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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 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 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.

How to Trade Stochastics

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In our last lesson, we learned about the relative strength index, and different ways that traders use this in their trade. In today’s lesson, we’re going to learn about another momentum oscillator, which is known as stochastics. So, let’s get started.

I’ll start by saying that there are three different types of stochastic oscillators: the fast stochastic, the slow stochastic, and the full stochastic. All of these operate in a similar manner, however. And when most traders refer to the stochastic, they’re talking about the slow stochastic. So, that’s going to be the focus of this lesson. The basic premise of a stochastic is that prices tend to close in the upper end of their trading range when the financial instrument you’re analyzing is in an uptrend. And in the lower end of their trading range, when the financial instrument you’re analyzing is in a downtrend.

When prices close in the upper-end of their range in an uptrend, this is, obviously, a sign that momentum of the trend is strong, and vice-versa for a downtrend. The stochastic contains two lines, which are known as the percent K line, and the percent D line.

I’m not going to go into the formulas for each, because most charting packages, if not all charting packages that you’ll use, will calculate these lines for you. However, you should know that this is a momentum oscillator. So, when the percent K line is rising, that is an indication that momentum in the market is increasing. And when the percent K line is falling, it’s an indication that momentum in the market is decreasing.

The percent D line is, very simply, a simple moving average of five periods; simple moving average of the percent K line, and it acts to smooth out the price action of the indicator, and slow it down a little bit. And also acts as a signal line for the faster, percent K line, which we’re going to learn about later in this lesson.

It’s a banded oscillator, just like the RSI, so, it fluctuates between 0 and 100. And the upper end of the range is marked by a line at 80. And the lower end of the range is marked by a line at 20. The first way that traders use this is to trade overbought and oversold levels.

George Lane, who invented the indicator, recommended waiting for a cross, back below the 80 line, when the market went from an extremely overbought area before placing a trade to the down side, and waiting for a break, back above the 20 line, before signaling a trade to the upside.

So, you see here, you have the overbought area. You have the break below the 80 line, and then you do have a sell-off that results after that. You have an oversold area here. You have a break back above the 20 line, and then you have a rally.

Again, hindsight is 20/20, and there are going to be false signals with this indicator, as with any other indicator that we’re going to look at. One of the ways to reduce the amount of false signals that you’re going to get is by combining indicators and combining methods of analysis, using some of the things that we’ve learned, so far.

Here you have a false signal. The indicator was in an overbought area, traded back below the 80 line. You did not have a sell-off after that. But hopefully, if you would have watched our lessons on trends and Dow Theory, you would have been watching this strong uptrend here, and you would have not been taken into that trade there to the downside, because there was not a break in that trend line.

Here, however, there was a break at the trend line, and you had, not only, the break of the trend line, which is a very strong signal, but also, the break back below the 80 line of the oscillator. And you did have a sell-off that resulted after that.

A second way this can be traded as crossover signals. Remember from earlier, the percent K line is the faster line. The percent D line is the slower line. So, when the percent K line crosses above the percent D line, this is an indication that it may be a good place to buy.

And when the percent K line crosses below the percent D line, this is an indication that it might be a good place to sell. This is, basically, a way for aggressive traders to catch earlier signals, particularly from overbought and oversold areas.

Here, we’ve got a Bearish cross from our overbought area. We’ve got the Bearish cross with the black line; the percent K line, and trading below the red percent D line. And we’ve got the break below 80 there.

You could have gotten in, however, earlier into the trade, had you been trading the Bearish cross from the overbought area, instead of waiting for the break. But that’s not recommended. And this indicator like the cross of the RSI is very prone to false signals. So, be careful there.

The divergence is the third way. And, very simply, when the market is making new highs, and when the market is trading in the opposite direction of the indicator, that’s an indication that a reversal may be coming. So, you have divergence here, and, as you can see, the market’s making new highs there.

But you can see by looking at the stochastic, that momentum in the market is not following upwards. So, that might be a good place to look for a sell-trade. If you remember from previous lessons, hopefully, you’ll also see something else there, which is a double top.

So, you have two things confirming that, that might be a good place to place a sell-trade. You have the divergence plus the chart pattern there; the double top. And you do have a nice sell-off that results after that.

As you probably noticed in this lesson, the stochastic oscillator is very similar to the RSI, and they’re both momentum oscillators. So, many traders will use one or the other. They’ll try out both, and figure out which one works better for them, for identifying the momentum in whatever instrument they’re trading. Another way that’s it’s used is with, in conjunction with the RSI, to confirm each other; so to confirm opinions on momentum.

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A lesson on how to trade the stochastic oscillator for active day traders and investors.

In our last lesson we learned about the RSI indicator and some of the different ways traders of the stock, futures, and forex markets use this in their trading.

In today’s lesson we are going to look at another momentum oscillator which is similar to the RSI and is called the Stochastic. Let me start by saying that there are 3 different types of stochastic oscillators: the fast, slow, and full stochastic. All of them operate in a similar manner however when most traders refer to trading using the stochastic indicator they are referring to the slow stochastic which is going to be the focus of this lesson.

The basic premise of the stochastic is that prices tend to close in the upper end of their trading range when the financial instrument you are analyzing is in an uptrend and in the lower end of their trading range when the financial instrument that you are analyzing is in a downtrend. When prices close in the upper end of their range in an uptrend this is a sign that the momentum of the trend is strong and vice versa for a downtrend.

The Stochastic Oscillator contains two lines which are plotted below the price chart and are known as the %K and %D lines. Like the RSI, the Stochastic is a banded oscillator so the %K and %D lines fluctuate between zero and 100.

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 the Flag Pennant Patterns Like a Pro

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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.

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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 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.