Tag: price action

Number 5.

The trading world is filled with interesting patterns, but the Head and Shoulders pattern is one of those classics that traders have relied on for decades. It’s fascinating, isn’t it? You’re basically watching human psychology play out on a chart. Let’s dig into why this pattern is so informative.

The whole beauty of the Head and Shoulders pattern lies in its storytelling ability. It’s like watching a mini-drama unfold in the market.

In the first move, I see a wave of optimism sweeping over buyers as they push the price upwards. It’s as if the market is collectively saying, “This is a good buy!”

Then comes the second move—a slight retracement. To me, this isn’t just a dip; it’s a pause, a moment for buyers to catch their breath. If sellers were truly in control, they’d push the price way down, but that doesn’t happen. This signals to me that the sellers are still on the sidelines.

The third move is where things get exciting. The buyers come back in full force, pushing the price to new heights. I’m always tempted to think that this is a lasting uptrend, but I’ve learned to hold off on that thought. The market is setting itself up for higher expectations—sometimes too high.

And that’s where the fourth move comes in. It’s like a reality check. Sellers see the inflated prices and think, “This is overvalued.” And so, they push back, balancing out that buyer enthusiasm. At this point, I’m starting to think a reversal might be on the cards.

The fifth move is the market’s last-ditch effort to maintain the uptrend, but the price rarely surpasses the previous high. This tells me that the buyers are running out of steam. They’re losing their grip on the market.

Now the sixth move—it’s like the final act of the drama. When the price breaks through the previous support level, I generally see that as my entry point. This break suggests that sellers are now in control and that it’s a good time to enter a short position.

As for my stop-loss, I usually place it just above the breakout point. If this stop-loss looks too small, placing the stop-loss above the highest point, or the “head,” can also be a wise move. I prefer spotting this pattern on higher time frames; they tend to be more reliable and less prone to market ‘noise.’

I avoid using this pattern in range-bound markets or when erratic news events are in play. The pattern loses its reliability under these conditions. On a scale of 1 to 10, I’d rate the Head and Shoulders pattern a solid 7. It’s not foolproof, but when it appears, it’s often too good to ignore. In a world where every edge counts, this pattern has earned its place in my toolkit.

Head and Shoulders pattern is not just a series of price movements; it’s a narrative that reveals key shifts in market sentiment. And that’s why I think it’s a must-know for any trader.

Number 4.

Picture this: You see the price heading upward. It’s like the buyers are on a shopping spree. But then, there’s a pullback. Sellers step in, maybe taking profits or perhaps trying to short the market. However, they don’t succeed in driving the price down substantially. Then, the buyers come back in, pushing the price higher, but without breaking the previous swing high. Over time, you’ll notice the lows are getting higher while the highs remain relatively constant. Essentially, what you’re seeing is increasing demand at higher prices, but resistance at the same price level.

That, my friend, is an ascending triangle. To me, it’s a story about growing confidence among buyers. They’re willing to buy at higher and higher lows, but there’s this one point, the resistance level, where the sellers are saying, “No more!” When that resistance level finally breaks, that’s when I know it’s game on. I usually go long here, placing my stop loss just below the breakout point or even under the whole triangle to be on the safe side.

Now, imagine the opposite scenario. You see the price trending down, making lower highs but somehow not breaking below a certain level. That’s your descending triangle. It’s like a mirror image of the ascending one, just flipped upside down. Sellers are getting more aggressive, but they’re still not strong enough to bust through the floor the buyers have set. When that floor finally gives way, though, that’s my signal to short. I place my stop loss just above the breakout point or the triangle.

As for when I like to use these patterns? Well, in a trending market, they’re gold. If everything’s moving upwards, an ascending triangle feels like a home run waiting to happen. If we’re in bear territory, a descending triangle is like a gift that keeps on giving. Also, right after a market gap—those triangles can be super powerful. The momentum from that initial push often carries through, you know?

But hey, it’s not all roses. I’ve learned to be cautious in sideways or range-bound markets. Triangles in those situations are like a box of chocolates—you never know what you’re gonna get. So, I usually steer clear.

If we’re talking ratings, I’d say these triangles deserve a high 8 or even a 9 out of 10. They show up way more frequently than something like a Head and Shoulders pattern, especially on shorter timeframes. And their reliability? Well, let’s just say they’re one of the MVPs in my trading toolkit.

Ascending and descending triangles are not just shapes on a chart for me; they’re like the pulse of the market, showing who’s gaining strength and who’s losing it. They’ve proven their worth time and time again in my trading experience.

Number 3.

Let’s dive into Double Tops and Double Bottoms. These patterns are like some of the most trustworthy friends you can have in trading. They’re straightforward, reliable, and when you see them, you pretty much know what to expect.

So, let’s chat about the Double Top first. Imagine you’re watching a stock, and it’s like a rocket—shooting straight up. But then, it’s like it hits an invisible ceiling. It starts to retreat. Then it gains some strength and tries to break that ceiling again but fails. This is the essence of a Double Top. It’s like buyers are trying to bust through this wall, but they get repelled—twice. To me, that’s a red flag that says, “Hey, this rally might be running out of steam.”

Here’s how I play it: as soon as I see that second top forming and the price starts to roll over, I think about going short. Timing’s the tricky part, right? You don’t want to jump the gun, but you also don’t want to miss the boat. So, I usually look for a strong bearish sign, like a bearish engulfing pattern, or a MACD crossover. That’s my cue. And for a safety net, I set my stop-loss just above that resistance level—the invisible ceiling I talked about.

Flipping that around, you’ve got the Double Bottom, which is like the Double Top’s twin, just living in the upside-down world. It starts with a strong selling pressure pushing prices down, but then it finds a floor and bounces back up. When it revisits that floor and fails to break through—man, that’s like a treasure signal. It tells me sellers have given it their best shot but are throwing in the towel.

So, when I see this pattern, I start prepping for a long trade. Again, I look for a clear bullish pattern as my green light. My stop-loss? I set it just below that support level, which is like the floor the stock doesn’t want to break.

Don’t get hung up on the ‘double’ label, by the way. You can also find Triple Tops or Triple Bottoms. The core principle’s the same—it’s like a standoff between buyers and sellers, and you’re trying to figure out who’s going to win.

So when do I love using these patterns? When I’m sniffing around for trend reversals. They’re like weather vanes, telling me which way the wind’s blowing. As for when not to use them—honestly, I don’t have a lot of restrictions. Whether it’s in a range-bound market or during a pullback against a trend, these patterns are like Swiss Army knives for me.

If we’re talking ratings, I’d easily give Double Tops and Double Bottoms a 9 out of 10. They appear frequently on trading charts and have been important in my trading journey. If these patterns show up on a one-day timeframe, especially in the stock market, I wouldn’t ignore them.

Number 2.

Let’s dig into the Flag pattern. Now, I’ve got to tell you, this pattern is like the unsung hero of my trading strategy. You know those moments in sports where a player makes a big dash but then takes a quick breather before the next big play? That’s what a Flag pattern feels like in trading.

Picture this: you’re watching an asset, let’s say it’s a stock or a forex pair, and out of nowhere, the price starts to rocket upwards. But then, just as quickly, it slows down. Not a full stop, but like it’s catching its breath. If you draw trend lines above and below this little resting period, it actually looks like a flag on a pole, hence the name.

So, what’s this telling us? Initially, there’s a crazy-strong move upwards. Could be because of good news, a strong earnings report, or maybe a big player jumped in. Honestly, the reason doesn’t matter that much. As traders, we’re like detectives looking for clues in the price action. So, the price starts climbing, but then, it’s as if the market says, “Hold on a second, let’s think this through.” Maybe some folks are cashing out, or perhaps the market’s just hesitating.

Now, the real magic happens when the price breaks through the upper trend line of this pullback area. If this is accompanied by a strong candle—let’s say, a clear green breakout candle—I usually go for a long entry. As for safety nets, I prefer setting my stop loss just below this Flag pattern to mitigate risk.

The strategy can be flipped if the asset initially moves downward. A minor pullback upwards, followed by a trend line sketch, gives us an inverted Flag pattern. When there’s a breakout below this area, that’s my cue to go short, with the stop loss just above the topmost point of the pullback.

Here’s the kicker: you want to look for this pattern when there’s a lot of action. Let’s say the market opens with a significant gap, or there’s some strong momentum in one direction. That’s when this pattern shines the brightest. But, if you’re looking at a long timeframe, like a 4-hour chart, this pattern might not be that helpful.

Now, on a scale of 1 to 10? For me, it’s easily a 10. But I do have a preference for shorter time frames; they allow for quick entries and exits. So bear in mind that my high rating could be influenced by my shorter timeframe preference. If you’re more of a long-term trader, you might not hold this pattern in such high regard.

Number 1.

Now you’re in for a treat. Let’s talk about one of my favorite chart patterns, which is basically a combination of the Flag pattern mixed with ascending and descending triangles. I’ve fine-tuned this setup to work especially well for momentum trading. Once you get the hang of it, you’ll see why I have liked it so much in my trading journey.

So let’s set the stage. Imagine you’re watching a stock and you see this massive burst of energy propelling it upwards. It’s not just some minor spike. I’m talking about the kind of jump that makes you lean in closer to your screen. Then, like any good thriller, there’s a pause in the action—a modest pullback.

Now here’s where you want to be Sherlock Holmes. You start observing the swing lows and swing highs during this pullback period. Usually, we want the swing highs of the pullback to form lower than the previous one. But since every setup is different and not that perfect, it’s okay if not every swing high is lower than the previous one. However, what you absolutely want to see is that the swing lows are around the same level. When you connect these highs and lows with trend lines, you’re looking at what seems like a Flag pattern and a descending triangle pattern.

But hold on, we’re not just going basic here. In a typical descending triangle pattern, you’d usually jump in when the price breaks below the swing low, right? Well, not in this scenario. What I wait for is a good breakout above the trendline that was drawn using the swing highs of the pullback. That’s my green light. Safety first, though—I place my stop-loss just below the swing low since it’s a proven support level.

On the other hand, if the stock makes a nosedive but then has a small uptick, you want to pay attention to the swing highs and lows again. We want to see that the swing highs are around the same level, and the swing lows should form higher than the previous one. This time, wait for a breakout below the swing low trendline, preferably with a strong bearish candle. The stop-loss goes just above the swing high resistance.

So why does this work so well? Think about it: you’ve got strong momentum, either bullish or bearish, followed by a smaller counter-movement. That hesitation around a certain level is your clue that the original momentum is about to kick back in. It’s like the market’s telling you, “Hey, I’m not done yet.”

When it comes to trading this pattern, I’ve found it most effective in shorter timeframes, particularly in the stock market. In my opinion, this isn’t the pattern to be used in more “choppy” markets, where identifying clear swing highs and lows is like searching for a needle in a haystack. And honestly, I mostly stick to the stock market with this strategy; it just works better there for me.

Rating time? This pattern gets a solid 10 out of 10 from me. It’s been a rock star in my trading journey. Maybe it’s because I’m partial to those shorter time frames that make this pattern really shine. But the bottom line is that this setup and the previous one are some of the most useful chart patterns I have used.

Now, you probably noticed that all this time, I didn’t say anything about the profit targets with these chart patterns. Well, because the profit target depends on the setup, and every setup is different from the previous one. But here’s a simple rule I follow most of the time. If I take a reversal entry using a chart pattern, I prefer a low reward-risk ratio, such as 1 to 1 or 0.5 to 1. That’s because reversal trading has a lower probability of success, in my experience. On the other hand, if I’m taking trades in the trend direction using a chart pattern, I prefer a 1 to 1 or higher reward-risk ratio. Don’t go too high, though, since that will just reduce the win rate too much.