Chart Lesson 10: Broadening Wedges, Descending

Broadening Wedges, Descending

Ranks:

Upward Breakouts:  Bull Market – 12/23, Bear Market – 14/19

Downward Breakouts:  Bull Market – 11/21, Bear Market – 6/21

Identification:

Shape:  Looks like a megaphone tilted down.  Both TLs slope downward with the LTL having a steeper slope.  They broaden out over time and neither is horizontal.

Breakout:  Look for patterns to break out in the direction of the current trend.

Partial Decline:  Price must touch the TTL, move down, turn around, and head higher without coming close to the LTL.  Look for an upward breakout.

Confirmation:  Wait for prices to close beyond the TLs before placing a trade.

Trade the TLs:  If the formation is especially broad, buy the LTL and sell at the top.  If it is a partial rise, close the position and look for a downward breakout.  Alternatively, sell short at the TTL once prices are heading down, and close the position if it rebounds off the LTL.

For Best Performance

• Trade with the trend: Select patterns with upward breakouts in a bull market, downward breakout in a bear market.

• Patterns in a bull market with an upward breakout have the lowest failure rates for extended moves.

• Bull markets throw back/pull back less often than do bear markets.

• Breakout day gaps help performance.

• A partial decline in a bull market correctly predicts an upward breakout

87% of the time and performance improves, too.

• In a bear market, look for a trend change 5 or 6 weeks after the breakout,

7 weeks in a bull market.

• Select patterns that are both tall and narrow. Avoid those that are short and wide.

• Patterns with a falling volume trend perform best when the breakout is upward. A rising volume trend does well for downward breakouts.

Chart Lesson 9: Dual Candlestick Patterns

Now that we've covered some important single candlestick patterns, we can cover some dual patterns.  We always want to wait for confirmation before entering a trade, and the dual patterns can be used for this.

Engulfing Candles:

The Engulfing Pattern can be identified with a small candle on the first day followed by a candle that engulfs the previous on the second day.  This pattern indicates a reversal is possible.

Tweezer Bottoms and Tops:

The Tweezer Pattern is also a reversal pattern that is identified with the first candle the same as the overall trend and a second candle that is opposite the overall trend.  The shadows should be equal lengths.

Chart Lesson 8: Single Candlestick Patterns

Every lesson that I learn and write about should build on the last.  Hopefully these all get shown in the correct order that they should be learned.  This lesson will be about single candle patterns.  As prices approach certain levels such as support, resistance or yearly highs or lows, it is important to look for clues as to how the market will treat that level.  When these candles are spotted, both traders and investors are given a clue how the market feels about the price level, and what might happen next.

The Hammer and Hanging man

These Hammer and Hanging Man look identical but mean different things depending on where we spot them.  They can be identified by small bodies, short or missing upper shadows, and long lower shadows (2 to 3 times the size of the body).  The color of the body is not important, so long as it is at the top of the trading range (top of the candle).

The Hammer (left) is a Bullish Reversal pattern that forms in a downtrend and may be an indication of a bottom.  The color of the Hammer is not important, but a white candle may be considered more bullish.  A white candle on the next trading day can be confirmation of the reversal.  A buy order can be placed with a stop below the body of the Hammer.  The Hanging Man (right) is the opposite, bearish.  It is found after an uptrend and may indicate the top.  Again, the candle can be black or white, but black may be considered more bearish.  After getting confirmation of a black candle on the next day, a sell order can be placed with a stop above the body of the Hanging Man.  These are also good places to close existing positions if riding a trend.  You may want to consider moving a trailing stop or completely closing a position after spotting these candles.

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star are the exact same as the Hammer and Hanging Man except for their appearance.  Instead of small bodies with short upper shadows and long lower shadows, they have short lower shadows and long upper shadows.  When spotted in an up or down trend, they both signal a possible reversal.

Understanding these patterns can allow us to see a potential reversal, which will allow us to develop a plan and execute it.  Whether it gives up our entry or exit point, learning indicators is an excellent way to avoid making bad trades.  They can also help us minimize the damage of bad trades, and maximize the good ones.

Chart Lesson 7: Broadening Wedges, Adcending

Broadening Wedges, Ascending

Identification:

Shape:  Looks like a megaphone tilted up with two up-sloping trend lines (higher highs and higher lows).  The top trend line is steeper than the bottom, neither is horizontal.

Touches:  At least 3 touches or near touches on either side.

Premature Breakouts:  Are very rare.  A close below the lower trend line is usually a genuine breakout.

Breakout:  Downward the vast majority of the time.

Partial Rise.  Price touches the LTL, climbs toward the UTL, but fails to touch, price reverses and breaks out downward.

Volume:  Heavy on breakout.

Lowest Formation Low:  Is a natural area of Support.

Once recognizing the Broadening Wedges, Ascending formation:

When the price is going up:

Go Short at the high:  Sell short when the price starts heading down from the top trend line.

If price fails to touch the Top trend line:

Sell the Breakout Down:  Sell short through the breakout down.

When the price is going down:

Go Long at the Low:  Buy after the stock makes it’s turn at the lower trend line.

For Best Performance

• Most broadening wedges breakout downward.

• Trade with the market trend: Select wedges in a bear market with a

Down ward breakout or in a bull market with an upward breakout.

• The lowest failure rates occur with patterns in a bull market and

Up ward breakout.

• Throwbacks and pullbacks hurt performance. Look for overhead resistance or underlying support before trading.

• Breakout day gaps usually help performance.

• A partial rise or decline allows you to enter a trade sooner and usually predicts the breakout direction.

• Select tall or narrow patterns.

• Pick patterns with heavy breakout volume.

Chart Lesson 6: Broadening Tops

Broadening Tops

Identification:

*Formation preceded by an upward price trend*

Shape:  The formation looks like a megaphone tilted up with higher highs and lower lows.

Trend Lines:  Upper and Lower trend lines slope opposite of each other.  The upper line connects higher highs (resistance) while the lower line connects lower lows (support).

Once recognizing the Broadening Tops formation:

When the price is going up:

Buy the Breakout Up:  Set a buy order above the Upper Trend (resistance) line.

If the Breakout Fails:

Go Short at the High:  Sell short after the price starts heading down from the top of the trend line.

When the price is going down:

Sell the Breakout Down:  Set a sell order below the Bottom Trend (support) line.

If the Breakout Fails:

Go Long and the Low:  Buy after the price turns up off the Lower Trend (support) line.

*Set stop-loss orders $.15 below resistance and $.15 below support after breakouts*

Partial Decline:  Go long.  Add to position after upward breakout

For Best Performance

•          Select patterns in line with the market trend (bull market, upward breakout or bear market, downward breakout).

•          Bear markets decline at a steeper slope than bull markets rise, but the move is not as far.

•          Select patterns in a bull market with upward breakouts for the lowest failure rates.

•          Pick patterns with breakouts near the yearly low.

•          A partial rise or decline correctly predicts the breakout direction most of the time.

•          Select tall patterns.

•          Pick bull market patterns with a falling volume trend and bear market patterns with a rising volume trend.

Chart Lesson 5: Basic Candlestick Patterns

There is no single indicator that can accurately predict what direction a stock or currency will go in the future.  Only by combining our indicators do we start getting a strong sense of future direction.  This lesson will be about how Japanese Candlesticks can help us.  It can be found on BabyPips.com.

If you want an in-depth lesson on candlestick bodies, you can search the web and find out all you need to know, but for now I will give a quick breakdown.  Candlesticks are a visual representation of what the price did in a specific time frame.  If you are reading a daily chart, it is the price action of that day.

The picture above shows the anatomy of a candlestick.  It shows the open, high, low, and close of that time period.  If the body of the candle is white, the stock or currency went up, while a black body means it went down.  In a white candle, the bottom of the body is the open and the top is the close, where the black candle is the opposite.  The upper shadow on both is how high price went during that time period, and the lower shadow indicates how low the price went.  The bigger the candle, the more one side was in control.  Smaller candles show indecision, and we look for them as a sign of a trend reversal, or future breakout.  Large candles, however, can indicate a lot of enthusiasm in that direction, and we look for them to confirm the breakouts of our patterns.

If you need more of an explanation, you can do more research, but candle bodies are literally that simple.  Now we need to figure out how to use them.  Just like charts, candlesticks also form patterns that can give us an idea of the psychology of the market.  Certain candles and combinations give us clues as to what people are thinking, which can help us decide where a stock or currency is going.

Spinning Tops

These candles have small bodies and long upper and lower shadows.  This indicates indecision and, depending on where it occurs, could be the sign of a reversal.  Look for these near areas of support and resistance to trade the bounce.

Marubozu

These long bodied candles have no shadows.  In a white candle, the bottom is the open and the top is the close.  Buyers were in control the entire day.  A black candle is just the opposite.  The top is the open, the bottom is the close, and sellers were in control.  These candles are important because they can be used to confirm a breakout or a continuation of a pattern.

Doji

Doji have short bodies because the open is the same as the close.  These candles show indecision in the market.  The location of the doji can be an indication of future price movement.

 If the doji appears after a series of black candles during a down trend, it may indicate that buyers are willing to step in and we may see a reversal up.

The same can be said about it's appearance after white candles in an uptrend.  A doji is an indicator of indecision, and the buying may be over.  In both situations, confirmation is required to make a trade, but we will get more into that later.

Chart 6: Right-Angled and Descending pattern in NZDUSD chart

The key to getting better at charting is to look at tons of charts and draw lines connecting highs and lows until you find patterns.  While doing this, I found a Right-Angled and Descending pattern in the 1 hour chart for NZDUSD.  You can see the highs form a horizontal resistance line at the top, and the support line angles down connecting the lower lows.  The way to trade this is with the trend, which we can see is a downtrend.  Basically we are looking to short this as the price curls down off the top resistance and buy it back near support.  Also, as the price heads down to support, we would set a sell order below support to catch a breakout down (we look for a breakout in the direction of the current trend).  If the price has a partial rise off support, it is a sign of a breakout down, where we would short immediately.