<Last updated 25.04.2020>
Hi! If you are interested in online trading and technical analysis please read carefully the below article that shows the patterns observed in the historical time series of prices.
Technical Analysis and Patterns
Traders use charts, to search for price patterns which are essentially market formations or market “moods”. The trick is to recognize what the current mood of the market is and more importantly, how long it is going to last.
A price pattern is a pattern within a chart when prices are graphed and naturally occurs and repeats over a period.
Technicians look for many patterns in the historical time series of prices. These patterns are reputed to provide information regarding the size and timing of subsequent price moves.
Some say these patterns are illusions and have no real meaning. In fact, they can be seen in a randomly generated price series.
These patterns can be as simple as trendlines and as complex as double head-and-shoulders formations.
Support and Resistance
Support, or a support level, refers to the price level that an asset does not fall below for a period of time. If the support level is the price of an asset does not fall below, the resistance level is the price point at which finds trouble passing. Think of the support level as the floor, and the resistance level as the ceiling.
A common characteristic of support/resistance is that an asset’s price may have a difficult time moving beyond a round number.
Traders use support and resistance levels to plan entry and exit points for trades. These levels are denoted by multiple touches of price without a breakthrough of the level.
If the price action on a chart breaches the support levels, it is seen as an opportunity to buy in or take a short position, depending on what the trader sees from other indicators.
Support and resistance areas can be identified on charts using trendlines and moving averages and other indicators such as the Fibonacci tools.
Regardless of how the moving average is used, it often creates “automatic” support and resistance levels.
A trendline is a straight line drawn on a chart by connecting a series of descending peaks (highs) or ascending troughs (lows).
> minimum of three or more price pivot points.
> They show direction and speed of price, and also describe patterns during periods of price contraction.
An Uptrend occurs where prices are experiencing higher highs and higher lows. The uptrend line is drawn by connecting the ascending lows. Nothing moves straight up for long, but the overall
direction needs to be higher in order for it to be considered an uptrend.
A Downtrend occurs where prices are experiencing lower highs and lower lows.
A breakout refers to when the price moves above a resistance area, or moves below a support area. This indicates that the price probably will start trending in the breakout direction.
Breakouts that occur on high volume show greater conviction which means the price is more likely to trend in that direction. Not everyone cares about the same support and resistance levels. An increase in volume on the breakout shows that the level is important.
i.e. Short-term traders will often sell the initial breakout, but then attempt to buy quite quickly for a profit.
This buying temporarily drives the price back to the breakout point.
If the breakout is legitimate (not a failure), then the price should move back in the breakout direction. If it doesn’t, it’s a failed breakout.
Breakouts are commonly associated with chart patterns such as triangles, flags, wedges, and head-and-shoulders.
These patterns are formed when the price moves in a specific way which results in well-defined support and/or resistance levels.
Reversals and Retracements
A reversal is a trend change in the price. A pullback is a counter-move within a trend that doesn’t reverse the trend.
A retracement refers to the temporary reversal of an overarching trend. It is a minor or short-term pullback in the price. Should the price fall below or rise above support or resistance, or violate an uptrend or downtrend, then it is no longer considered a retracement but a reversal.
Fibonacci Retracement Levels-downwards
Fibonacci retracement levels are horizontal lines that indicate where support and resistance are likely to occur. They are based on Fibonacci numbers. Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced.
Here the move is 100% and the price retraces towards the 61.8% level.
Fibonacci Retracement Levels-upwards
Fibonacci retracement levels, another example. Here the price is moving upwards and we identified the levels 61% and 50% beforehand, waiting for the price to move to the next level.
Also notice that in this case the price increases exponentially.
A continuation pattern suggests that the price will continue to move in the same direction after a continuation pattern completes as it did prior.
The trading technique involves is to wait for the pattern to form, draw trendlines around the pattern, and then enter a trade when the price breaks out of the pattern in the direction of the prevailing trend.
Continuation Patterns – Triangle
A triangle occurs when the price action becomes more and more compressed. Price moves into a tighter and tighter range as time progresses. It signals a potential trend continuation after a brief consolidation.
There are three types of triangles:
- and symmetrical.
Example: Ascending Triangle:
Continuation Patterns – Wedge
The trend lines drawn above and below the price chart pattern can converge to help us anticipate a breakout reversal. While price can be out of either trend line, wedge patterns have a tendency to break in the opposite direction from the trend lines.
Continuation Patterns – Pennant
Pennants are continuation patterns where a period of consolidation is followed by a breakout. The price usually consolidates and forms a tiny symmetrical triangle, which is called a pennant.
Continuation Patterns – Rectangles
Rectangles are a common continuation pattern that shows a pause in the price trend with price action moving sideways.
Price moves between two horizontal lines, with the upper line serving as a resistance, while the lower line serving as a support.
Price Channel forms when the price is buffeted by the forces of supply and demand, and can be upward, downward, or sideways trending. Once price action carves out a set of highs and lows that follow a discernible pattern and can be connected by two parallel lines, a price channel has been formed.
Price channels are quite useful in identifying breakouts. Traders can also trade within the channel.
Double Top and Double Bottom
Double top and bottom analysis is used in technical analysis to explain price and can be used as part of a trading strategy to exploit recurring patterns.
A double top pattern is formed from two consecutive rounding tops.
A double bottom is formed following a single rounding bottom pattern which can also be the first sign of anpotential reversal.
Head and Shoulders is formed when a market trend is in the process of reversal either from a bullish or bearish trend; 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.
Head and Shoulders Pattern is most often seen in uptrends. You can see that once the price goes below the neckline it makes a move that is at least the size of the distance between the head and the neckline.
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