market as the long lower wick represents a period of trading where the sellers were initially in control but the buyers were able to reverse that control and drive prices back up to close near the high for the day, thus the short body at the top of the candle.

After seeing this pattern form in the market most traders will wait for the next period to open higher than the close of the previous period to confirm that the buyers are actually in control. Two additional things that traders will look for to place more significance on the pattern are a long lower wick and an increase in volume for the time period that formed the hammer.

How to Trade Bollinger Bands

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In our last lesson we learned about the stochastic oscillator, an indicator which helps us gauge momentum in the market. In today’s lesson we’re going to learn about Bollinger Bands, an indicator which helps us gauge the volatility in the market, as well as how high or low prices are relative to their historical price action. So, let’s get started.

Bollinger Bands are comprised of three bands, which are referred to as the upper band, the lower band and the center band. The center band is a simple moving average which is normally set at 20 periods and the upper and lower band represent chart points that are two standard deviations away from the moving average.

Bollinger Bands are designed to give traders a feel for what the volatility is in the market and how high or low prices are relative to the recent past. The basic premise of Bollinger Bands is that prices should normally fall within two standard deviations represented by the upper and lower band of the mean, which is the center of moving average line.

As this is the case, trend reversals often occurred near the upper or lower bands. As the center line is a moving average which represents the trend in the market, this line will also frequently act as support and resistance.

The first way that traders use the indicator is to identify potential over bought and over sold places in the market by watching for touches of the upper and lower bands or trading outside of those bands which tend to represent extremes.

Although some traders in the market use a close outside the upper or lower band as buy and sell signals, John Bollinger, who developed the indicator, recommends that this method should only be traded with the confirmation of other indicators.

Outside of the fact that as we’ve talked about in previous lessons, most traders would recommend confirming signals with more than one method. With Bollinger Bands, specifically prices tend to hug or even trade outside of the upper or lower band for long periods of time, specifically in strong up trends or down trends. And that’s obviously not a situation where you want to be positioning for a reversal.

Selling the upper band at the lower band is a technique that if you are going to use, and actually a pretty good technique if used with other indicators in range band markets. OK, so that’s what we’re going to look at here.

You can see here is a chart of the QQQQs, which is the NASDAQ ETF. And you can see here we have a ranging market there. We have a trending market here. And you can see that in the ranging market, we had multiple touches of both the upper and lower band, but in the trending market it was hugging the upper band for a good portion of that time.

Now, the trade set up here, we could look at, you know, just buying or selling on a touch of the upper and lower band, but a better method would be to combine with another indicator which I’ve done with RSI here, which we learned about two lessons ago, and you can see that you’ve got a divergence here as price moves up to a new high, but RSI does not confirm.

So, that would be your sell point and then the buy point would be when the, or the close would be when the market pulls back off of the lower band because in range bound markets, we’re anticipating that a move that starts at one end of the, or one extreme, the high band is going to move all the through to the low extreme, which is going to be low band.

And so, we don’t want to get out of the trade before it’s finished following through. If it goes into a down trend, it continues to hug that bottom line, we want to be in that trade so we’re going to wait for a pull back off of the bottom Bollinger Band line.

The second method is what’s known as the Bollinger Band contraction. And in general, after there are periods of low volatility in the market, the market tends to rally rather significantly because, as we’ve learned in some of our other lessons, periods where the market doesn’t move that much up or down are an indication that neither the bulls nor the bears are winning. So, when one side does win, the market tends to move pretty dramatically in the direction of the winning side whether that be up or down.

Low volatility is obviously represented by contracting Bollinger Bands and high volatility would be represented by widening Bollinger Bands.

You can see here we have a contraction in the Bollinger Band there and then we have a break above the top Bollinger Band meaning that the buyers have won out in this situation and we have a nice run up after that.

Now, be careful when you’re trading this strategy because if you do trade this strategy because a lot of traders say that the first break above or below the Bollinger Band line tends to be a fake out. So, it actually reverses and goes in the opposite direction. A lot of traders will trade the second break to avoid getting faked out and pulled into a trade in the wrong direction.

Bollinger Bands, because they’re an indicator which is plotted on price, are just a good indicator to use with other things such as some of things that we’ve learned so far here. So, by looking at this chart and if you’ve been through some of our other lessons, you should be able to identify the double top there.

You should also be able to identify the divergence in that top, which is represented by the relative strength index meaning that not only do we have a double top, but going up into that second double top, there was a loss of momentum compared to the first top.

You can also see a touch of the Bollinger Band there and that represented a pretty good move down in the market after that.

Now, there are lots of resources out there because Bollinger Bands is one of the most popular indicators.

As always, now that we’re talking about strategies and everything, remember that trading is risky. Nobody, certainly not me, can guarantee profits. You should design your own strategies. This is just meant for information purposes. Make sure you do your homework before getting into the market and make sure that you’re only trading with risk capital and that trading fits into your investment profile, OK?

In our next lesson we’re going to learn about something called the ADX, or the Average Directional Index, which is going to help give us an indication of the strength of the trends in the market – strength and weakness of trends in the market. So, we hope to see you in that lesson.

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A Lesson on Bollinger Bands for active traders and investors using technical analysis in the forex, futures, and stock markets.

The link that I refer to on Standard Deviation is here.

In today’s lesson we are going to learn about an indicator which helps traders gauge the volatility and how current prices compare to past prices. Bollinger Bands are comprised of three bands which are referred to as the upper band, the lower band, and the center band. The middle band is a simple moving average which is normally set at 20 periods, and the upper band and lower band represent chart points that are two standard deviations away from that moving average. Example of Bollinger Bands: Bollinger bands are designed to give traders a feel for what the volatility is in the market and how high or low prices are relative to the recent past.

The basic premise of Bollinger bands is that price should normally fall within two standard deviations (represented by the upper and lower band) of the mean which is the center line moving average.

Morning/Evening Star Candlestick Pattern

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In our last lesson, we looked at the Hammer and Hanging Man Candlestick patterns; two patterns which can be considered reversible patterns when seen in an uptrend or a downtrend. In today’s lesson we’re going to look at two more reversible patterns, which are known as the Morning and Evening Star. So, let’s get started.

OK, so the Morning Star is a pattern which is made up of three candles: a long black candle followed by a short, wider black candle, which is then followed by a long white candle. In order to have a valid Morning Star formation, most traders will look for a close of the third candle that is at least half way up the body of the first candle in the pattern.

When found in a downtrend, this pattern can be seen as a powerful reversible pattern. If you look at what this represents from a supply and demand standpoint, you can understand why. What you have here is the downtrend accelerating here with the period represented by the long black bar.

And then you have a period of indecision. In this case it’s a doji, if you remember that from our previous lesson on those patterns. But it could be any short candle. It doesn’t have to be a doji. And then you have a long, white candle representing buyers taking control after that star of indecision; that star portion of the pattern.

Unlike the Hammer and the Hanging Man, which we learned about in our last lesson; as the Morning Star is a three-candle pattern, traders will, oftentimes, not wait for confirmation from the fourth candle before considering this a valid pattern.

And, in addition, traders will look to the size of the candles for an indication of how big the potential reversal might be. Basically, what they’re saying here is the larger the white and black candle, the larger the potential for reversal, and the larger that reversal may be. And the more that the white candle goes up into the body of the black candle, the greater the potential for reversal, and the larger the reversal is expected to be.

Here’s what this looks like on a chart. You can see here, we’ve got the downtrend in place. And then we have the Morning Star. Ideally, we’d like to see a little larger black candle there on the left hand side, but this is still a valid pattern here, and especially since we’ve got such a large uptake in volume on the move upward, where the buyers are taking control. That should be an eye-opener there that, potentially, something’s changing, in terms of the trend there.

The Evening Star is, basically, the exact opposite of the Morning Star. When it’s found in an uptrend, it’s considered a reversal pattern. And what you’ve got here is a long white candle showing the acceleration of the uptrend. And then a short candle, again here, it doesn’t have to be a doji, representing indecision in the market after that big upshot in the market.

And then you’ve got the long black candle, indicating that sellers are taking control of the market, and there’s a potential reversal in the making there. Here again, just like with the Morning Star, the close of the third candle needs to be at least half way down the body of the first candle.

And as with the Morning Star, as well, a lot of traders will not wait for a fourth candle for confirmation before considering this a valid pattern. And the same rules apply for the length of the candles, in terms of the potential for trend reversal, and the size of that potential reversal.

The longer the white and black candles are, the larger the potential reversal may be. And also, the more the black candle goes into the body of the white candle, the stronger the reversal is thought to, potentially, be.

OK, so, just a quick example here of the Evening Star. We’ve got an uptrend here in place. And we’ve got a three candle Evening Star pattern there, and the sell-off that occurs after that. Just as with the Morning Star, you don’t want to have volume confirmation there. And the more things you have, as with everything that we go over, confirming that there’s a potential reversal in place, the better. All right?

All right, that completes our lesson for today. In tomorrow’s lesson, we’re going to finish up our series on Candlestick Patterns, with a look at the Shooting Star and the Inverted Hammer pattern. So, we hope to see you in that lesson.

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How to trade the morning and evening star candlestick chart patterns for active traders and investors.

In our last lesson we looked at the Hammer and Hanging Man Candlestick Chart Patterns. In today’s lesson we are going to look at two more reversal candlestick patterns which are known as the Morning and Evening Star.

The Morning Star Pic The Morning Start Candlestick Pattern is made up of 3 candles normally a long black candle, followed by a short white or black candle, which is then followed by a long white candle. In order to have a valid Morning Start formation most traders will look for a close of the third candle that is at least half way up the body of the first candle in the pattern. When found in a downtrend, this pattern can be a powerful reversal pattern.

What this represents from a supply demand situation is a lot of selling into the downtrend in the period which forms the first black candle, then a period of lower trading but with a reduced range which forms the second period and then a period of trading indicating that indecision in the market, which is then followed by a large up candle representing buyers taking control of the market.

Unlike the Hammer and Hanging Man which we learned about in our last lesson, as the Morning Star is a 3 candle pattern traders often times will not wait for confirmation from the 4th candle before entering the trade.

How to Trade the MACD Indicator

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Today’s lesson will look at an indicator which is based on moving averages which is known as the Moving Average Convergence/Divergence. So let’s get started.

One of the advantages of using the MACD indicator instead of the moving averages is that the MACD gives you an indication not only of what’s happening with trends in the market but also what’s happening with momentum, so you’re given an addition to the picture there that this indicator paints for you. The indicator is constructed by taking a 12-period exponential moving average of a financial instrument and subtracting its 26-period exponential moving average. The resulting line is then plotted below the price chart and fluctuates above and below a center line which is placed at value zero. A nine-period exponential moving average of that MACD line is normally plotted along with the line and is used as a signal of potential trading opportunities which we are going to look at in our next lessons.

Look at what this looks like on a chart. You can see here the MACD below the price chart and you can see here the black line is the MACD line and the blue line is the nine-period exponential moving average of that black MACD line which is the signal line. OK.

Now, when the MACD line is above zero this tells the trader that the 12-period exponential moving average is trading above the 26-period exponential moving average and when the MACD line is below zero this tells the trader that the 12-period exponential moving average is below the 26-period exponential moving average.

So that it is the simplest, the first thing that this is, is an easier way to look at a moving average crossover system. Traders are going to watch the MACD line and when it’s above zero and rising, they’re going to look at this as a sign of positive bullish momentum in the market as the gap, the positive gap, between the exponential moving averages is widening.

When it’s below zero and falling, they’re going to look at this as a bearish sign for the market as this indicates that the negative gap between the two moving averages is widening. So you can see here the MACD line is above zero and rising and that is bullish and you can see here it is below zero and falling and that is bearish, so it did play out there for us.

The purpose of the nine-period exponential moving average is to further confirm the bullish changes in momentum when the MACD crosses above the zero line and the bearish changes in momentum when the MACD crosses below the zero line. You can see here the MACD crossing above the signal line is further confirmation that there’s a bullish momentum in the market.

You can see here it crossing below and it actually crosses below at the top peak of the market there and that was a bearish sign and that was a very good signal that this particular indicator caught to the bearish side because the market did sell off after that. Lastly, mini-traders and charting packages will plot a histogram along with the MACD which is representative of the distance between the MACD and its signal line.

When the MACD histogram is above the zero line, this is an indication that positive momentum is increasing. Conversely, when the MACD histogram is below the zero line, this is an indication that the negative momentum is increasing. OK.

You should now have a good understanding of the different components of the MACD and in our next lesson we’re going to look at exactly how you can use some of the signals that this indicator generates in your trading and how you can use those actually to place trades and how you can actually use the indicator to get it a feel for direction in the market and momentum in the market.

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How to trade the Moving Average Convergence Divergence (MACD) in the stock, futures, and forex markets. The indicator, which was developed by Gerald Appel, is constructed by taking a 12 period exponential moving average of a financial instrument and subtracting its 26 period exponential moving average.

The resulting line is then plotted below the price chart and fluctuates above and below a center line which is placed at value zero. A 9 period EMA of the MACD line is normally plotted along with the MACD line and used as a signal of potential trading opportunities in the stock, futures and forex markets. When the MACD line is above zero this tells the trader that the 12 period exponential moving average is trading above the 26 period exponential moving averages.

When the MACD line is below zero this tells the trader that the 12 period exponential moving average is below the 26 period exponential moving average. Traders will watch the MACD line as when it is above zero and rising this is a sign that the positive gap between the 12 and 26 EMA’s is widening, a sign of increasing bullish momentum in the financial instrument they are analyzing.

Conversely when the MACD line is below zero and falling this represents a widening in the negative gap between the 12 and 26 day EMA’s, a sign of increasing bearish momentum in the financial instrument they are analyzing.

See Trade the MACD Indicator Like a Pro Part 2 >>

How to Trade Triangle Chart Patterns

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In our last lesson we learned about the flag and pennant chart patterns as well as strategies for trading each when we find them in an uptrend or down trend. In today’s lesson, we’re going to look at a similar chart pattern which is known as the triangle chart pattern, so that we can then learn some strategies for trading this chart pattern.

The triangle pattern can be broken down into three categories. And these are the ascending triangle, the descending triangle, and the symmetrical triangle. While the shape of the triangle is significant, of more importance is the direction that the market moves when it breaks out of the triangle. Lastly, while triangles can sometimes be reversal patterns, they are normally seen as continuation patterns. So let’s take a look here. Start with the ascending triangle here, and the ascending triangle is formed when the market makes higher lows and the same level highs. OK. These patterns are normally seen in an uptrend and viewed as a continuation pattern as the bulls gain more and more control running up to the top resistance line of the pattern. While you normally see this pattern in an uptrend, if you do see it in a down trend, it should be paid special attention to as it can be seen as a powerful reversal signal if it does show up in a down trend.

Chart of Walgreen Company here. And you see the higher lows there. All right. And then you see the same level highs. And what that indicates there is that as the market and the buyers continue to bump up against that top resistance line, you can see they’re gaining more and more control.

As the market does sell off but it sells off less and less as the pattern matures, indicating that the buyers are getting more and more control. And therefore, a lot of traders are going to look for a break out there of the top line to be imminent in that situation.

The descending triangle is basically the opposite or the ascending triangle flipped upside down. So you can see that this is formed when lower highs and the same level lows are made. These patterns are normally seen in a down trend and viewed as continuation patterns as the bears gain more and more control running down to the bottom support line, in this case, not the resistance line.

And while you normally see this pattern in a down trend, like the ascending triangle, if you do see this in the opposite trend, which is the uptrend in this case, you should pay special attention because this can be seen as a powerful reversal signal.

We have a chart of the dollar/yen here. And we see the lower highs there and then the same level lows. So you can see, basically, flipped upside down there. And again here, what the market is showing from a supply/demand perspective and why this pattern is paid attention to is because as the lower highs are made, it indicates that the buyers are having less and less control running down into the support line. And the sellers are getting more and more control and therefore, a lot of traders will look at that as the break at that bottom support line is imminent there.

The symmetrical triangle is unique in the sense that a lot of times you’re going to see this, not in the uptrend or a down trend, but in a directionless market as neither the bulls or the bears or the buyers or the sellers are in control of the market. So we see a contracting range and a directionless contracting range. So unlike the rising or falling wedge, the triangle which is similar to those, points off to the side indicating that neither the buyers nor the sellers are having any control over the market.

And this is formed when the market makes lower highs and higher lows and basically, is going to be seen, if it is in an uptrend or a down trend, is going to be seen as a continuation or reversal pattern depending on which way it breaks out of the pattern. So we can see here the lower highs and then the higher lows forming the pattern, the contraction there. And eventually the market does break out of the bottom of that pattern. And when it does, it breaks out pretty forcefully as you can see there.

The pattern matures the range gets narrower and narrower indicating that neither the buyers nor the sellers have control. So once the pattern does break, that’s an indication that the sellers have taken control in this instance, and therefore the markets have broken pretty significantly there. OK.

You should now have a good understanding of the different types of triangle patterns and what each signifies. In our next lesson, we’re going to go over strategies for trading each of these patterns complete with entry and exit points.

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The first lesson in a two part series on how to identify and trade the ascending, descending, and symmetrical triangle chart patterns using technical analysis in the futures market, forex market and stock market for day traders and investors.

See How to Trade Triangle Chart Patterns Like a Pro Part 2 >>

How to Trade Moving Averages Like a Pro

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In today’s lesson, we’re going to look at one of the more popular technical indicators, the moving average.

There are several types of moving averages which we’re going to look at here, all of which are used by traders to try and smooth out price action of a financial instrument and get a better feel for the longer term direction without all the noise that’s often associated with just looking at price.

In addition to getting a better feel for the longer term trend of a financial instrument, most averages are also used to spot potential support and resistance levels, and are often used in conjunction with one another to generate buy and sell signals.

Before we get into the details, however, let’s first have a look at the two main types of moving averages; the simple moving average and the exponential moving average. The simple moving average is the most basic type of moving average and it’s calculated by taking the past X number of points, averaging them and then plotting the resulting line on a chart.

The reason why it’s called a moving average is because as new data points become available, the average moves forward to incorporate the new data point and drops the last data point in the series.

For example, if we’re looking at a financial instrument here that has the following 10 days – let’s look at a 10 period simple moving average, 10 day moving average. How we would calculate the first data point there is we would take the sum of day one through 10, divide that by 10 and then we would get 5.2 for the first data point, using this as an example.

To get the second data point, the 10 days used would be day two through day 11 as the moving average shifts forward after the close of day 11 of trading. So we would then – the 10 days used would be day two through day 11, divide that by 10 and we get 5.4.

You don’t really need to understand all the math behind this as most charting packets, if not all charting packages, will calculate the simple moving average for you and plot it on the chart. That’s what it looks like there. You can see how the price action is smoothed out using the moving average.

The exponential moving average was basically created to do away with some of the weaknesses that traders were sighting with the simple moving average, primarily that the simple moving average gives the same weight to each data point in the series that you’re using to calculate the data points of the simple moving average.

And basically, the critics say there that the more recent data points, if we’re looking at 10 day moving average day – say nine and 10 – should be given more weight because they’re more relevant to future price action. So the exponential moving average, it was created – what it does is it gives more weight to the more recent data points and, therefore, it reacts faster to price movement.

So here’s the formula for the exponential moving average. I’m not going to go into the details on this one because it’s much more complicated. But basically, you just need to understand that the simple moving average is going to react slower than the exponential moving average because it’s giving the same weight to the first data point in the series as it does to the last where exponential moving averages are going to give more weight to the last data point in the series than they are to the first.

Here’s an example of what an exponential moving average looks like on the chart. You can’t really tell the difference there, but I’ve included both here. The black line in this case is the exponential moving average. The blue line is the simple moving average.

You can see here that the black exponential moving average line is reacting faster. As the market turns down there on the left, the black exponential moving average line turns down much quicker than the blue simple moving average line there on the right when the market turns up. Again, there you see the black exponential moving average line moving up faster than the blue simple moving average.

As far as which moving average traders use in their trading – in general, it’s going to depend on the timeframe of their trades. If a trader is looking to capture shorter term price moves, a lot of times he’ll use the exponential moving average because it’s going to react faster if he’s looking to capture longer-term price moves, he’s going to focus on the simple moving average because it’s going to generate less faults trading signals.

Lastly, they’ll also look at the financial instrument that they’re trading and the price action in relation to both the moving averages historically and incorporate their strategy into that and look at which has given better trading signals based on their strategy and the financial instrument that they’re looking to trade.

So that’s our lesson for today. In tomorrow’s lesson, we’re going to look at some different ways that traders use moving averages to trade, so we hope to see you in that lesson. As always, if you have any questions or comments, please feel free to leave them in the comment section below. And have a great day!

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The basics of trading with moving averages in two lessons for active day traders and investors in the stock market, futures market, and Forex markets.

See How to Trade Moving Averages Like a Pro Part 2 >>

How to Trade Triangle Chart Patterns Like a Pro Part 2

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In our last lesson, we learned about the different chart types of triangle chart patterns: the ascending triangle, descending triangle and symmetrical triangle. In today’s lesson, we’re going to learn specific strategies for trading each of these patterns, complete with entry and exit points. So let’s get started.

The direction in which the market breaks out of the triangle, and whether the market is in an uptrend or downtrend, determines whether the pattern is a continuation or a reversal pattern, and therefore whether traders are going to look to get long or go short as a result of the breakout. As with other patterns that we’ve recently learned about, when traders spot an ascending triangle, which we’re going to start with, they will look to trade the break of the upper resistance line. The target is then derived by measuring the distance between the starting high point of the ascending triangle, and the starting low point of the triangle, which is then projected upward from the break point.

The stop is then placed just below the most recent trough of the patterns. So let’s look at an example here. We’ve got our ascending triangle that we learned about in last lesson. We have the break. We then measure the distance between the high and the low of the start of the pattern, and we get five points. So that is our target for the buy entry of the trade, and then we place our stop just below the most recent trough of the pattern. OK?

The descending triangle is basically just the opposite. It’s a mirror image. We’re normally going to see these in down trends, and we’re going to look to trade, or traders are going to commonly look to trade the break of the lower support line. The target is then calculated in the same way as the ascending triangle, by measuring the distance between the high and the low points, and then projecting that distance downward from the break.

The stop is then placed just above the nearest peak. Here’s our descending triangle. You can see there, the same one from last lesson. We see the break here. We see the distance between, or measure the distance between the high and low at the start of the pattern. We get 800 points there, so that’s our target for the trade. And then we place our stop just above the most recent peak. All right.

The symmetrical triangle can be seen in either up trends, down trends, or most of the time it is commonly seen in directionless markets. As it’s an indication that neither bulls or bears are winning out. That’s why the market range contracts as they continue to fight each other.

That’s why traders are going to look to trade in the direction of the breakout. It doesn’t matter which side it breaks out on, because the break out is an indication of the side that’s won. So if it breaks to the upside, the bulls have won, if it breaks to the downside, the bears have won.

We’ve got our symmetrical triangle here that we’ve looked at from last lesson, and in this instance, it’s broken to the downside, so traders are going to look to get short there, commonly. And the target is measured in the same way as it is with the other two triangles, by getting the distance at the start. So this case, it’s 1050. Project that downward, and that’s our target for the trade.

And then the stop, because it’s broken to the upside, is placed just above the most recent peak. If that trade had broken to the upside, or if the market had broken to the upside of the symmetrical triangle there, then everything would be done in reverse. All right.

As with our other lessons, and the other patterns that we’ve looked at recently, in those volume is often looked to as a confirmation of all three of these patterns. Traders are going to like to see a decrease in volume as the pattern matures, and then an increase in volume on the break, of the break out from the triangle. So keep that in mind just as with our other strategies that we’ve looked at most recently.

All right. That’s our lesson for today, and that’s going to complete our lessons on charting patterns. In our next lesson, we’re going to start to look at a trading indicators, or technical indicators, which are going to be good for complementing a lot of the stuff that we’ve learned so far.

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The second lesson on how to identify and trade triangle chart patterns in the stock market, forex market, and futures market using technical analysis.