Channel and Triangle

Capture Profits Using Bands And Channels

noreply@blogger.com (roselyn) — Tue, 19 Jan 2010 06:11:00 +0000

Widely known for their ability to incorporate volatility and capture price action, Bollinger bands have been a favorite staple of traders in the FX market. However, there are other technical options that traders in the currency markets can apply to capture profitable opportunities in swing action. Lesser-known band indicators such as Donchian channels, Keltner channels and STARC bands are all used to isolate such opportunities. Also used in the futures and options markets, these technical indicators have a lot to offer given the vast liquidity and technical nature of the FX forum. Differing in underlying calculations and interpretations, each study is unique because it highlights different components of the price action. Here we explain how Donchian channels, Keltner channels and STARC bands work and how you can use them to your advantage in the FX market.

Donchian Channels
Donchian channels are price channel studies that are available on most charting packages and can be profitably applied by both novice and expert traders. Although the application was intended mostly for the commodity futures market, these channels can also be widely used in the FX market to capture short-term bursts or longer-term trends. Created by Richard Donchian, considered to be the father of successful trend following, the study contains the underlying currency fluctuations and aims to place profitable entries upon the start of a new trend through penetration of either the lower or upper band. Based on a 20-period moving average (and thus sometimes referred to as a moving average indicator), the application additionally establishes bands that plot the highest high and lowest low. As a result, the following signals are produced:

A buy, or long, signal is created when the price action breaks through and closes above the upper band.
A sell, or short, signal is created when the price action breaks though and closes below the lower band.

The theory behind the signals may seem a little confusing at first, as most traders assume that a break of the upper or lower boundary signals a reversal, but it is actually quite simple. If the current price action is able to surpass the range's high (provided enough momentum exists), then a new high will be established because an uptrend is ensuing. Conversely, if the price action can crash through the range's low, a new downtrend may be in the works. Let's look at a prime example of how this theory works in the FX markets.

Figure 1 - A typical example of the effectiveness of Donchian channels

In Figure 1, we see the short, one hour time-framed Euro/U.S. dollar currency pair chart. We can see that, prior to Dec 8, the price action is contained in tight consolidation within the parameters of the bands. Then, at 2am on Dec 8, the price of the euro makes a run on the session and closes above the band at point A. This is a signal for the trader to enter a long position and liquidate short positions in the market. If entered correctly, the trader would have gained almost 100 pips in the short intraday burst.

Keltner Channels
Another great channel study that is used in multiple markets by all types of traders is the Keltner channel. The application was introduced by Chester W. Keltner (in his book "How To Make Money In Commodities" (1960)) and later modified by famed futures trader Linda B. Raschke. Raschke altered the application to take into account average true range calculation over 10 periods. As a result, the volatility-based technical indicator bears many similarities to Bollinger bands. The difference between the two studies is simply that Keltner's channels represent volatility using the high and low prices, while Bollinger's studies rely on the standard deviation. Nonetheless, the two studies share similar interpretations and tradable signals in the currency markets. Like Bollinger bands, Keltner channel signals are produced when the price action breaks above or below the channel bands. Here, however, as the price action breaks above or below the top and bottom barriers, a continuation is favored over a retracement back to the median or opposite barrier.

If the price action breaks above the band, the trader should consider initiating long positions while liquidating short positions.
If the price action breaks below the band, the trader should consider initiating short positions while exiting long, or buy, positions.

Let's dive further into the application by looking at the example below.

Figure 2 - Three profitable opportunities are presented to the trader through Keltner.

By applying the Keltner study to a daily charted British Pound/Japanese Yen currency cross pair we can see that the price action breaks above the upper barrier, signaliing for the trader to initate long positions. Placing effective entries, the FX trader will have the opportunity to effectively capture profitable swings higher and at the same time exit efficiently, maximizing profits. No other example is more visually stunning than the initial break above the upper barrier. Here, the trader can initate above the close of the initial session burst above at Point A on July 17. After the initial entry is placed above the close of the session, the trader is able to capture approximately 300 pips before the price action pulls back to retest support. Subsequently, another position can be initiated at Point B, where momentum once again takes the position approximately 350 pips higher

STARC Bands
Also similar to the Bollinger band technical indicator, STARC (or Stoller Average Range Channels) bands are calculated to incorporate market volatility. Developed by Manning Stoller in the 1980s, the bands will contract and expand depending on the fluctuations in the average true range component. The main difference between the two interpretations is that STARC bands help to determine the higher probability trade rather than standard deviations containing the price action. Simply put, the bands will allow the trader to consider higher or lower risk opportunities rather than a return to a median.

Price action that rises to the upper band offers a lower risk sell opportunity and a high risk buy situation.
Price action that declines to the lower band offers a lower risk buy opportunity and a high risk sell situation.

This is not to say that the price action won't go against the newly initiated position; however, STARC bands do act in the trader's favor by displaying the best opportunities. If this indicator is coupled with disciplined money management, the FX enthusiast will be able to profit by taking on lower risk initiatives and minimizing losses. Let's take a look at an opportunity in the Kiwi/U.S. dollar currency pair.

Figure 3 - A great risk to reward is presented through this STARC bands example in the NZD/USD

Looking at the Kiwi/U.S. dollar currency pair presented in Figure 3, we see that the price action has been mounting a bullish rise over the course of November, and the currency pair looks ripe for a retracement of sorts. Here, the trader can apply the STARC indicator as well as a price oscillator (Stochastic, in this case) to confirm the trade. After overlaying the STARC bands, the trader can see a low-risk sell opportunity as we approach the upper band at point A. Waiting for the second candle in the textbook evening star formation to close, the individual can take advantage by placing an entry below the close of the session. Confirming with the downside cross in the Stochastic oscillator, point X, the trader would be able to profit almost 150 pips in the day's session as the currency plummets from 0.7150 to an even 0.7000 figure. Notice that the price action touches the lower band at that point, signaling a low-risk buy opportunity or a potential reversal in the short-term trend.

Putting It All Together
Now that we've examined trading opportunities using channel-based technical indicators, it's time to take a detailed look at two more examples and to explain how to capture such profit windfalls.

In Figure 4 we see a great short-term opportunity in the British pound/Swiss franc currency cross pair. We'll put the Donchian technical indicator to work and go through the process step-by-step.

Figure 4 - Applying the Donchian channel study, we see a couple of extremely profitable opportunities in the short time frame of a one-hour chart.

These are the steps to follow:

1. Apply the Donchian channel study on the price action. Once the indicator is applied, the opportunities should be clearly visible, as you are looking to isolate periods where the price action breaks above or below the study's bands.

2. Wait for the close of the session that is potentially above or below the band. A close is needed for the setup as the pending action could very well revert back within the bands parameters, ultimately nullifying the trade.

3. Place the entry at slightly above or below the close. Once momentum has taken over, the directional bias should push the price past the close.

4. Always use stop management. Once the entry has been executed, the stop should always be considered, as in any other situation.

Applying the Donchian study in Figure 4, we find that there have been several profitable opportunities in the short time span. A prime example would be point A: here, the session closes below the bottom channel, lending to a downside trend. As a result, the entry is placed at the low of the session after the close, at 2.2777. The subsequent stop will be placed slightly above the high of the session, at 2.2847. Once you are in the market, you can either liquidate your short position on the first leg down or hold on to the sell. Ideally, the position would be held in retaining a legitimate risk to reward ratio. However, in the event the position is closed, you may consider a reinitiation at point B. Ultimately, the trade will profit over 120 pips, justifying the high stop.

Defining a Keltner Opportunity
It's not just Donchians that are used to capture profitable opportunities - Keltner applications can be used as well. Taking the step-by-step approach, let's define a Keltner opportunity:

1. Overlay the Keltner channel indicator onto the price action. As with the Donchian example, the opportunities should be clearly visible, as you are looking for penetration of the upper or lower bands.

2. Establish a session close of the candle that is the closest or within the channel's parameters.

3. Place the entry four to five points below the high of low of the session's candle.

4. Money management is applied by placing a stop slightly below the session's low or above the session's high price.

Let's apply these steps to the British pound/U.S. dollar example below.

Figure 5 - A tricky but profitable catch using the Keltner Channel

In Figure 5, we see a very profitable opportunity in the British pound / U.S. dollar major currency pair on the daily time frame. Already testing the upper barrier twice in recent weeks, the trader can see another third attempt as the price action rises on July 27 at Point A. What needs to be obtained at this point is a definitive close above the barrier, constituting a break above and signaling a long position initiation. Once the chartist receives the clear break and closes above the barrier, the entry will be placed 5 points above the high of the closed session (entry). This will ensure that momentum is on the side of the trade and the advance will continue. The notion will place our entry precisely at 1.8671. Subsequently, our stop will be placed below the low price by 1 to 2 points or in this case at 1.8535. The trade pays off as the price action moves higher in the following weeks with our profits maximized at move's high of 1.9128. Giving us a profit of over 400 pips in less than a month, the risk reward is maximized at an over 3 to 1 ratio.

Conclusion
Although Bollinger bands are more widely known, Donchian channels, Keltner channels and STARC bands have proven to offer comparably profitable opportunities. By diversifying your knowledge and experience in different band-based indicators, you'll be able to seek a multitude of other opportunities in the FX market. These lesser-known bands can add to the repertoire of both the novice and the seasoned trader.

by Richard Lee,

Richard Lee is a currency strategist at Forex Capital Markets LLC. Employing both fundamental models and technical analysis applications, Richard contributes regularly to DailyFX and Bloomberg. He has extensive experience in trading the spot currency markets, options and futures. Before joining the research group, Richard traded FX, equity and equity derivatives for a private equity consortium. Richard graduated from Pennsylvania State University with a Bachelor of Arts in economics and a Bachelor of Science in French with an emphasis in international business.

Channel Breakouts With The CCI

noreply@blogger.com (roselyn) — Sat, 09 Jan 2010 05:35:00 +0000

Often in life, the right action is the hardest to take. The same dynamic occurs in trading. For most traders it is extremely difficult to buy tops and sell bottoms because from a very early age we are conditioned to look for value and buy "cheap" while selling "dear". This is why although most traders proclaim their love for trading with the trend, in reality, the majority love to pick tops or bottoms. While these types of "turn" trades can be very profitable, turn trading can sometimes seem like a Sisyphean task as price trends relentlessly in one direction, constantly stopping out the bottom and top pickers.

Most traders are reluctant to buy breakouts for fear of being the last one to the party before prices reverse with a vengeance. So, how can they learn to trade breakouts confidently and successfully? The "do the right thing" setup is designed to deal with just such a predicament. It tells the trader to buy or sell when most ingrained lessons are against doing so. Furthermore, it puts the trader on the right side of the trend at the times when many other traders are trying to fade the price action. Read on as we cover this strategy and show you some examples of how it can be used.

Do the Right Thing - Trade Breakouts
In the "do the right thing" strategy, the capitulation of top and bottom pickers in the face of a massive buildup of momentum forces a covering of positions, allowing you to exit profitably within a very short period of time after putting on a trade.

"Do the right thing" employs a rarely used indicator in FX called the commodity channel index (CCI), which was invented by Donald Lambert in 1980 and was originally designed to solve engineering problems regarding signals. The primary focus of CCI is to measure the deviation of the price of the currency pair from its statistical average. As such, CCI is an extremely good and sensitive measure of momentum and helps us to optimize only the highest probability entries for our setup.

Without resorting to the mathematics of the indicator, please note that CCI is an unbound oscillator with a reading of +100 typically considered to be overbought and any reading of -100 is considered oversold. For our purposes, however, we will use these levels as our trigger points as we put a twist on the traditional interpretation of CCI. We actually look to buy if the currency pair makes a new high above 100 and sell if the currency pair makes a new low below -100. In "do the right thing" we are looking for new peaks or spikes in momentum that are likely to carry the currency pair higher or lower. The thesis behind this setup is that much like a body in motion will remain so until it's slowed by counterforces, new highs or lows in CCI will propel the currency farther in the direction of the move before new prices finally put a halt to the advance or the decline.

Rules for the Long Trade

On the daily or the hourly charts, place the CCI indicator with standard input of 20.
Note the very last time the CCI registered a reading of greater than +100 before dropping back below the +100 zone.
Take a measure of the peak CCI reading and record it.
If CCI once again trades above the +100 and if its value exceeds the prior peak reading, go long at market at the close of the candle.
Measure the low of the candle and use it as your stop.
If the position moves in your favor by the amount of your original stop, sell half and move the stop to breakeven.
Take profit on the rest of the trade when the position moves to two times your stop.

Rules for the Short Trade

On the daily or the hourly charts, place the CCI indicator with standard input of 20.
Note the very last time the CCI registered a reading of less than -100 before poking above the -100 zone.
Take a measure of the peak CCI reading and record it.
If CCI once again trades below the -100 and if its value exceeds the prior low reading, go short at market at the close of the candle.
Measure the high of the candle and use it as your stop.
If the position moves in your favor by the amount of your original stop, sell half and move the stop on the remainder of the position to breakeven.
Take profit on the rest of the trade when position moves to two times your stop.

CCI Setup On Longer Time Frames
In the daily chart of the EUR/USD pair (Figure 1) we see that the former peak high above the CCI +100 level was recorded on September 5, 2005, when it reached a reading of 130. Not until more than three months later on December 13, 2005, did the CCI produce a value that would exceed this number.

Throughout this time, we can see that EUR/USD was in a severe decline with many false breakouts to the upside that fizzled as soon as they appeared on the chart. On December 13, 2005, however, CCI hit 162.61 and we immediately went long on the close at 1.1945 using the low of the candle at 1.1906 as our stop. Our first target was 100% of our risk, or approximately 40 points. We exited half the position at 1.1985 and the second half of the position at two times our risk at 1.2035. Our total reward-to-risk ratio on this trade was 1.5:1, which means that if we are only 50% accurate, the setup would still have positive expectancy. Note also that we were able to capture our gains in less than 24 hours as the momentum of the move carried our position to profit very quickly.

Figure 1: Do the Right Thing CCI Trade, EUR/USD

Source: FXtrekIntellichart

For traders who do not like to wait nearly a quarter of a year between setups, the hourly chart offers far more opportunities for the "do the right thing" setup. It is still infrequent, which is one of the reasons that makes this setup so powerful (the common wisdom in trading is "the rarer the trade, the better the trade"). Nevertheless, it occurs on the hourly charts far more often than on the dailies.

In Figure 2, we look at the hourly chart of the EUR/USD between March 24 and March 28 of 2006. At 1pm on March 24, the EUR/USD reaches a CCI peak of 142.96. Several days later at 4am on March 28, the CCI reading reaches a new high of 184.72. We go long at market on the close of the candle at 1.2063. The low of the candle is 1.2027 and we set our stop there.

The pair consolidates for several hours and then makes a burst to our first target of 1.2103 at 9am on March 28. We move the stop to breakeven to protect our profits and are stopped out a few hours later, banking 40 pips of profit. As the saying goes, half a loaf is better than none, and it is amazing how they can add up to a whole bakery full of profits if we simply take what the market gives us.

Figure 2: Do the Right Thing CCI Trade, EUR/USD

Source: FXtrekIntellichart

CCI Setup On Shorter Time Frames
Figure 3 shows a short in the USD/CHF. This example is the opposite of the approach shown above. On October 11, 2004, USD/CHF makes a CCI low of -131.05. A few days later, on October 14, the CCI prints at -133.68. We enter short at market on the close of the candle at 1.2445. Our stop is the high of that candle at 1.2545. Our first exit is hit just two days later at 1.2345. We stay in the trade with the rest of the position and move the stop to breakeven. Our second target is hit on October 19 - no more than five days after we've entered the trade.

The total profit on the trade? 300 points. Our total risk was only 200 points, and we never even experienced any serious drawdown as the momentum pulled prices farther down. The key is high probability, and that is exactly what the "do the right thing" setup provides.

Figure 3: Do the Right Thing CCI Trade, USD/CHF

Source: FXtrekIntellichart

Figure 4 shows another example of a short-term trade, this time to the downside in the EUR/JPY. At 9pm on March 21, 2006, EUR/JPY recorded a reading of -115.19 before recovering above the -100 CCI zone. The "do the right thing" setup triggered almost perfectly five days later, at 8pm on March 26. The CCI value reached a low of -133.68 and we went short on the close of the candle. This was a very large candle on the hourly charts, and we had to risk 74 points as our entry was 140.79 and our stop was at 141.51.

Many traders would have been afraid to enter short at that time, thinking that most of the selling had been done, but we had faith in our strategy and followed the setup. Prices then consolidated a bit and trended lower until 1pm on March 27. Less than 24 hours later we were able to hit our first target, which was a very substantial 74 points. Again we moved our stop to breakeven. The pair proceeded to bottom out and rally, taking us out at breakeven. Although we did not achieve our second target overall, it was a good trade as we banked 74 points without ever really being in a significant drawdown.

Figure 4: Do the Right Thing CCI Trade, EUR/JPY

Source: FXtrekIntellichart

When "Do the Right Thing" Does You Wrong
Figure 5 shows how this setup can go wrong and why it is critical to always use stops. The "do the right thing" setup relies on momentum to generate profits. When the momentum fails to materialize, it signals that a turn may be in the making. Here is how it played out on the hourly charts in AUD/USD. We note that CCI makes a near-term peak at 132.58 at 10pm on May 2, 2006. A few days later at 11am on May 4, CCI reaches 149.44 prompting a long entry at .7721. The stop is placed at .7709 and is taken out the very same hour. Notice that instead of rallying higher, the pair reversed rapidly. Furthermore, as the downside move gained speed, prices reached a low of .7675. A trader who did not take the 12-point stop as prescribed by the setup would have learned a very expensive lesson indeed as his losses could have been magnified by a factor of three. Therefore, the key idea to remember with our "do the right thing" setup is - "I am right or I am out!"

Figure 5: Do the Right Thing CCI Trade, AUD/USD

Source: FXtrekIntellichart

Conclusion
"Do the right thing" allows traders to trade breakouts confidently and successfully. CCI can put you on the right side of a trade when many others are trying to fade the price action. However, this setup only works if you apply it along with disciplined stops to protect you from major losses if the expected momentum fails to materialize.

by Kathy Lien and Boris Schlossberg,
Boris Schlossberg runs BKTraderFX, a forex advisory service and is the senior currency strategist at Forex Capital Markets in New York, one of the largest retail forex market makers in the world. He is a frequent commentator for Bloomberg, Reuters, CNBC and Dow Jones CBS Marketwatch. His book, "Millionaire Traders" (John Wiley and Sons) is available on Amazon.com, where he also hosts a blog on all things trading.

Kathy Lien is Chief Strategist at the world's largest retail forex market maker, Forex Capital Markets in New York. Her book "Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Swings" (2005, Wiley), written for both the novice and expert, has won much acclaim. Easy to read and easy to apply, this book shows traders how to enter the currency market with confidence - and create long-term success! Kathy has taught currency trading seminars across the U.S. and has also written for CBS MarketWatch, Active Trader, Futures Magazine and SFO Magazine. Follow her blog at www.kathylien.com

Introducing The Bearish Diamond Formation

noreply@blogger.com (roselyn) — Tue, 29 Dec 2009 03:50:00 +0000

For years, market aficionados and forex traders alike have been using simple price patterns not only to forecast profitable trading opportunities but also to explain simple market dynamics. As a result, common formations such as pennants flags and double bottoms and tops are often used in the currency markets, as well as many other trading markets. A less talked about, but equally useful, pattern that occurs in the currency markets is the bearish diamond top formation, commonly known as the diamond top. In this article, we'll explain how forex traders can quickly identify diamond tops in order to capitalize on various opportunities.

The diamond top occurs mostly at the top of considerable uptrends. It effectively signals impending shortfalls and retracements with relative accuracy and ease. Because of the increased liquidity of the currency market, this formation can be easier to identify in the currency market than in its equity-based counterpart, where gaps in price action frequently occur, displacing some of the requirements needed to recognize the diamond top. This formation can also be applied to any time frame, especially daily and hourly charts, as the wide swings often seen in the currency markets will offer traders plenty of opportunities to trade.

Identifying and Trading the Formation
The diamond top formation is established by first isolating an off-center head and shoulders formation and applying trendlines dependent on the subsequent peaks and troughs. It gets its name from the fact that the pattern bears a striking resemblance to a four-sided diamond.

Let's look at a step-by-step breakdown of how to trade the formation, using the Australian dollar/U.S. dollar (AUD/USD) currency pair (Figure 1) as our example. First, we identify an off-center head and shoulders formation in a currency pair. Next, we draw resistance trendlines, first from the left shoulder to the head (line A) and then from the head to the right shoulder (line B). This forms the top of the formation; as a result, the price action should not break above the upper trendline resistance formed by the right shoulder. The idea is that the price action consolidates before the impending shortfall, and any penetrations above the trendline would ultimately make the pattern ineffective, as it would mean that a new peak has been created. As a result, the trader would be forced to consider either reapplying the trendline (line B) that runs from the head to the right shoulder, or disregarding the diamond top formation altogether, since the pattern has been broken.

To establish lower trendline support, the technician will simply eye the lowest trough established in the formation. Bottomside support can then be drawn by connecting the bottom tail to the left shoulder (line C) and then connecting another support trendline from the tail to the right shoulder (line D). This connects the bottom half to the top and completes the pattern. Notice how the rightmost angle of the formation also resembles the apex of a symmetrical triangle pattern and is suggestive of a breakout.

Figure 1 - Identifying a diamond top formation using the AUD/USD.

Trading the diamond top isn't much harder than trading other formations. Here, the trader is simply looking for a break of the lower support line, suggesting increasing momentum for a probable shortfall. The theory is quite simple. Both upper resistance and lower support levels established by the right shoulder will contain the price action as each subsequent session's range diminishes, suggestive of a near-term breakout. Once a session closes below the support level, this indicates that selling momentum will continue because sellers have finally pushed the close below this significant mark. The trader will then want to place his/her entry shortly below this level to capture the subsequent decline in the price. This approach works especially well in the currency markets, where price action tends to be more fluid and trends are established more quickly once a certain significant support or resistance level is broken. Money management would be applied to this position through a stop-loss placed slightly above the previously broken support level to minimize any losses that might occur if the break is false and a temporary retracement takes place.

Figure 2 below shows a zoomed in view of Figure 1. We can see that a session candle closed below or "broke" the support trendline (line D.i.), indicating a move lower. The diamond top trader would profit from this by placing an entry order below the close of the support line at 0.7504, while also placing a stop-loss slightly above the same line to minimize any potential losses should the price bounce back above. The standard stop will be placed 50 pips higher at 0.7554. In our example, the stop order would not have been executed because the price did not bounce back, instead falling 150 pips lower in one session before falling even further later on.

Figure 2 - A closer look at the diamond top formation using the AUD/USD. Notice how the position of the entry is just below the support line (D.i.).

Finally, profit targets are calculated by taking the width of the formation from the head of the formation (the highest price) to the bottom of the tail (the lowest price). Staying with our example using the AUD/USD currency pair, Figure 3 shows how this would be done. In Figure 3, the AUD/USD exchange rate at the top of the formation is 0.8003. The bottom of the diamond top is exactly 0.7250. This leaves 753 pips between the two prices that we use to form the maximum price where we can take profits. To be safe, the trader will set two targets in which to take profits. The first target will require taking the full amount, 753 pips, and taking half that amount and subtracting it from our entry price. Then, the first target will be 0.7128. The price target that will maximize our profits will be 0.6751, calculated by subtracting the full 753 pips from the entry price.

Figure 3 - The price target is calculated on the same example of the AUD/USD

Using a Price Oscillator Helps
One of the cardinal rules of successful trading is to always receive confirmation, and the diamond top pattern is no different. Adding a price oscillator such as moving average convergence divergence and the relative strength index can increase the accuracy of your trade, since tools like these can gauge price action momentum and be used to confirm the break of support or resistance. Applying the stochastic oscillator to our example (Figure 4), the investor confirms the break below support through the downward cross that occurs in the price oscillator (point X).

Figure 4 - The cross of the stochastic momentum indicator (point X) is used to confirm the downward move.

Putting It All Together
Not only do bearish diamond tops form in the major currency pairs like the Euro/U.S. dollar (EUR/USD), the British pound/U.S. dollar (GBP/USD) and the U.S. dollar/Japanese yen (USD/JPY), but they also form in lesser-known cross-currency pairs such as the Euro/Japanese yen (EUR/JPY). Although the formation occurs less in the cross-currency pairs, the swings tend to last longer, creating more profits. Let's look at a step-by-step example of this using the EUR/JPY:

1) Identify the head and shoulders pattern and confirm the offset nature of the formation by noticing that the head is slightly to the left, while the tail is set to the right.

2) Form the top resistance by connecting the left shoulder to the tip top of the head (line A) and the head to the right shoulder (line B). Next, draw the trendlines for support by connecting the left shoulder (line C) to the tail and the tail to the right shoulder (line D).

3) Calculate the width of the formation by taking the prices at the top of the head, 141.59, and the bottom of the tail, 132.94. This will give us a total of 865 pips of distance before we can take our full profits. Divide by two and our first point to take profits will be 432 pips below our entry.

4) Establish the entry point. Look to the apex of the right shoulder and notice the point where the candle closes below the support line, breaking through. Here, the close of the session is 137.79. The entry order should then be placed 50 pips below at 137.29, while our stop-loss order will be placed 50 pips above at 137.79.

5) Calculate the first take profit price by subtracting 432 pips from the entry. As a result, the first profit target will be at 133.45.

6) Finally, confirm the trade by using a price oscillator. Here, the stochastic oscillator signals ahead and confirms the opportunity as it breaks below overbought levels (point X).

If the first target is achieved, the trader will move his/her stop up to the first target, then place a trailing stop to protect any further profits.

Figure 5 - A different example of a diamond top formation using the EUR/JPY cross-currency pair. This chart shows all the trendlines, the highest and the lowest price, and the price target.

Conclusion
Although the bearish diamond top has been overlooked due to its infrequency, it remains very effective in displaying potential opportunities in the forex market. Smoother price action due to the enormous liquidity of the market offers traders a better context in which to apply this method and isolate better opportunities. When this formation is combined with a price oscillator, the trade becomes an even better catch - the price oscillator enhances the overall likelihood of a profitable trade by gauging price momentum and confirming weakness as well as weeding out false breakout/breakdown trades.

Richard Lee is a currency strategist at Forex Capital Markets LLC. Employing both fundamental models and technical analysis applications, Richard contributes regularly to DailyFX and Bloomberg. He has extensive experience in trading the spot currency markets, options and futures. Before joining the research group, Richard traded FX, equity and equity derivatives for a private equity consortium. Richard graduated from Pennsylvania State University with a Bachelor of Arts in economics and a Bachelor of Science in French with an emphasis in international business.

Profiting With Gartley Patterns

noreply@blogger.com (roselyn) — Sat, 19 Dec 2009 04:12:00 +0000

Bearish Gartley

Bearish Gartley: A Recent Example

Bullish Gartley

A Recent Example of a Bullish Gartley Pattern

So why does this pattern work so well?

This is purely opinion, but as you look at the pattern construction there are two key elements to the success of this pattern.

Let’s put it in the context of a Bullish Gartley Pattern:

A) You are trading with the overall trend. Note that the move from X to A is a large move up, and that the move against the trend from A to D is counter to that of the XA move, but is contained within XA so the trend up is not broken. In fact, in Elliott Wave world the translation of this pattern is that we have one Impulse wave up from X to A, then three corrective moves to the downside (AB, BC, and CD). The conclusion then from Elliott Wave would be the likelihood for another impulse wave to the upside.

B) Secondly, the reason this pattern is successful is that it is a bit of a “trap.” Let’s look at this step by step from swing point A.

a. After establishing swing point A price drops down to B and forms a swing low. Psychologically traders see this as a defining point and start to accumulate positions on the long side.

b. As price climbs and forms a swing high C the positions are established and many stops are placed under the swing low B point. In fact, short sellers are even starting to look at this swing B point as a potential area to short if price comes back down.

c. As the pattern plays out and price starts coming down from swing high C, the longs are getting nervous and the shorts and sitting in the background ready to pounce. Then Whammo! Price goes below the swing low B and all of a sudden the weak long traders start selling and the short players begin to sell ‘em creating additional momentum to the downside that ultimately takes us down to ideally around the .786 retracement of swing XA. This is a defining point for the stock/commodity. This is where the Gartley pattern screams to look for opportunity to buy…why? Partly due to the fact that you are psychologically going against the market at this point.

d. If swing D holds above X and price starts to creep up traders get a little uptight. Then as price goes back above swing low point B the weak short players cover and the longs that got shook out come back in and you’re long position is enjoying the ride from this psychological shake out.

So, to conclude, the pattern has been successful for so many years, in my opinion because it trades WITH the trend (in the context of the XA move), AND it capitalizes on the psychological aspects of traders. This is a pattern that I think every trader should be aware of and in many cases should incorporate into their trading plan. Derrik Hobbs

Integrated Pitchfork Analysis

noreply@blogger.com (roselyn) — Wed, 09 Dec 2009 03:15:00 +0000

In this article we look at preparation, techniques and money management for using integrated pitchfork analysis.

Spotting the Trade Opportunity
The process of low-risk high-probability spotting trades is very systematized for the experienced trader. He/she should visually scan the various choices of the operational time frame charts: 60-min, 30-min, 15-min and less frequently the 5-min chart. Our goal is to detect candidates representing low-risk high-probability trades. Once these opportunities revealed, we will employ different techniques with all the recommended disciplined rigour and patience. One of these is the zoom-and-retest technique, which is applied to a German Dax up-sloping failure.

Finding the Optimal Set-Up
In this trade, we have spotted triple up-sloping failures on 60-min, 30-min and 15-min operational charts (refer to Figures 1, 2 and 3). We have chosen the 60-min chart (refer to Figure 4), as our optimal operational trading time frame, because of the better trend visualisation, longer running profit and less market noise. The risk might be slightly higher but the profit, like I said, much more consistent.

Time Frame Alignment
We have noted that the upper time frames (weekly and daily charts) are both in the same up-sloping direction, but ready to be corrected. Then, we have looked at the three lower time frames (60-, 30- and 15-min) to observe the local market movements, and to better pinpoint our entry. We notice that the corrections of the three up-sloping trends, on theses charts have already started. The 5169 level pivot is common for all the studied time frames: weekly, daily (both charts not shown), 60-min, 30-min and 15-min charts.

The above 60-min chart illustrates the beginning of a correction with a big down-bar, closing right on the Center Line of the Action/Reaction lines set-up. The triple mirror pattern at the highest high (5169 level) is the guarantor of the reversal, beginning of a correction. It is highly probable that the down move will continue, at least a few bars, with intense momentum.

The above 30-min chart illustrates the beginning of a correction. The market travelled for a 6-bar duration on the lower median line, through a very narrow ascending channel, being halted cold at the 5169 resistance level. Then, it dropped with a big down-bar; very close to the external lower 150% Fibonacci line. The triple mirror pattern at the highest high is the guarantor of the reversal, beginning of a significant correction. It is highly probable that the down move will continue, at least for a few bars, with high-steamed momentum.

The above 15-min chart illustrates the beginning of a correction. The very strong market travelled almost vertically, made an eight bar narrow range consolidation below the 5169 level. Then, it dropped with a big down-bar, almost freely. The triple top pattern at the highest high is the guarantor of the reversal, beginning of a significant correction. It is highly probable that the down move will continue, for at least a few bars, with the same vigorous momentum.

Three Pawn Technique – Triple Order Preparation and Trade Execution
By observing the Figure 4, we note that the down move continues strongly, as anticipated, and created a down-gap, zooming through the upper median line of the ascending pitchfork. Now that the zoom is accomplished, let us consider the following trade, in case of a test or retest of the upper median line (U-MLH):

Sell stop entry at 5125 – if test or retest, after zooming move,
Initial stop loss - buy stop at 5129 - just above the last high of the previous trend,
First profit target objective (target No 1) – buy stop at 5062 - at the confluence of the market price with the median line (ML).
Second profit target objective (target No 2) – buy stop at 4990 - at the intersection of the market price with the lower median line (L-MLH). The value of this target has been calculated using the ATRs technique.

Due to the size and the location of the gap, which is probably a breakout gap, it seems that the trade has a high probability potential. Thus, we will consider, two trading units:

First that will be exited at the target No 1 level, and
The second that will be exited at the target No 2 level. Who knows, we might be able to get a free ride and trade with the market’s own money.

But before placing any orders, we will have to establish the reward/risk ratio, and verify if the R/R ratio value is above/below our 2.5 usual limit.

Let us proceed and calculate the reward/risk ratio (R/R ratio), for this low-risk high-probability short trade. The calculation per contract will be only done until the target n°1. For the target n°2 there will be no risk because as soon as the target n°1 is attained, we will move the stop loss to the break-even point at 5125 level:

Reward is 63 Dax points for target No 1, [entry level (5125) minus target n°1 level (5062)],
Risk is 4 Dax points - [stop loss level (5129) minus entry level (5125)],
Reward/Risk ratio is 15.75 – (63 divided by 4) – an excellent value.

Conclusion – the R/R ratio being excellent, we will place our three pre-arranged orders.

The second bar of the opening just retraced, slightly over the upper median line, thus executing the entry order (Figure n° 5). The third opening bar (last one on the chart) has its close in its lower quarter, hinting towards a down-sloping move. We are confident in our progressing short-trade, mainly because of the breakout gap and the down-zooming huge bar.

The market has started to develop a pullback with regard to the down-move (refer to Figure 6). It is an excellent opportunity to add on (scale in) one trading unit. When adding, the trader should add on fewer units than the number of initial entry units. The standard value is 33% to a maximum of 50% of the number of the total entry units.
Therefore, we enter a pre-arranged add on unit sell stop order at 5125 level. The same stop loss (5129 level ) will be used, as that of the initial entry, targeting the same target n°1.
Therefore, we will have two trading units initially entered and a third one, as an add on, a total of three units. Two are exiting at target n°1 level, and the third at target n° 2 level. The enormous potential of this trade requires more than an intra-day trading session, so we have decided to let the trade in overnight.

As anticipated, the next day, the market dropped farther (refer to Figure 7) with a huge gap of 55.5 Dax points. Not only did the market price reach our target n° 1, but it exceeded it. At the opening of next day, we were still in the trade, in spite of the pre-arranged buy stop at 5062 (target n° 1). Thus, we had to manually exit with two units, right at the opening bar (5032 level). We also moved the stop of the remaining trading unit to the break-even level. We note that the occurrence of a second gap, usually called the running gap, gives another dimension to the already consistent trade potential.

The 50% level of the latter gap represents the half potential of the entire trend. The opening bar of the next day (refer to Figure 7) has a huge down tail, representing two thirds of the body. It only signals a short break in the strong down market drop. It looks like the target n°2 has a great probability to be attained. This would be the moment to add on (scale in) another trading unit, because of the high probability trade outcome.

The above chart illustrates the targeting out of our last unit (the third one) at 4990 level (target n°2) during the last hour of the day. Thus, our trade was terminated. We should emphasize here, the merit of the pre-arranged exits, especially the second one, which helped us to get the most out of this trade. Without this, we would have not been able to optimally manage the trade.

Profit & Loss – P/L Statement
Now, that the trade has been concluded let us see its outcome:

We have taken three trading units, all of them traded following an automatic pilot mode with pre-arranged orders, even if the market forced us, to exit manually. We should emphasize that all three units were governed by the three-pawn technique.
We have risked per contract four DAX points representing 100 euros ($127).
The reward per contract pertaining to the R/R ratio of 15.75, initially calculated per contract, was 63 Dax points. As we know, we have traded three units: two at the initial entry and one add on. Their exits were as follows: two units at 5032 level, and the last one at 4990 level.

Therefore, we have obtained the following results:

Firstly, for the two trading units, we have per contract a reward of 93 Dax points:
[entry level (5125) minus exit No 1 level (5032)],
Secondly, for the third trading unit, we have per contract a reward of 135 Dax points:
[entry level (5125) minus exit No 2 level (4990)],

The total financial result per contract (all three units) is 321 Dax points (2x93 + 1x135) a total of 8025 euros ($10191). The total time spent in the trade was two days, from the second hourly bar of the first day to the last bar of the next day.

Trader’s Journal - Keep Your Records
We write in the journal the main topics and also the unusual events or missing opportunities due to either the respect of the rules, or to the occurrence of new lessons pertaining to the learning curve.
Let us proceed further:

We fully respected the rules, especially the three pawn technique rules.
The trade reward is excellent, above the average results.
We have comfortably detected the first add on opportunity which we traded and also the second one below 5032 level, right at the opening of the second bar of the second day. We chose not to trade the latter because of the large required stop loss.
Once again, we realized the importance of identifying the types of gaps and their relationship with:

The median line and its contextual pitchfork acolytes,
Money management of the trade.

We took note of the role of the scanning of all five times frames, in order to reveal a low-risk high-probability trade, thus giving us an increased confidence in our tools and techniques. This is one of the best remedies for treating and healing the trigger-shy syndrome.
We noticed also the role of the failures, their detection and also the best way to trade them. Their concomitant occurrence in the already mentioned multiple times frames enhances, several times, the classic trade potential. Always look for them… they are great money-makers!

How I Identify Powerful Setups Using Symmetry?

noreply@blogger.com (roselyn) — Sun, 29 Nov 2009 02:49:00 +0000

I am often asked what I mean by the term "symmetry" in my work. I can attempt to define with words what it means to me in the market but the following charts (visuals) will probably illustrate the concept more accurately. Symmetry is essentially similarity and sometimes equality in the market. Actually, I just used the thesaurus and came up with Balance, Equilibrium and Proportion as synonyms.

Let's start with an example of "symmetry" in both price and time! The first example is on a 15-minute Nasdaq futures chart below. (I had a ball with this one with my subscribers as it started to unfold.) The overall trend on this chart at the time of this "potential trade setup" was bullish. If this trend was going to remain intact, we wanted to consider entering the buy side after a corrective decline terminated. What helps us determine when a corrective decline might terminate? SYMMETRY!

In this particular case, I saw the decline that was playing out in Nasdaq futures approaching the 100% price projection of the prior decline into the 1770 swing low. This prior decline lasted 87 points. If you projected the measurement of this decline and subtracted from the 1918 high, you came up with 1831 for this projection and potential support level. The June contract ended up making a new low for the move from the 1918 swing high at 1831 which was exactly 87 points down from that high. Besides this, just eye-balling the chart, I saw symmetry in time. As I checked the "time count" of the corrections, I found that this low made at EXACTLY 100% in price of the prior decline, was also made at 100% in TIME of the same prior decline (22 bars & 22 bars). This is definitely an argument against RANDOM market theory!!

At this point, I had to call this a pivotal low. If we saw price hold above here, we wanted to consider the buy side against it. Although I was not extremely confident that this low would hold, due to the bearish price action going into this low, I watched it carefully. The result was a continued hold above the 1831 low and a initial rally that took this contract to 1992!

In the next chart, we are looking at the 5-minute June S&P contract . Notice the similarity in both the price and time of the corrective declines shown marked with the red lines. They are not EXACTLY the same, but are very similar in both price and time! I constantly watch for similar corrective moves in a market to potentially enter with an "edge" in the direction of the main trend. In this case, the trend is defined on a 5-minute basis! Ideally, we want to see the higher degree time frame trend, agree with the lower. (For example, we want to see the daily, 60-minute and 5-minute agree, all showing higher highs and higher lows.).

When projecting my key price cluster zones, I will lean towards trading against a zone that INCLUDES a 100% projection of a prior decline. Why? Because of the "symmetry." This projection along with a healthy confluence of other Fibonacci projections, tells me to focus on those price clusters that include symmetry. In this case, I saw the 100% projection of the prior corrective decline came in at 1906. Coincidentally, a beautiful cluster of Fib retracements and extensions overlapped this key 100% projection, and gave us a key price zone to consider a trade against (1902-1909***). In this particular case, a low was made at 1909. The rally in Nasdaq futures resumed almost immediately after testing this zone, that included "symmetry."

How about the Nasdaq cash index ? Note that a very important price projection I will be watching for "potential" resistance and/or termination of the rally from the April 4, 2001 low in this market, includes the 100% projection of the prior corrective rally into the Jan. 24 high.

What does symmetry mean to us when we are looking at it as an indication of trend? It can be very helpful in indicating a change in trend, therefore in tell us when to exit a trade and/or initiate a trade in the opposite direction. For example: In the 60-minute Nasdaq futures chart below, when we "violated" the bearish symmetry (we rallied more in time and price than the prior four corrective rallies) it signaled the potential termination of the decline we were experiencing from the 1777 swing high. In this case, after this "symmetry" was violated, buying a pullback to the last low was a "winning strategy." I see this happen over and over again in all markets.

Although using "symmetry" is a wonderful addition to our "technical tool bag," I feel compelled to show you an example of a "break in symmetry" that did NOT result in a trend change. This is just to remind you, that although these methods work extremely well and produce positive results more often than not, when a market does not start the play out as expected, your discipline should be to stop yourself out of the trade in question in order to preserve capital!!

If you begin to study the markets with these concepts discussed above in mind, you have the potential to greatly improve your bottom line in trading.

By Carolyn Boroden | TradingMarkets.com

How to trade triangle breakouts

noreply@blogger.com (roselyn) — Thu, 19 Nov 2009 02:48:00 +0000

When prices fluctuate in a smaller range over time a triangle formation occurs. Triangle patterns are some of the best trading opportunities in financial markets. Our favorite aspect of triangles is that they usually retrace beyond the standard 61.8% Fibonacci retracement level and hurt traders. By Elliott Wave terms, we also see a “wave E” break of both trendline resistance/support and the 61.8% Fibonacci level.

This does two things. First it hits stops and sees a surge in breakout buying. Second, that mass movement by the market sets up the reversal point in “wave E” which then catches the market wrong footed again. Fun! Identifying triangle patterns usually only comes about near the apex in “wave E” so experienced traders know to be very cautious as whipsaw movement is the standard for these formations. Interestingly, the currency markets currently have two major pairs in long term triangle patterns. Let’s look at each of these.

First is USDJPY which we believe is going to see a typical “false breakout” in “wave E of IV” in this triangle formation. That would likely mean a move to 1.24/25 (just above the 61.8% Fib of the wave C to D decline). Then a sharp reversal over the first several months of 2007 as the JGB market declines rapidly in line with a move higher in rates. We will look to buy JPY once we reach “wave E.” When prices fluctuate in a smaller range over time a triangle formation occurs. Triangle patterns are some of the best trading opportunities in financial markets.

Our favorite aspect of triangles is that they usually retrace beyond the standard 61.8% Fibonacci retracement level and hurt traders. By Elliott Wave terms, we also see a “wave E” break of both trendline resistance/support and the 61.8% Fibonacci level. This does two things. First it hits stops and sees a surge in breakout buying. Second, that mass movement by the market sets up the reversal point in “wave E” which then catches the market wrong footed again. Fun! Identifying triangle patterns usually only comes about near the apex in “wave E” so experienced traders know to be very cautious as whipsaw movement is the standard for these formations. Interestingly, the currency markets currently have two major pairs in long term triangle patterns. Let’s look at each of these.

First is USDJPY which we believe is going to see a typical “false breakout” in “wave E of IV” in this triangle formation. That would likely mean a move to 1.24/25 (just above the 61.8% Fib of the wave C to D decline). Then a sharp reversal over the first several months of 2007 as the JGB market declines rapidly in line with a move higher in rates. We will look to buy JPY once we reach “wave E.”

USDJPY fundamental picture is very much in line with the technically bearish descending triangle formation, supporting our forecast of near term yen weakness followed by a sharp rebound. After years of quantitative easing and months of Zero Interest Rate Policy, the Bank of Japan had finally taken a first step toward removing the extreme accommodation and raised interest rates to 0.25%. However, the month of August saw nothing but negative economic data from Japan. Among the most notable figures were a decline in Q2 GDP from 0.8% all the way to near-recession levels at 0.2%, a drop in new housing starts from nearly 7% to 4%, and finally a shortfall in core CPI from 0.6% to 0.2%. As a result, speculation over further central bank tightening has diminished significantly with both currency and JGB markets seeing declines in yen and a rally in bonds. Years of “free money” have set up a climate of inevitable recovery, however just as the central bankers from Japan have warned us, that recovery will be far more gradual than the impatient markets were expecting.

Another major pair putting on the finishing touches of “wave E of IV” is EURGBP. This is a bullish triangle formation from the May 2003 highs and has the classic EW “ABCDE” count in what is typically a “wave IV” consolidation. While a bit unconventional, we prefer to buy near the “puke point” in “wave E” which is the May ‘05 “wave C” low at 0.66. That means traders should buy here this week at 0.6740 (s/l @ 0.66 and target at 0.77) for a 7:1 reward to risk ratio.

Fundamentally, we find a comparable to Japan windfall of deterioration in economic data coming in from the UK to be just as compelling. Sharp declines in manufacturing and industrial production were followed by data showing diminishing inflationary pressures. After a surprise rate hike last month, the Bank of England monetary policy committee will restore its conservative approach to monetary policy with a hold on interest rates at 4.75% on September 7.

The euro side of the EURGBP coin is far more attractive. After a slight stumble in the ZEW survey as measured by industry analysts, the more reliable business manager sentiment IFO index showed a slight improvement. And while this week’s ECB decision is unlikely to produce another rate hike, we expect central bank Governor Trichet to maintain the accelerated tightening pace and to once again signal further removal of accommodation at the next meeting in October. Jes Black is the fund manager at Black Flag Capital Partners and Chairman of the firm’s Investment Committee, which oversees research, investment and trading strategies. You can find out more about Jes at BlackFlagForex.com. Prior to organizing the hedge fund he was hired by MG Financial Group to help run their flagship news and analysis department, Forexnews.com. After four years as a senior currency strategist he went on to found FxMoneyTrends.com - a research firm catering to professional traders.

EURUSD Intraday ( 10 Nov )

noreply@blogger.com (roselyn) — Wed, 11 Nov 2009 02:23:00 +0000

Breakout happened and yesterday give a new bounce.
See how new pattern of channel created.

It seem the price couldn't break 38.2 and try to break the resistence at 1.5020.
And it will break 1D channel resistence at 1.5062 ?

What do you think?

EURUSD Intraday ( 08 Nov )

noreply@blogger.com (roselyn) — Mon, 09 Nov 2009 01:59:00 +0000

EURUSD , get sideway pattern for 2 days ago... I wish this could be good breakout entry point.

USDJPY - Intraday ( 08 Nov )

noreply@blogger.com (roselyn) — Mon, 09 Nov 2009 01:38:00 +0000

This week channeling pattern seem unbreakable... the market movement so weak and the last NFP had no enough power to breakdown the support at 89.23.
Now , the asian market open look like disagree with the last movement of NFP.... I wish you have take this chance for profit and wait for better vision of golden ratio.

USD/JPY - monthly-weekly Analyst

noreply@blogger.com (roselyn) — Mon, 09 Nov 2009 01:21:00 +0000

USDJPY have strength downtrend pattern when the price had no power to breakthrough into 50% of last swing pattern.The Confirmations to continue the trend make it completely the bouncing time is offer and starting to continue the trend.

EUR/USD Monthly-Weekly analyst

noreply@blogger.com (roselyn) — Mon, 09 Nov 2009 01:10:00 +0000

This week , the pattern in consolidate for the next trend journey after uptrend at long week. As we seen in channeling preview the last pattern seem cross through 50% of last swing this give 2 options for next trend "Channeling" or "Ranging".

The last bounce price at 76.4 and yesterday resistence created at 23,6.

Intraday will clearly show when the price breakup the resistence and for middle term it need confirmations at 1.5059.

For me , I waiting for clearly vision and find better confimation candles to entry or try levitation system trading just for my best Risk and Rewards Ratio.

USDJPY - Quarterly market

noreply@blogger.com (roselyn) — Sun, 14 Jun 2009 15:26:00 +0000

Just like my predictions , last monday open there will be gap... Last week price try to up through into upperline channel but seem stucked and in yearly channel we can see that price stucked at golden rasio 98.88. Long signal still open , stop loss at 97.43 with confirmation resistent at 99.68 as Up buffer zone golden rasio... I think when this broken the price will swing into 100.62 as our target profit.

noreply@blogger.com (roselyn) — Sun, 14 Jun 2009 15:26:00 +0000

Last week price try to up through

USDJPY - Quarterly market

noreply@blogger.com (roselyn) — Sun, 07 Jun 2009 14:18:00 +0000

Last week price break golden rasio and start the journey into upperline channel. for long trade safety stop loss at 97.43 and new target at 100.62 May be there will be gap in monday start open....

USDJPY - Quarterly market

noreply@blogger.com (roselyn) — Sun, 31 May 2009 14:05:00 +0000

This week , price almost reach golden rasio... I wish you safe your profit before they going down back. For next week , I prefer to wait and make clear vision about usdjpy movement... even long signal still open. Watch out!! Otherwise with EURUSD , last thurs-friday trend strong enough.... I think monday will be corrections for it and EURJPY may be will give us more clearly technical direction moreover if USDJPY completed the directions to breakdown.

USDJPY - Long term channeling market

noreply@blogger.com (roselyn) — Mon, 25 May 2009 04:03:00 +0000

USDJPY - Yearly Chart Usdjpy , yearly formed channel pattern and stuck in golden rasio... USDJPY - Semester Chart Usdjpy in the bottom of seconds channel... will it breakdown or go through in the golden rasio of the seconds channel? Just wait.. let the market decided what they want. Entry Long at 95.07 with target golden rasio 97.48 , SL = 94.31 Entry Short for breakdown 93.52 with target 89.58 , SL=94.31

Trade Broken Trendlines Without Going Broke

noreply@blogger.com (roselyn) — Mon, 15 Dec 2008 17:34:00 +0000

Plotting trendlines onto a chart is one of the easiest ways for technical traders to get a quick idea of an asset's direction. As you may know, trendlines come in a variety of different forms and they can greatly vary in length and significance. In this article, we'll take a look at an 11-month trendline that we identified on the chart of NVR Inc. (NYSE: NVR) in our June 12, 2007 ChartAdvisor newsletter, and we'll show how it affected the short-term direction of the stock's price. We'll also cover a simple stop-loss strategy that may be used when trading technical signals based on breaks of support/resistance. What We Saw A price move through an identified trendline is one of the most common signals of a trend reversal and, as you can see in Figure 1 below, this was exactly what happened on the chart of June 12 NVR chart. We noted that the drop below the trendline would likely be the first signal of a reversal in the trend, but also that it was important to pay attention to the lower-than-average volume because it could signal a failed break. The low volume was a concern for technical traders because it was showing that the bears were not as interested in pushing the price sharply lower as most were expecting. Given the low volume and lack of volatility, we argued that it would be a good idea to wait several days to confirm that the bulls wouldn't be able to send the stock price back above the trendline. Figure 1 What happened? In the case of NVR, the price started to move lower and with this came technical confirmation that the breakdown was valid. The bulls tried to step back in by pushing the price toward the newly formed resistance level, but this attempt was met with a flood of sellers. The retest of the resistance, also known as a throwback, is a common occurrence in trading and the failed move higher is usually the final piece of confirmation needed by traders looking to profit from a pullback. When the dust settled near the end of July, volatility remained high and volume was trading at higher-than-average levels. NVR shares were hovering around the $600 mark - falling from a mid-month high of $723. The break below the trendline was a good indication of the impending downward momentum and proved to be a profitable strategy for those who knew what to look for. No Man's Land The clear signal of a stock breaking through a trendline is the first step to making a highly profitable trade. However, the act of taking a profit is not quite as easy. A trader's job becomes substantially more difficult when a stock is trading midway between influential levels of support and resistance because, from a technical perspective, the stock could go either way. The questions in the trader's mind come quickly: "Should I take a profit when the downward momentum lets up?" and "Is this just a period of consolidation before the bears continue to hammer the stock lower?" As you can see from the chart below, NVR did trend lower for the next couple of months, ending near $560. It is important to mention that the extra percentage gain from $600 to $550 comes at a substantially higher cost because the trader consciously ran the risk of giving up a healthy gain in the event that the stock was able to find some unexpected strength. Notice how in Figure 2 the stock was trading halfway between the March 2007 high and the May low from 2006. This can leave a trader uncertain about the future direction. In addition, the declining volume again suggested that traders were losing interest. If a trader does not have a defined target, it may be a wise decision to close some or all of the position at a junction like this and to look for a trade with a higher probability of success. Figure 2 A Strategy for Managing Stop Losses There is also a strategy that traders can consider when using trendlines as a basis for a trade. Previous swing highs/lows are a good indicator of potential areas that may influence the stock's momentum. These are levels where the price has reversed in the past and traders will often look for this situation to occur again. As you can see in Figure 3 below, there can often be many levels of support/resistance and one strategy would be to set a stop-loss order above the previous level of resistance (in the case of a short position) and trail the order behind the price as it breaks below the lower price levels. Keep in mind that traders will pay more attention to levels that have been tested several times (red lines) because of their historical influence. Figure 3 In this example, traders with a higher level of risk aversion, or those with a long-term investment horizon, may instead prefer to trail a stop order above the resistance found two levels above the current price. This would allow the given security to have more room to fluctuate and is used to profit from prolonged downward moves. It is important to note that this version of the strategy will lead to larger losses if the stop price is reached, but can also lead to larger gains. What We Learned A drop below a trendline is often used by traders as a signal of a reversal in the current trend. The clear move below a trendline is often a good indicator for determining a strategic entry price. Sometimes it only takes the implementation of a simple risk-management strategy to protect the gains made from an uptake in momentum that accompanies a breakdown through a trendline. by Casey Murphy, investopedia.com Casey Murphy is the senior analyst at Investopedia.com and is a graduate of the University of Alberta School of Business. He specializes in technical analysis and is dedicated to uncovering profitable trading opportunities.

Channeling: Charting A Path To Success

noreply@blogger.com (roselyn) — Mon, 08 Dec 2008 17:28:00 +0000

Channel trading is a powerful yet often overlooked form of trading that capitalizes on the tendencies of markets to trend. It combines several forms of technical analysis to provide traders with precise points from which to buy and sell, put stop-loss and take-profit levels, and much more! This article will show you how to create and effectively trade these amazing instruments. Channel Characteristics In the context of technical analysis, a channel is defined as the area between two parallel trendlines and is often taken as a measure of a trading range. The upper trendline connects price peaks (highs) or closes, and the lower trendline connects lows or closes. An example of a channel is shown below.Breakout points in channels indicate bullish (on upward trends) or bearish (on downward trends) signals. Channels are useful for short-to medium-term trading - not long-term trading or investing. The technique often works best on stocks with a medium amount of volatility. Remember, the volatility determines your profit per trade. Channeling also tend to work best when the technique is combined with other forms of technical analysis, at which we take a closer look below. Finding an Equity Not all equities can utilize this technique as it requires that the underlying equity has an existing channel in its chart. Generally, a channel consisting of four contact points is necessary for the channel to be considered “trade-able”. There are three ways to locate an equity to which this strategy can be applied: 1. Manually look through charts to locate channel patterns. 2. Utilize software or a service that automatically recognizes channel patterns. 3. Subscribe to a company that provides you with a list of equities to which this technique can be applied. Creating a Channel Channels are relatively easy to create using these four simple steps: 1. Locate a relative high and a relative low in the past from which to begin the channel. 2. Locate another subsequent high and low that follows one of the three following patterns (see table below): a. Ascending channel - higher high and higher low. b. Descending channel- lower low and lower high. c. Horizontal channel- horizontal highs and lows. 3. Draw two trend lines - one connecting the two highs, and one connecting the two lows. Note that these two lines should be near parallel. 4. These two lines form your basic channel after there are at least two contact points with the upper channel and two with the lower channel. More contact points enhance the reliability of the channel. Trading the Channel Channels provide a clear, systematic way to trade. In fact, these simple instruments can show you when to buy and sell, where to place your stop-loss and take-profit points, how to determine the reliability of the trade and how long you should expect the trade to take! Let's look at how these can be done... Locating Buy and Sell Points Channels help locate optimal buying and selling points. Here are the standard channel trading rules: • When the price hits the top of the channel, sell your existing position and/or take a short position. • When the price is in the middle of the channel, hold. • When the price hits the bottom of the channel, add to your existing position, cover your short and/or buy. Two exceptions to these rules: 1. If the price breaks through the top or bottom of the channel, then the channel play ends until a new channel is established. 2. If the price drifts between the channels for a prolonged period of time, a new narrower channel may be established. There may be times when other forms of technical analysis are needed to enhance the accuracy of the channel plays, and verify the overall strength of the channel. Using other techniques in conjunction with channeling can also help you avoid the side-effects of the two exceptions listed above. A few useful ones to keep in mind are: • Moving average convergence divergence - These can be used to confirm channel movements, especially after a contact is made. • Stochastics - These are useful to confirm channel movements. • Volume - Analyzing volume ratios can also help you determine the strengths of different channel movements, which determine the overall channel strength. • Short-term moving averages - These can provide you with a short-term outlook on a channel play. They are most useful after a contact is made to confirm the change in direction. • Candlestick patterns - These are useful for spotting channel breakouts. Determining Stop-Loss and Take-Profit Levels Channels provide built-in money-management capabilities in the form of stop-loss and take-profit points. Here are the standard rules for determining these points: • If you have bought at the bottom of the channel, set a (moving) take-profit point at the top of the channel. Also, set a (moving) stop-loss point slightly below the bottom of the channel, allowing room for regular volatility (taking the beta into consideration). • If you have taken a short position at the top of the channel, set a (moving) take-profit point at the bottom of the channel. Also, set a (moving) stop-loss slightly above the top of the channel, allowing room for regular volatility (taking the beta into consideration). Determining Trade Reliability Channels provide the ability to determine how likely your trade is to be successful. This is done through something known as confirmations. Confirmations represent the number of times the price has rebounded from the top or bottom of the channel - in essence confirming the accuracy of the channel. Here are the important confirmation levels to remember: • 1-2 - Weak channel (non-trade-able). • 3-4 - Adequate channel (trade-able). • 5-6 - Strong channel (reliable). • 6+ - Very strong channel (very reliable). Estimating Trade Length The amount of time a trade takes to reach a sell point from a buy point can also be calculated using channels. This is done by recording the amount of time it has taken for trades to execute in the past, then averaging the amount of time for the future. This strategy relies on the theory that channel price movements tend to be nearly equal in time and price. Conclusion Channels provide one of the most accurate methods from which to trade in any market. By “encasing” an equities price movement into two parallel trend lines, this simple chart can provide the exact points from which to buy and sell, create stop-loss and take-profit points, check channel strength and even estimate how long the trade will take. This technique is a valuable asset to any trader. Resources Voodoo Trader (http://www.chart.nu) - A free service that automatically locates stocks that are compatible with channel trading. ChartAdvisor (http://www.chartadvisor.com) - A paid service that identifies chart patterns. Tradecision (http://www.tradecision.com) - Trading software that automatically generates various technical formations, including channels. by Justin Kuepper Justin Kuepper has many years of experience in the market as an active trader and a personal retirement accounts manager. He spent a few years independently building and managing financial portals before obtaining his current position with Accelerized New Media, owner of SECFilings.com, ExecutiveDisclosure.com and other popular financial portals. Kuepper continues to write on a freelance basis, covering both finance and technology topics.

Surf's Up With Filtered Waves

noreply@blogger.com (roselyn) — Mon, 01 Dec 2008 17:15:00 +0000

In 1977, long before investment analysis software made testing strategies a painless process, market researcher Arthur Merrill manually tested the idea of "filtered waves". Several years later, Martin Zweig popularized the concept as a trading model in his 1986 book, "Winning on Wall Street". In this article, we'll introduce you to this simple trading strategy and illustrate why every active trader should consider paddling out to catch these waves. What are Filtered Waves? Very few people read Merrill's short book, "Filtered Waves, Basic Theory: A Tool for Stock Market Analysis", when he completed it, but this work clearly demonstrated that legendary trader Jesse Livermore's swing trading methods worked. A Wall Street legend, Livermore had detailed his methods of swing trading late in his trading career and was able to make a complex subject understandable to all. While Livermore traded on a short time frame, Merrill discovered that with an appropriate filter, this strategy could form the backbone of long-term investing strategies. Swing trading is a strategy that involves holding a stock overnight, and at times for longer periods. With filtered waves, trades can last for months, and occasionally years. The goal of both methods is to take the low-risk gains from the middle of a trend, rather than trying to pick bottoms and tops. The idea is shown in Figure 1. The swing trader would hold this stock during the time indicated by the dashed line, buying after the bottom is confirmed and selling after the top is confirmed. Figure 1: A wave In Figure 1, the buy signal occurs when the price moves above the previous high. The sell signal is tougher to define; it can be a rule that sells after three days without a new high, or a decline equal to a percentage retracement of the previous move (for example, selling when the stock gives back half of the gains made on the upside). Livermore defined swing buying and selling signals in percentage terms. First, Livermore identified the trend as up or down. An uptrend is a series of higher highs and higher lows; a downtrend is marked by lower lows and lower highs. During an uptrend, Livermore's system only takes long trades. The specific buy and sell points are illustrated in Figure 2. As the uptrend runs its course, prices will eventually experience a decline of at least 4% from a high (Point A in Figure 2). This is the signal to close long trades. When price penetrates the previous swing low by 2% (B), Livermore entered short position. Shorts were closed when prices rose 4% from a recent low (C) and new longs were initiated only after the previous swing high was exceeded by 2% (D). This is also the point where Figure 2 started, with the buy signal shown on the left side of the chart. Figure 2 - Trading the waves However, Livermore never offered proof that his tactics worked. Merrill picked up where Livermore left off, and quantitatively tested the idea of buying and selling based on percentage moves. He simplified the rules, backtesting on the Dow Jones Industrial Average, switching from long to short whenever price rose or fell by 5%. Merrill's results showed that despite a lot of losing trades in trendless markets, these rules beat a buy-and-hold strategy. The name filtered waves comes from the idea that the market moves in waves. These waves ebb and flow just like ocean waves. Up waves are followed by down waves and they all come in different sizes and strengths. Merrill ignored the minor waves, filtering out any moves of less than 5%. The filter allowed him to identify the long-term trend, and formed the basis of a trend following trading system. Building a Trading Strategy Zweig extended the work of Merrill by providing a complete trading history in his book, crediting Ned Davis with developing the trading rules. Using the Value Line Index, a popular trading vehicle at that time, buy signals were generated whenever prices closed 4% above the most recent low. Sells occurred when prices declined 4% from previous highs. From 1966 until 1993, the period Zweig tested in his book, the strategy significantly outperformed the buy-and-hold investor. Taking both short and long trades, Zweig reported that this simple rule posted a 12.6% annualized gain, compared to a 2.7% gain for the index. The system was also profitable on long-only trades, switching to cash instead of shorting the market. Of course, this system can still lose. For example, if we take a trade at the beginning of a bull market, the averages may increase by 20%. This would lead to a trade with a profit of 12%, because entry is delayed until the market has gained 4% and an additional 4% of profits are given back before the sell signal is taken. While this would be a respectable trade, most swing moves are smaller than that. On a 10% move, the trader would show a profit of only 2% before trading costs are considered. On a 5% move, the trader would actually lose 3% or more after trading costs are considered. Advanced Trading Strategies Traders can think of filtered waves as a trend identification tool rather than a standalone trading strategy. While the results are certainly impressive, in a trading range market, the patience and equity of most traders will suffer. Simple modifications to the basic idea should help reduce the risks of being caught in a series of whipsaw trades. Using asymmetrical signals is one way to limit the size of drawdowns. This means setting the buy and sell points at different percentages. Ned Davis Research has published impressive results for the S&P 500. The rules are to buy when the index rises by 8.4% from an extreme low closing price, and sell when it falls by 7.2% from a top. Long-only, this system returned 11.5% per year between 1969 and 2001, easily beating the market return of 7.9%. More advanced students of the market can consider substituting a multiple of the average true range (ATR) instead of percentage changes to define the strategy. The ATR indicator was designed to change with market volatility by measuring the absolute level of change within the market over a certain time. As an example of this approach, traders could use a filter of three times the 10-day ATR as the trigger for buy and sell signals. From a high or low, the ATR calculation would be completed and added or subtracted to identify the trade trigger. Using ATRs as the wave filter would have the benefit of accommodating market conditions, allowing a trader to stay with the trend longer during volatile times. Unfortunately, it can also increase the amount given back by traders during those volatile times. As such, this approach might be better suited for short-term, risk-tolerant traders. Conclusion No matter how it's applied, filtered waves are a valuable addition to an investor's toolbox. With them, traders are guaranteed to always be on the right side of the trend without being overrun by the crashing wave. With refinements, this versatile technique can be useful as part of a long-term trading strategy and can be applied to mutual funds, ETFs, or volatile stocks. by Michael Carr , investopedia.com Mike Carr, CMT, is a member of the Market Technicians Association and editor of the MTA's newsletter, Technically Speaking. He is a full-time trader and writer.

In Trending Markets, Use These Candlestick Continuation Patterns

noreply@blogger.com (roselyn) — Mon, 24 Nov 2008 17:07:00 +0000

If you want to be popular and respected among traders, call every reversal point accurately. Warn traders when the top is forming, and inform people to prepare for the bottom. If you can do that with pinpoint accuracy, I guarantee that you will be a star. You will be the most sought-after person in the trading community. The Engulfing pattern, the Harami pattern, the Shooting Star, Morning and Evening Star patterns -- all these reversal candlestick patterns are supposed to be excellent ways of detecting important bottoms and tops. More than a few years ago, I read a report that said, "The candlestick charting technique does not have unfair advantages over other charting methods. The accuracy of candlestick charting technique is 50/50, or worse, depending on which market you are trading in." I'm not trying to discredit candlesticks. In fact, I encourage you to use them as part of your decision-making process. It is always wise to get as many confirmations as possible before committing your money. Remember, multiple signals are better than one signal. Today, I want to talk about continuation patterns of candlesticks. As you know, strong stocks cannot go up forever without taking a rest. They have to pull back from their highs before resuming their uptrend. This is the main idea behind continuation candle patterns. They are designed to detect when strong or weak stocks are taking a rest. It is just like the popular 1-2-3-4. Let's begin with the Rising Three Method. The Rising Three Method On this daily chart of ASTRO Power (AWPR | Quote | Chart | News | PowerRating), I want you to focus on numbers 1 through 5. This is what the Rising Three Method looks like. For it to be effective, some traders insist that Day 5's close must be higher than Day 1's high, and Day 4's low cannot go below the low of Day 1. I don't think this is really necessary, and do not wish to restrict myself too much when I trade. Since this pattern consists of five candlesticks, I think some leeway should be allowed. First, we need to confirm a stock is in an uptrend. The number 1 bar must be an up day with its open near the low and its close near the high. The numbers 2, 3, and 4 are pullback bars with small real bodies, and the color of the real body is not important. The number 5 bar is a bullish engulfing line that wraps almost entirely the previous down bars. A conventional buy entry will be made when the stock takes out the high of the number 5 bar. This is where I disagree. If you are a follower of the 1-2-3-4 method, you would be a buyer of this stock on Day 5. You can safely buy this stock when it trades above the high of the number 4 bar. The Falling Three Method The opposite of the Rising Three Method can be seen on this daily chart of Nabors Industries (NBR | Quote | Chart | News | PowerRating). I would like you to take a look at numbers 1 through 5. The number 1 bar has to be a down day with its open near the high and its close near the low. The numbers 2, 3, and 4 are pullback bars with small real bodies. Some traders demand that the color of the small real bodies be the opposite of Day 1. The number 5 bar is a bearish engulfing line that almost wraps all prior three bars. Your sell entry comes when the stock falls below the low of the number 5 day. Again, if you are a typical pullback player, you would not wait that long. In fact, you sell the stock when it trades below the low of the number 4 day. I want you to be a flexible trader. In actual trading situations, as you know, textbook-perfect shapes and patterns rarely develop. Here is a daily chart of MDU Resources Group (MDU | Quote | Chart | News | PowerRating). As you can see, it appears to be forming the Falling Three Method, but if you count correctly, it has four small real bodies. The number 6 bar is a bearish engulfing line that almost covers all previous four small bodies. Don't be too textbookish. Rather, be flexible. After all, a textbook is a textbook. By Tsutae Kamada | TradingMarkets.com

Chart Patterns to Avoid: Climax Top Off a Parabolic Move

noreply@blogger.com (roselyn) — Mon, 17 Nov 2008 16:28:00 +0000

This pattern occurs when a stock rises very quickly out of a base and gets overextended. Stocks in a Parabolic Move can double or triple in value in a very short period of time (usually less than two weeks). As an investor you certainly don't want to be one of the last passengers on the train and get quickly thrown off. Some examples of this pattern are shown below. Notice the quick move upward in MCOM back in July. In 5 trading days it went from $20 to $57 for a gain of 185%. Also notice that on the biggest volume day (point A) that it gapped up strongly to $53 and then closed poorly around $41. This was the Climax Top Off the Parabolic Move. As an investor you should have sold this day if you had bought the stock in the $20's. Meanwhile you certainly should have not bought this stock this day. Notice how the stock eventually pulled all the way back to $20 by early August (point B). Another example of a Climax Top Off a Parabolic Move is demonstrated by LWIN. This stock skyrocketed from $30 to $95 in 10 trading days for a whopping gain of 217%. The Climax Top occurred on the 10th and 11th days of trading as the volume peaked (point A). The stock then sold off and retreated back quickly to around $42 by late November. As you can see stocks that go up very quickly, in a Parabolic Move, can also come down just as fast. My advice is if you buy a stock and it doubles or triples in value in a very short period of time (1 to 2 weeks) take your profits and congratulate yourself for a job well done. If you become greedy then you could lose most of your gains as the above examples indicate. Furthermore if your buying a stock in this type of move be very careful and watch out for the Climax Top if the stock is trading on its biggest volume day. Bob Kleyla Amateur-Investors.Com

Analyzing Chart Patterns: Gaps

noreply@blogger.com (roselyn) — Mon, 10 Nov 2008 14:31:00 +0000

A gap in a chart is essentially an empty space between one trading period and the previous trading period. They usually form because of an important and material event that affects the security, such as an earnings surprise or a merger agreement. This happens when there is a large-enough difference in the opening price of a trading period where that price and the subsequent price moves do not fall within the range of the previous trading period. For example, if the price of a company’s stock is trading near $40 and the next trading period opens at $45, there would be a large gap up on the chart between these two periods, as shown by the figure below. Figure 1 Gap price movements can be found on bar charts and candlestick charts but will not be found on point-and-figure or basic line charts. The reason for this is that every point on both point-and-figure charts and line charts are connected. It is often said when referring to gaps that they will always fill, meaning that the price will move back and cover at least the empty trading range. However, before you enter a trade that profits the covering, note that this doesn’t always happen and can often take some time to fill. There are four main types of gaps: common, breakaway, runaway (measuring), and exhaustion. Each are the same in structure, differing only in their location in the trend and subsequent meaning for chartists. Common Gap As its name implies, the common gap occurs often in the price movements of a security. For this reason, it's not as important as the other gap movements but is still worth noting. Figure 2: Common Gap These types of gaps often occur when a security is trading in a range and will often be small in terms of the gap's price movement. They can be a result of commonly occurring events, such as low-volume trading days or after an announcement of a stock split. These gaps often fill quickly, moving back to the pre-gap price range. Breakaway Gap A breakaway gap occurs at the beginning of a market move - usually after the security has traded in a consolidation pattern, which happens when the price is non-trending within a bounded range. It is referred to as a breakaway gap as the gap moves the security out of a non-trending pattern into a trending pattern. Figure 3: Breakaway gap A strong breakaway gap out of a period of consolidation is considered to be much stronger than a non-gap move out. The gap gives an indication of a large increase in sentiment in the direction of the gap, which will likely last for some time, leading to an extended move. The strength of this gap (and the accuracy of its signal) can be confirmed by looking at that volume during the gap. The greater the volume out of the gap, the more likely the security will continue in the direction of the gap, also reducing the chances of it being filled. While the breakaway gap generally doesn't fill like the common gap, it will in some cases. The gap will often provide support or resistance for the resulting move. For an upward breakaway gap, the lowest point of the second candlestick provides support. A downward breakaway gap provides resistance for a move back up at the highest price in the second candlestick. The breakaway gap is a good sign that the new trend has started. Runaway Gap (Measuring Gap) A runaway gap is found around the middle of a trend, usually after the price has already made a strong move. It is a healthy sign that the current trend will continue as it indicates continued, and even increasing, interest in the security. Figure 4: Runaway (or measuring) gap After a security has made a strong move, many of the traders that have been on the sideline waiting for a better entry or exit point decide that it may not be coming and if they wait any longer they will miss the trade. It is this increased buying or selling that creates the runaway gap and continuation of the trend. Volume in a runaway gap is not as important as it is for a breakaway gap but generally should be marked with average volume. If the volume is too extreme, it could signal that the runaway gap is actually an exhaustion gap (discussed further in the next section), which signals the end of a trend. The runaway gap forms support or resistance in the exact same manner as the breakaway gap. Likewise, the measuring gap does not often fill, and there's cause for concern if the price breaks through the support or resistance, as it is a sign that the trend is weakening - and could even signal that this is an exhaustion gap and not a runaway gap. Exhaustion Gap This is the last gap that forms at the end of a trend and is a negative sign that the trend is about to reverse. This usually occurs at the last thrusts of a trend (typically marked with panic or hype), but can also be the point when weaker market participants start to move in or out of the security. The exhaustion gap usually coincides with an irrational market philosophy, such as the security being touted as "a can't-miss opportunity" or conversely as something to "avoid at all costs". Figure 5: Exhaustion gap To identify this as an exhaustion gap or the last large move in the trend, the gap should be marked with a large amount of volume. The strength of this signal is also increased when it occurs after the security has already made a substantial move. Because the exhaustion gap signals a trend reversal, the gap is expected to fill. After the exhaustion gap, the price will often move sideways before eventually moving against the prior trend. Once the price fills the gap, the pattern is considered to be complete and signals that the trend will reverse. Island Reversal One of the most well-known gap patterns is the island reversal, which is formed by a gap followed by flat trading and then confirmed by another gap in the opposite direction. This pattern is a strong signal of a top or bottom in a trend, indicating a coming shift in the trend. Figure 6: Island reversal pattern Above is an example of an island-bottom reversal that occurs at the end of a downtrend. It's formed when an exhaustion gap appears in a downtrend followed by a period of flat trading. The pattern is confirmed when an upward breakaway gap forms in the price pattern. The size of the trend reversal or the quality of the signal is dependent on the location of the island in the prior trend. If it happens near the beginning of a trend, then the size of the reversal will likely be less significant. By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

Analyzing Chart Patterns: Triangles

noreply@blogger.com (roselyn) — Mon, 03 Nov 2008 14:19:00 +0000

As you may have noticed, chart pattern names don't leave much to the imagination. This is no different for the triangle patterns, which clearly form the shape of a triangle. The basic construct of this chart pattern is the convergence of two trendlines - flat, ascending or descending - with the price of the security moving between the two trendlines. There are three types of triangles, which vary in construct and significance: the symmetrical triangle, the descending triangle and the ascending triangle. Symmetrical triangle The symmetrical triangle is mainly considered to be a continuation pattern that signals a period of consolidation in a trend followed by a resumption of the prior trend. It is formed by the convergence of a descending resistance line and an ascending support line. The two trendlines in the formation of this triangle should have a similar slope converging at a point known as the apex. The price of the security will bounce between these trendlines, towards the apex, and typically breakout in the direction of the prior trend. If preceded by a downward trend, the focus should be on a break below the ascending support line. If preceded by an upward trend, look for a break above the descending resistance line. However, this pattern doesn't always lead to a continuation of the previous trend. A break in the opposite direction of the prior trend should signal the formation of a new trend. Figure 1: Symmetrical triangle Above is an example of a symmetrical triangle that is preceded by an upward trend. The first part of this pattern is the creation of a high in the upward trend, which is followed by a sell-off to a low. The price then moves to another high that is lower than the first high and again sells off to a low, which is higher than the previous low. At this point the trendlines can be drawn, which creates the apex. The price will continue to move between these lines until breakout. The pattern is complete when the price breaks out of the triangle - look for an increase in volume in the direction of the breakout. This pattern is also susceptible to a return to the previous support or resistance line that it just broke through, so make sure to watch for this level to hold if it does indeed break out. Ascending Triangle The ascending triangle is a bullish pattern, which gives an indication that the price of the security is headed higher upon completion. The pattern is formed by two trendlines: a flat trendline being a point of resistance and an ascending trendline acting as a price support. The price of the security moves between these trendlines until it eventually breaks out to the upside. This pattern will typically be preceded by an upward trend, which makes it a continuation pattern; however, it can be found during a downtrend. Figure 2: Ascending triangle As seen above, the price moves to a high that faces resistance leading to a sell-off to a low. This follows another move higher, which tests the previous level of resistance. Upon failing to move past this level of resistance, the security again sells off - but to a higher low. This continues until the price moves above the level of resistance or the pattern fails. The most telling part of this pattern is the ascending support line, which gives an indication that sellers are starting to leave the security. After the sellers are knocked out of the market, the buyers can take the price past the resistance level and resume the upward trend. The pattern is complete upon breakout above the resistance level, but it can fall below the support line (thus breaking the pattern), so be careful when entering prior to breakout. Descending triangle The descending triangle is the opposite of the ascending triangle in that it gives a bearish signal to chartists, suggesting that the price will trend downward upon completion of the pattern. The descending triangle is constructed with a flat support line and a downward-sloping resistance line. Similar to the ascending triangle, this pattern is generally considered to be a continuation pattern, as it is preceded by a downward trendline. But again, it can be found in an uptrend. Figure 3: Descending triangle The first part of this pattern is the fall to a low that then finds a level of support, which sends the price to a high. The next move is a second test of the previous support level, which again sends the stock higher - but this time to a lower level than the previous move higher. This is repeated until the price is unable to hold the support level and falls below, resuming the downtrend. This pattern indicates that buyers are trying to take the security higher, but continue to face resistance. After several attempts to push the stock higher, the buyers fade and the sellers overpower them, which sends the price lower. By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com

Analyzing Chart Patterns: Round Bottoms

noreply@blogger.com (roselyn) — Sun, 26 Oct 2008 13:12:00 +0000

A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downtrend to an uptrend. This pattern is traditionally thought to last anywhere from several months to several years. Due to the long-term look of these patterns and their components, the signal and construct of these patterns are more difficult to identify than other reversal patterns. A rounding-bottom pattern looks similar to a cup and handle, but without the handle. The basic formation of a rounding bottom comes from a downward price movement to a low, followed by a rise from the low back to the start of the downward price movement - forming what looks like a rounded bottom. The pattern should be preceded by a downtrend but will sometimes be preceded by a sideways price movement that formed after a downward trend. The start of the rounding bottom (its left side) is usually caused by a peak in the downward trend followed by a long price descent to a new long-term low. Figure: Rounding bottom (saucer bottom) reversal The time distance from the initial peak to the long-term low is considered to be half the distance of the rounding bottom. This helps to give chartists an idea to as to how long the chart pattern will last or when the pattern is expected to be complete, with a breakout to the upside. For example, if the first half of the pattern is one year, then the signal will not be formed until around a year later. In terms of the chart pattern's quality, the two stages of the rounding bottom should be similar in length. If the price were to rise too quickly from the low to the prior peak, the strength of the chart pattern would be diminished. This does not mean that they must be equal, but the trend should illustrate a cup shape on the chart. The way in which the price moves from peak to low and from low to second peak may cause some confusion as the long-term nature of the pattern can display several different price movements. The price movement does not necessarily move in a straight line but will often have many ups and downs. However, the general direction of the price movement (either up or down) is important, depending on the stage of the pattern. Volume is one of the most important confirming measures for this pattern where volume should be high at the initial peak (or start of the pattern) and weaken as the price movement heads toward the low. As the price moves away from the low to the price level set by the initial peak, volume should be rising. Breakouts in chart patterns should be accompanied by a large increase in volume, which helps to strengthen the signal formed by the breakout. Once the price moves above the peak that was established at the start of the chart pattern, the downward trend is considered to have reversed and a buy signal is formed. By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com