Tag Archives: stockmarket

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 Relative Strength Index (RSI)

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In today’s lesson we’re going to look at indicators which are known as oscillators, starting with the one of the most popular oscillators, the RSI. So let’s get started!

An oscillator is a technical indicator which fluctuates above and below a central line and normally has an upper and lower band which indicate overbought and oversold conditions in the market. An exception to this upper and lower band component would be the MACD, which we learned about yesterday, which is an oscillator as well but is not encompassed by an upper and lower band. One of the most popular what’s known as banded oscillators is what’s known as the RSI, which is what we’re going to start our discussion on oscillators with today. The RSI’s best described as an indicator which represents the momentum in a particular financial instrument as well as when it’s reaching extreme levels to the upside which is referred to as overbought conditions or extreme levels to the downside which is referred to as oversold conditions.

The indicator accomplishes this through a formula which compares the size of recent gains for a financial instrument to the size of it’s recent losses. The results are then plotted as a line which fluctuates between 0 and 100. And bands are then placed at 70, which is considered an extreme level to the upside and 30, which is considered an extreme level to the downside.

This is what an oscillator looks like. You can see the price chart there. And you can see the RSI plotted to the bottom. And you can see the central line there at level 50, and the upper band at 70 and the lower band at 30. That’s what an RSI looks like when it’s plotted on a chart. And you can see how it fluctuates above and below those lines. We’re going to look at what that means next.

There’s several different ways that traders use the RSI in their trading. The first is to identify overbought and oversold conditions in the market. As we just talked about when the RSI is below the 30 line, this is considered an oversold level and therefore traders are going to look to trade a reversal of the trend there because the boat is tipped too far to one side so to speak.

The RSI goes below 30, the market bottoms there then turns upward. And then the market continues upward, goes into overbought territory on the RSI, and then you can see it turns downward after that.

The second way that traders use the RSI in their trading is what’s known as RSI divergence, and this is similar to what we learned about with the MACD divergence. If the indicator (the RSI) is trading in the opposite direction or trending in the opposite direction as the price action of the financial instrument that you’re analyzing, this tells you that momentum is waning and therefore that particular financial instrument may be due for reversal.

So, you can see here the market is making a new high, but the RSI is not. And that is a divergence there showing that the market may be running out of steam. In that case it was, and it sold off pretty dramatically right after that.

The third way that traders use this in their trading is known as the centerline crossover. And this you know a less reliable signal than the first two so you definitely going to want to use this one in conjunction with some of the other things that we’ve learned about or some of the things that we’re going to learn about in future lessons.

But basically what this is, is when the RSI crosses above the 50 line that’s considered a bullish sign, and because the market is making more highs and more making more gains than it is losses. When it crosses below that center 50 line that’s considered a bearish sign because the market is making more losses than gains.

You could use that and how it would have actually worked very well recently trading the euro-dollar. You could see there’s a head and shoulders pattern there, that we learned about in one of our previous lessons. And then you can see the RSI makes a bearish crossover confirming, so to speak, that that break below the neckline of the head and shoulders pattern is legitimate. In that case you would caught a nice big candle down, and might catch a few more in the days that come as a result of that confirmation.

So that’s our lesson for today. You should now have a good understanding of the RSI and how traders use this in their trading. And then tomorrow’s lesson we’re going to look at another oscillator which is known as the stochastic oscillators.

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A lesson on how to trade the RSI. In our last lesson we looked at 3 different ways that the MACD indicator can be traded. In today’s lesson we are going to look at a class of indicators which are known as Oscillators with a look at how to trade one of the more popular Oscillators the Relative Strength Index (RSI).

An oscillator is a leading technical indicator which fluctuates above and below a center line and normally has upper and lower bands which indicate overbought and oversold conditions in the market (an exception to this would be the MACD which is an Oscillator as well).

One of the most popular Oscillators outside of the MACD which we have already gone over is the Relative Strength Index (RSI) which is where we will start our discussion. The RSI is best described as an indicator which represents the momentum in a particular financial instrument as well as when it is reaching extreme levels to the upside (referred to as overbought) or downside (referred to as oversold) and is therefore due for a reversal. The indicator accomplishes this through a formula which compares the size of recent gains for a particular financial instrument to the size of recent losses, the results of which are plotted as a line which fluctuates between 0 and 100.

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 Calculate Forex Trading Profits and Losses

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In today’s lesson we are going to continue our discussion on the logistics of forex trading with a look at how to calculate profits and losses in the forex market.

As the forex market does not have standardized trade sizes and because many currency pairs are not quoted in terms of US Dollars, the method for calculating profits and losses in the forex market is a little more difficult than in many other markets. Luckily most trading platforms list out how much the value of a one pip move in the market is on the platform, so clients don’t have to calculate this themselves.

With this in mind, let’s quickly log into our real time demo trading account so we can see what I am talking about.

Once inside the platform, you should see the dealing rates window and in that window you should see two tabs at the top, one that says ‘advanced dealing rates’ and one that says ‘simple dealing rates’. Click the link that says simple dealing rates which should switch over to a different looking quotes window with a bunch of columns in it.

If you scroll over to the right of that window, you should see a column which says ‘pip cost’. The numbers listed onto this column are the value of a one pip move in the market for each currency pair.

To calculate your profit or loss, all you really need to do is take that number and multiply it by the number of pips of potential profit and loss you have on the trade. Once you have that number you then multiply that by the number of contracts you are trading and this will give you the total amount of potential profit and loss on the trade in US Dollars.

To calculate your profit or loss, all you really need to do is take the number and the pip cost line of the dealing rates window and multiply it by the number of pips of potential profit and loss you have on the trade. Once you have this number you then multiply this number by the number of contracts that you are trading and this will give you the total potential profit and loss on the trade in US Dollars.

As an example, let’s say that I am trading three contracts of Dollar-Swiss. My profit target on the trade is 100 pips and my loss target on the trade is 50 pips away from my entry price. To get the total amount of potential risk and reward on this trade, I would simply multiply the pip value of Dollar-Swiss, which as of this lesson is 995/100 which is my profit target, which would give me $995. This is my potential profit on the trade per one contract.

As I am trading three contracts, I would then multiply $995 x 3, which would give me $2, 985 in potential profit. On the loss side, I would take my $50 stop-loss target and multiply this by the 995 pip cost of Dollar-Swiss as of this lesson. This would give me $497.50 in potential loss per one contract. As I am trading three contracts, I would then take the $497.50 and multiply that by the three contracts I am trading, which would give me $1, 492.50 in potential loss.

As you’ll notice if you scroll down the ‘pip cost’ column of the real time demo trading platform, the value of a one pip move in currency pairs where the US Dollar is the counter or second currency in the pair, is always $10. This is because as we have learned in earlier lessons, a currency quote represents how many of the second currency in the pair it takes to buy one of the first currency.

As we are trading contract sizes of 100, 000 of the base currency, a one pip move in four decimal place currency pairs is equal to 0.0001 x 100, 000 which equals $10 in currency pairs where the US Dollar is the second currency in the pair.

As you’ll also notice, for currency pairs where the US Dollar is not the second currency in the pair, the value of a one pip move in the market varies. This is because in those instances, the counter currency or the second currency in the pair is not the US Dollar and therefore the value of a one pip move in the market has to be converted back into US Dollars at the current exchange rate.

To look at an example where the US Dollar is not the second currency in the pair, let’s take the Dollar-Swiss. Here one pip move in the market is equal to 0.0001 Swiss francs. So to get the value of a one pip move in the market, we would take 0.0001 Swiss francs and multiply it by the 100, 000 contract size which gives us 10 Swiss francs as the value of a one pip move in the market in the Dollar-Swiss currency pair.

So the reason why the pip value fluctuates where the Dollar is not the second currency in the pair is because we must then take that, in this example 10 Swiss francs, and convert it back into US Dollars to get the US Dollar amount that the pip value is worth. The US Dollar pip value, which is done at the current exchange rate of the US Dollar and the Swiss franc. OK.

Since the calculations are done for you on the platform, don’t worry if you don’t understand all the math here. The two things that it is important understand are that for any currency pair where the US Dollar is the second currency in the pair, the value of a one pip move in the market will always be $10.

For any currency pair where the US Dollar is not the second currency or counter currency in the pair, the value of a one pip move in the market will vary depending on the exchange rate of whatever currency is in the second spot of the currency pair.

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A lesson on how to calculate profits and losses in the Forex market for active traders and investors in foreign exchange and currencies.

How to Calculate Leverage in Forex

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In our last lesson, we continued our discussion on the logistics of forex trading with a look at something which is known as trading on margin. In today’s lesson, we’re going to continue our free forex course with a look at how traders determine how much leverage they’re using so they can then determine how much margin they need to put up for each trade. So, let’s get started. As we covered in our last lesson the real time demo trading platform which we are using comes with a default leverage maximum of 100 to 1. What this means is that for every contract of 100,000 of the base currency that you open you need at least $1000 of margin in your account to avoid receiving a margin call and having that trade closed. The important thing to understand here is that this 100 to one leverage is the maximum offered by this particular demo account, and the level at which if you drop below, the open positions on your account will be closed.

With this in mind, it is my opinion, which has been formulated from years of trading and watching other people trade, that most successful traders would never put themselves in a position where they would receive a margin call. The reason behind this is that they employ a money management strategy which controls the amount of leverage that they would use on any one trade and for their account as a whole.

In general, most successful traders I’ve seen trade use a maximum leverage of five to one. And many would consider even this to be too highly leveraged. The amount of leverage used really depends on trading style as much as anything, as in general, traders who hold positions for short periods of time and cut losses quickly are able to successfully employ higher amounts of leverage than longer term traders who need more breathing room in their trades.

To help illustrate how this works from a logistical standpoint, let’s take a look at a couple of examples. The best way in my opinion to think about leverage and trading on margin is to always ask yourself the question ‘by how much am I amplifying the gain or loss on my account when opening this trade?’

For this example let’s say that I’m, that I start trading with $100,000 simply because this is an easy round number to work through the math with. If I open one contract of dollar-yen, then I am trading $100,000 against the equivalent amount of Japanese yen. So, if I have $100,000 in my account and I’m trading $100,000 against Japanese yen then I am not leveraged as the cash balance of my account equals the position size I’m trading.

With this example a one percent movement in the currency pair would represent a one percent gain or loss on the value of my account. As we learned in our last lesson the used margin column of my account in this example would show $1000 after the trade and my usable margin column would show $99,000.

If I open two contracts of dollar-yen, then I’m trading $200,000 against the equivalent amount of Japanese yen. As I have $100,000 in my account and $200,000 in open positions, I’m leveraged at two to one as the position size I’m trading is twice the value of the cash in my account. With this example, a one percent move in the dollar-yen currency pair would represent a two percent gain or loss in the value of my account, thus amplifying the potential gain or loss on this trade by two times. In this example, the used margin column after the trade in my account would show $2000 and my usable margin column would show $98,000.

If I open five contracts of dollar-yen, then I am trading $500,000 against the equivalent amount of Japanese yen. As I have $100,000 in my trading account and $500,000 in open positions I am leveraged at five to one. With this example a one percent move in the dollar-yen currency pair would represent a five percent gain or loss on the value of my account thus magnifying the potential gain or loss by five times.

For tonight’s homework assignment, I recommend working through a couple of examples as I’ve done here with other currency pairs in which US dollar is the base currency in the pair. Secondly, I encourage you to think about how to go about figuring out the leverage used when the US dollar is not the base currency in the pair.

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A lesson on how to calculate how much leverage you are using when the base currency pair in the pair you are trading is not the US Dollar. For active traders and Investors in the forex market.

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 >>