Tag Archives: market

How to Trade the Head and Shoulders Pattern 2

Posted on by
Reply

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.

YouTube Preview Image

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

Posted on by
Reply

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.

YouTube Preview Image

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

Posted on by
Reply

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.

YouTube Preview Image

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

How to Trade Bollinger Bands

Posted on by
Reply

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.

YouTube Preview Image

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.

How to Trade the Head and Shoulders Pattern

Posted on by
Reply

In previous lessons we looked at the double top pattern and the double bottom pattern which are two charting patterns which show that the momentum needed to break a resistance level, if we’re talking about a double top, or a support level, if we’re talking about a double bottom, is not there in the market. Because of this, when these patterns show up on a chart, traders look to trade a reversal of the current trend.

In today’s lesson we’re going to look at two more patterns which also show that the momentum needed to break a resistance level or a support level is not there in the market, which are known as the head and shoulders pattern and the reverse head and shoulders pattern. After we have a good understanding of these two indicators, then we’re going to look at a specific strategy with exact entry and exit points of how you can trade them. So let’s get started.

A head and shoulders pattern is basically defined as one peak in the market followed by a second higher peak in the market followed by a third peak which is lower than the second peak. So let’s take a look at what we’re seeing here on a chart. So you can see here, what forms the first peak is buyers in control drive the market up to a certain level, and then sellers take back control driving the market down which forms the first trough. Buyers then take back control which runs up to the second higher peak which forms the head of the pattern.

Sellers back in control to form the second trough before buyers take back control and form the second shoulder of the pattern which is the third peak. And then the pattern is completed when the neckline is broken which is formed by the two troughs.

The support level for this pattern is the two troughs which are formed between the shoulders and the head of the pattern. So you can see that there. So once that level’s broken that completes the pattern, and the market is theoretically supposed to sell off from there. And you can see why because the markets tried to push up three times, to go higher, and failed. So you can see where sellers will take control there.

The reverse head and shoulders is basically a mirror image of the head and shoulders pattern. And, basically, this is defined as one trough in the market followed by a second lower trough followed by a third higher trough. And you can see here the first shoulder being formed by sellers in control driving down into the first shoulder, and then buyers taking back control which forms the first peak of the pattern.

Before sellers take back control forming the head of the pattern. Buyers back in control forming the second peak of the pattern. And then sellers back in control to form the second shoulder of the pattern. And you can see there the neckline being drawn off of the top of the two peaks in between the two shoulders and the head this time.

And traders look for a break of that neckline which confirms the pattern is in place and has completed. OK. So you can see there instead of the resistance levels on the head and shoulders pattern, what is happening here is the market is failing to break support. And so, after it’s failed three times at three different levels, buyers theoretically will be in control for a good portion of the time after that.

So you should now have a good understanding of two more reversal patterns. In the next lesson, we’re going to look at a specific strategy with entry and exit points that traders use to trade these patterns.

YouTube Preview Image

The 3rd lesson in a series on charting patterns which looks at the head and shoulders pattern and how traders use them.

How to Trade the Flag Pennant Patterns Like a Pro

Posted on by
Reply

In our last lesson, we looked at strategies for trading the rising wedge and falling wedge chart patterns; two patterns which can be considered either reversal or continuation patterns, depending on how they show up on a chart.

We start our series on continuation patterns by learning about the flag and pennant patterns so that we can then look at strategies for trading each of these patterns. So let’s get started.

Flags and pennants are generally seen after a big move in one direction in a particular financial instrument and represent brief consolidations or pauses in the market before a resumption of the trend in which they occurred. The flag and pennant patterns both contain a flagpole which is represented by the sharp move upwards or downwards which sets up the consolidation. Then the flag is represented by a consolidation which can be encompassed by a rectangular formation, and a pennant is represented by a consolidation which needs to be encompassed by a triangle.

When a flag or pennant occurs in an uptrend, a break of the top resistance line can be seen or is oftentimes looked at as a resumption of the uptrend. And conversely, when a flag or pennant occurs in a downtrend, a break of the bottom support line can often be seen as a resumption of the downtrend.

So let’s look at a couple of examples here. We have a chart of Research in Motion here (RIM). Towards the right-hand side of the chart, you can see a little jump in the market there, and then the consolidation which we can encompass with two parallel lines, so that forms our flag portion of the pattern.

And then the flagpole is represented by the up move in the market, OK. so you can see the flagpole and the flag there.

Now, for flag patterns, the flag portion of the pattern can be either pointed directly to the side or slanted downward as we here; both are relevant flag patterns there and you can see the market breaking out above that and making a pretty good run after the breakout of the top of that flag pattern.

Because this flag pattern occurred in an uptrend and it was after a big jump upwards in the market, it’s known as a bull flag.

Here, we have a chart of Travel Zoo and we can see here we have our flag portion, a brief consolidation in the market after our move downward which is represented by the flagpole.

It’s basically the exact same as the bull flag example, except flipped upside down because we’re in a downtrend here, we have a big move downward, then a brief consolidation in the market before resumption of the downtrend. So you can see there.

And again here. The flag portion of the pattern can be represented by a rectangle that either points directly to the side or slightly upwards; either would be considered a valid flag pattern.

OK. So for the pennant pattern, the difference between a flag and a pennant is when a pennant is formed, the consolidation after the big move upwards or downwards narrows as it matures.

So we can see here a chart of, again, research in motion. We see a pennant formed here, and then our flagpole representing the move upward. Then we see the breakout above the top portion of the pennant.

And again here, just as with the flag, the pennant can point directly to the side or slightly downward and both would be considered valid moves there, and again here because this is an uptrend that’s represented. It’s considered a bull pennant.

OK. So here, we have a bear example. And again, just flipped upside down. Chart of Starbucks. You can see the consolidation narrowing there after the big move downward and representing the flagpole, and then you see the breakout below. OK.

You should now have a good understanding of flag and pennant patterns, and which is considered a bull flag and which is considered a bear flag, as well as with the pennants.

YouTube Preview Image

In this lesson we learn about what flag and pennant patterns are in technical analysis and how to identify them on charts in the stock market, futures market, and forex market for day traders and investors.

How to Trade Double Tops Like a Pro

Posted on by
Reply

In our last lesson we looked at the basics of charting patterns and two of the more common patterns you find in the market, double tops and double bottoms. In today’s lesson we’re going to look at a specific strategy that many traders use to trade these set-offs or these charting patterns complete with specific entry and exit points. So let’s get started.

The double top and the double bottom are signs that a financial instrument has failed to break through a specific level, considered resistance on the double top side and support on the double bottom side. So because of this they’re considered reversal patterns and where traders will look to these patterns or place a lot more significance on these patterns is when they’re occurring as part of an uptrend on the double top side and as part of a downtrend on the double bottom side. They’re going to look for, when they see a double top in an uptrend, they’re going to see that as a signal that the uptrend may be coming to an end and look to possibly trade that reversal. When they see a double bottom in a downtrend they’re going to look to that as a signal that the downtrend may be coming to an end and look to trade the potential reversal there.

Let’s start with a basic strategy for trading a double top. You can see the double top here forming our resistance level. The middle of the two points there, referred to as the trough, is considered our support level and so traders commonly wait for the market to pull back and break below that support level as a confirmation that the double top is actually in place.

They’re going to wait for the break there and then they’re going to enter on that break and then they’re going to measure this move here, the bottom of the trough, up to the top of the two points, and then that is going to be their profit target, OK? And then the stop loss is placed just above the second peak there. So a fairly basic strategy, but one that is commonly used to trade double tops and one that you may see a potential to use fairly often.

A second thing which traders are going to use for confirmation here is volume. I don’t actually have volume on this chart because this is an Forex chart, but if you’re trading futures or equities, you would have volume available and they’re going to look for a decrease in volume on the second peak, indicating that the buyers there driving up to the second peak were not as strong as they were into the first, and then an increase in volume on the break of the support level there indicating that that’s a true break, OK?

Double bottom strategy is the mirror image of the double top strategy. We have the double bottom in place here. We have the peak between the two double bottoms as our resistance level. We are waiting for a break to enter on the break of that resistance level as the common strategy. Measure the move there. Measure the difference between the highest trough and the middle of the peak and you get 174 points in this example. That’s the profit target.

Stop loss placed just below the lowest trough in the double bottom, OK? And again here looking for confirmation from volume. If you were looking at a stock market chart a futures market chart you would look for falling volume on the second trough that forms the double bottom and rising volume on the break of the resistance line.

OK, so you should now have a good understanding of one possible strategy for trading tops and bottoms that is commonly used in the market. In tomorrow’s lesson, we’re going to go into something which is known as head and shoulders, which is another charting pattern and lead into a potential strategy for trading that, OK? So starting to get a little interesting now with the trading strategies. Be careful when using these. A lot of practice, and make sure you understand exactly what you’re doing.

* As, the financial markets and trading in general is very risky, you should only trade with risk capital, money that you can afford to lose, and there’s no system or strategy that’s going to win all the time or that can guarantee profits or anything like that, so make sure you do your homework. As always, if you have any questions or comments, please feel free to leave them in the comments section below and have a great day.

YouTube Preview Image

The 2nd lesson in a series on charting patterns for traders and investors in which goes into specific strategies which can be used to trade double tops and double bottoms in the Forex market, stock market, and futures market.