Symmetrical
triangles are chart formations where the slope of the
price’s highs and the slope of the price’s lows converge together to a point
where it looks like a triangle. What is happening during this formation is that
the market is making lower highs and higher lows. This means that neither
the buyers nor the sellers are pushing the price far enough to make a clear
trend. If this was a battle between the buyers and sellers, then this
would be a draw.
This
type of activity is called consolidation.
In the
chart above, we can see that neither the buyers nor the sellers could push the
price in their direction. When this happens we get lower highs and higher
lows. As these two slopes get closer to each other, it means that a
breakout is getting near. We don’t know what direction the breakout will be,
but we do know that the market will break out. Eventually, one
side of the market will give in.
So how
can we take advantage of this? Simple. We can place entry orders above the
slope of the lower highs and below the slope of the higher lows. Since we
already know that the price is going to break out, we can just hitch a ride in
whatever direction the market moves.
In
this example, if we placed an entry order above the slope of the lower highs,
we would’ve been taken along for a nice ride up. If you had placed another
entry order below the slope of the higher lows, then you would cancel it as
soon as the first order was hit.
This
type of formation occurs when there is a resistance level and a slope of higher
lows. What happens during this time is that there is a certain level that the
buyers cannot seem to exceed. However, they are gradually starting to push the
price up as evident by the higher lows.
In the
chart above, you can see that the buyers are starting to gain strength because
they are making higher lows. They keep putting pressure on that resistance
level and as a result, a breakout is bound to happen. Now the question is,
“Which direction will it go? - Will the buyers be able to break that level or
will the resistance be too strong?”
Many
charting books will tell you that in most cases, the buyers will win this
battle and the price will break out past the resistance. However, it has been
my experience that this is not always the case. Sometimes the resistance level
is too strong, and there is simply not enough buying power to push it through.
Most
of the time the price will in fact go up. The point we are trying to make is
that we do not care which direction the price goes, but we want to be ready for
a movement in EITHER direction. In this case, we would set an entry order above
the resistance line and below the slope of the higher lows.
In
this scenario, the buyers won the battle and the price proceeded to skyrocket!
Descending Triangles
As you
probably guessed, descending triangles are the exact opposite of ascending triangles
(we knew you were smart!). In descending triangles, there is a string of lower
highs which forms the upper line. The lower line is a support level in which
the price cannot seem to break.
In the
chart above, you can see that the price is gradually making lower highs which
tell us that the sellers are starting to gain some ground against the
buyers. Now most of the time, and we did say MOST - the price will
eventually break the support line and continue to fall.
However,
in some cases the support line is too strong, and the price will bounce off of
it and make a strong move up.
The
good news is that we don’t care where the price goes. We just know that
it’s about to go somewhere. In this case we would place entry
orders above the upper line (the lower highs) and below the support line.
In
this case, the price did end up breaking the support line and proceeded to drop
rather quickly. (*note- The market tends to fall faster than it rises
which means you usually make money faster when you are short).
However,
in some cases the support line is too strong, and the price will bounce off of
it and make a strong move up.
The
good news is that we don’t care where the price goes. We just know that
it’s about to go somewhere. In this case we would place entry
orders above the upper line (the lower highs) and below the support line.
In
this case, the price did end up breaking the support line and proceeded to drop
rather quickly. (*note- The market tends to fall faster than it rises
which means you usually make money faster when you are short).
However,
in some cases the support line is too strong, and the price will bounce off of
it and make a strong move up.
The
good news is that we don’t care where the price goes. We just know that
it’s about to go somewhere. In this case we would place entry
orders above the upper line (the lower highs) and below the support line.
In
this case, the price did end up breaking the support line and proceeded to drop
rather quickly. (*note- The market tends to fall faster than it rises
which means you usually make money faster when you are short).
However,
in some cases the support line is too strong, and the price will bounce off of
it and make a strong move up.
The
good news is that we don’t care where the price goes. We just know that
it’s about to go somewhere. In this case we would place entry
orders above the upper line (the lower highs) and below the support line.
In
this case, the price did end up breaking the support line and proceeded to drop
rather quickly. (*note- The market tends to fall faster than it rises
which means you usually make money faster when you are short).
Double Top
A
double top is a reversal
pattern that is formed after there is an extended move up. The “tops” are
peaks which are formed when the price hits a certain level that can’t be
broken. After hitting this level, the price will bounce off it slightly, but
then return back to test the level again. If the price bounces off of that
level again, then you have a DOUBLE top!
In the
chart above you can see that two peaks or “tops” were formed after a strong
move up. Notice how the 2nd top was not able to break the high of the 1st top.
This is a strong sign that a reversal is going to occur because it is telling
us that the buying pressure is just about finished.
With
double tops, we would place our entry order below the neckline because we are
anticipating a reversal of the uptrend.
Wow!
We must be psychic or something because we always seem to be right! Looking at
the chart you can see that the price breaks the neckline and makes a nice move
down. Remember, double tops are a trend reversal
formation. You’ll want to look for these after there is a strong uptrend.
Double Bottom
Double
bottoms are also trend
reversal formations, but this time we are looking to go long instead of
short. These formations occur after extended downtrends when two valleys or
“bottoms” have been formed.
You
can see from the chart above that after the previous downtrend, the price
formed two valleys because it wasn’t able to go below a certain level. Notice
how the 2nd bottom wasn’t able to significantly break the 1st bottom.
This
is a sign that the selling pressure is about finished, and that a reversal is
about to occur. In this situation, we would place an entry order above the
neckline.
Would
you look at that!
The
price breaks the neckline and makes a nice move up. Remember, just like double tops, double
bottoms are also trend reversal formations. You’ll want to look for these after
a strong downtrend.
Head and Shoulders
A head
and shoulders pattern is also a trend reversal
formation. It is formed by a peak (shoulder), followed by a higher peak (head),
and then another lower peak (shoulder). A “neckline” is drawn by connecting the
lowest points of the two troughs. The slope of this line can either be up or
down. In my experience, when the slope is down, it produces a more reliable
signal.
In
this example, we can visibly see the head and shoulders pattern. The head is
the 2nd peak and is the highest point in the pattern. The two shoulders also
form peaks but do not exceed the height of the head.
With
this formation, we look to make an entry order below the neckline. We can also
calculate a target by measuring the high point of the head to the neckline.
This distance is approximately how far the price will move after it breaks the
neckline.
You
can see that once the price goes below the neckline it makes a move that is
about the size of the distance between the head and the neckline.
With
this formation, we look to make an entry order below the neckline. We can also
calculate a target by measuring the high point of the head to the neckline.
This distance is approximately how far the price will move after it breaks the
neckline.
You
can see that once the price goes below the neckline it makes a move that is
about the size of the distance between the head and the neckline.
Reverse Head and Shoulders
The
name speaks for itself. It is basically a head and
shoulders formation, except this time it’s in reverse. A valley is formed
(shoulder), followed by an even lower valley (head), and then another higher
valley (shoulder). These formations occur after extended downward movements.
re you can see that this is just like a head and shoulders pattern, but
it’s flipped upside down. With this formation, we would place a long entry
order above the neckline. Our target is calculated just like the head and
shoulders pattern. Measure the distance between the head and the neckline, and
that is approximately the distance that the price will move after it breaks the
neckline.
You
can see that the price moved up nicely after it broke the neckline. WE know
you’re thinking to yourself, “the price kept moving even after it reached the
target.”
And
our response is, “DON”T BE GREEDY!”
If
your target is hit, then be happy with your profits. However, there are
strategies where you can lock in some of your profits and still keep your trade
open in case the price continues to move your way. You will learn about those
later on in the course.
Summary of Chart Formations
Chart
formations are like bazookas because they often create huge explosions on the
chart.
Triangles
Symmetrical triangles
- Consist of lower highs and higher lows
- Place entry orders above the lower highs and below the higher lows
Ascending triangles
- Consist of higher lows and a resistance line
- It usually means that the price will break the resistance line and go higher but you should place entry orders on both sides just in case the resistance line is too strong.
- Place your entry orders above the resistance line and below the higher lows.
Descending triangles
- Consist of lower highs and a support line
- Usually mean that the price will break the support line and go lower but you should place entry orders on both sides just in case the support line is too strong.
- Place your entry orders above the lower highs and below the support line.
Summary of Chart Formations
Chart
formations are like bazookas because they often create huge explosions on the
chart.
Triangles
Symmetrical triangles
- Consist of lower highs and higher lows
- Place entry orders above the lower highs and below the higher lows
Ascending triangles
- Consist of higher lows and a resistance line
- It usually means that the price will break the resistance line and go higher but you should place entry orders on both sides just in case the resistance line is too strong.
- Place your entry orders above the resistance line and below the higher lows.
Descending triangles
- Consist of lower highs and a support line
- Usually mean that the price will break the support line and go lower but you should place entry orders on both sides just in case the support line is too strong.
- Place your entry orders above the lower highs and below the support line.
Trend Reversal formations
Double Top
- Happens after an extended uptrend.
- Formed by 2 peaks that can’t break a certain level. This level becomes a resistance line.
- Place our short entry order below the low point of the valley in between the 2 peaks.
Double Bottom
- Happens after an extended downtrend.
- Formed by 2 valleys that can’t break a certain level. This level becomes a support line.
- Place our long entry order above the high point of the peak in between the 2 valleys.
Head and Shoulders
- Happens after an extended uptrend.
- Formed by a peak, followed by a higher peak, and then another lower peak. A neckline is formed by connecting the low points of the two troughs or “valleys”.
- Place your short entry order below the neckline.
- We calculate our target by measuring the distance between the high point of the head and the neckline. This is the approximate distance that the price will move after it breaks the neckline.
Reverse Head and Shoulders
- Happens after an extended downtrend.
- Formed by a valley, followed by a lower valley, and then another higher valley. A neckline is formed by connecting the high points of the 2 peaks.
- Place your long entry order above the neckline.
- We calculate our target by measuring the distance between the low point of the head and the neckline. This is the approximate distance that the price will move after it breaks the neckline.
Pivot Points
Professional
traders and market makers use pivot points to identify important support and
resistance levels. Simply put, a pivot point and its support/resistance levels
are areas at which the direction of price movement can possibly change.
Pivot
points are especially useful to short-term traders who are looking to take
advantage of small price movements.
Pivot
points can be used by both range-bound traders and breakout traders.
Range-bound traders use pivot points to identify reversal points. Breakout
traders use pivot points to recognize key levels that need to be broken for a
move to be classified as a real deal breakout.
Here is an example of pivot points plotted on a 1-hour EUR/USD chart: