There are dozens of chart patterns, but it always comes down to studying the highs and lows through Dow Theory and concluding accordingly with a bullish opinion, or a bearish opinion, or a neutral opinion.
The principle of “decoding” graphic statistics remains the same for all statistics, we propose here to take an interest in the main graphic statistics and their interpretation.
The triangle represents an indecisive configuration of the course, assimilated into a phase of psychological consolidation on the part of investors.
There are mainly 3 types of triangles:
* Ascending triangle
* Descending triangle
* Symmetrical triangle
Generally, an ascending triangle follows an upward movement and appears opposite to a descending triangle. As a symmetrical triangle, it can appear in any type of configuration. One of the common points of these 3 triangles is that the course oscillation decreases between the two limits of the figure.
The ascending triangle is represented by an upward trend line that connects the previous low points of the price upwards, this line acts as dynamic support.
The upper limit of the triangle is represented by a resistance connecting the high points of the same level. This figure is considered a phase of consolidation within a bullish movement, so the pressure within this figure remains bullish as the pair manages to align a succession of low points on the rise.
The descending triangle is represented by a downward trend line that connects the previous high points of the price with the decline, this line acts as dynamic resistance.
The lower boundary of the triangle is a support that connects the price’s previous lows at the same level.
This triangle is considered a consolidation phase within a bearish movement, so the pressure remains bearish as price aligns with a succession of downward high points.
The symmetrical triangle is also a figure of consolidation and indecision, but it is difficult to place the psychological bias of investors in the figure because of the continuation of downward high points and the succession of rising low points.
It is still considered that the direction in which this triangle was entered is more likely for the price to exit.
In other words, if the movement was bearish prior to the formation of this triangle, the price would be more likely to break out of this figure from below.
How to trade triangles?
The first thing to remember is that when it comes to trading, the most advantageous thing is to position yourself in a sound and directional pattern in the direction of the trend.
Dow’s theory assesses the “credibility” of a trend at time t.
If the price aligns a succession of high and low points on the rise, then the trend is bullish and “healthy” according to Dow theory.
If prices are aligned with alternating periods of downward highs and lows, the trend is bearish and “healthy” according to Dow’s theory.
With reference to this theory, we note that no configuration is “healthy” according to Dow’s theory in the case of triangles because prices do not align high and low points in the same direction.
So the least risky scenario waits to exit the triangle leading itself to the exit. It is important to know that exiting a triangle often creates volatility and therefore it is appropriate to position yourself in this situation.
In such a situation your profit expectation may reach the width specified between the high and low points farthest from the triangle.
After noting a triangle exit, it is also wise to anticipate a correction to the previous upper or lower boundary of the triangle to plan a possible “pullback/throwback” on this resistance that has turned into support or resistance at this support.
Shoulder-Head-Shoulder is a well-known chartist figure, often significant in a trend reversal.
This pattern will vary according to the configuration of the trend, in the case of an uptrend we would evoke a “classic” shoulder-head-shoulder (ETE) while in a downtrend we would speak of a shoulder-head-“inverted” shoulder. (ETEI).
Shoulder-Head-Shoulder “Classic” (ETE):
Shoulder-Head-Shoulder “Inversion” (ETEI):
ETE is a chartist figure that most often forms at the end of a trend, it then offers a high probability of reversing the trend that preceded its formation.
Nevertheless it is possible to find an ETE within a bearish movement as it is also possible to observe an ETEI within a bullish movement.
This case is really rare but important to know because the meaning is quite different. In these two cases the figure will be interpreted as a trend continuation figure and not a reversal.
ETE consists of three successive peaks.
The second vertex is called the “head” and must always be higher than the two vertices corresponding to the “shoulders”.
The “shoulder” of the image should ideally reach the same level, but if the second shoulder (the one on the right) is lower than the first, the image will remain valid.
Conversely, if the second shoulder has a greater width than the first, caution is advised.
In fact, let’s say we are reading an ETE in a bullish configuration, if the height of the right shoulder is equal to or lower than the left shoulder, it means that traders are finding it difficult to continue their purchases at the current price and this therefore strengthens the credibility of the figure.
How to trade an ETE or an ETEI?
In the case of an ETE, the lows reached between the highs make it possible to implement a horizontal support called the “neck line”.
A break of this “neck line” will serve as a sell alert, the objective being determined by reporting the height of the head from the neck line.
Note that returns to breakouts and crossings are quite frequent (pullbacks for ETE and throwbacks for ETEI). Investors can take advantage of this to strengthen their positions.
Target completion time is typically half of the pattern training time.
Double Top/Triple Top
A double top is a graphic trend reversal figure that occurs at the end of a bullish movement.
This chart pattern depicts an invalidation of the uptrend as the price now aligns its previous high at the same level in a resistance zone.
Psychologically, this figure shows that the bias is reversing as the bulls are no longer able to continue buying at the last high reached.
The inability of prices to cross the last high point reflects a general weakness of buyers and indicates a possible bearish reversal is coming.
A double top is represented by 2 nearly identical peaks in terms of duration and amplitude. It is worth noting that the 2nd peak may be slightly lower than the first. This precision lends credence to the pattern as the second top gives an additional clue about bull weakness at current prices.
The low point reached between the “2 tops” makes it possible to represent a support zone called the “neck line”. A breakout of this neck line will reveal the formation of this pattern and confirm a “pullback” trend reversal of this neck line.
Volume study in figure:
Volume generally decreases over the entire image. Down periods are often supported by more volume than up periods.
Vertices in the image are often represented by “volume peaks” and the 2nd vertex is usually less supported by volume than the 1st.
A break in the neck line is often accompanied by a large volume.
Variation: Triple Top
The triple top is rare, this figure is a derivative of the double top with an additional top. Its psychological and graphic interpretation is exactly the same as that of the double-top. The analysis of the volume is also similar to that of the double-top.
Application in trading and graphic representation of double-top
1/ Wait for the neckline to break
2/ Assume a pullback on this neckline
3/ Positioning yourself to sell after a pullback formation
4/ Adjust your stops above the last high point
5/ Adjust your takeoff according to the “lead” method by calculating the difference in pips between the peak and neck lines.
The “V” top is a graphic representation of what we see in the long term of an upward movement in a top. This configuration reflects the acceleration of investors leading the uptrend to eventually continue buying at levels that are no longer justified.
Traders get caught up in the bullish craze and the “hard effect” is allowing the market to reach significant levels that will quickly correct it.
The structure of these statistics is therefore a buying frenzy in the market which leads to the greed of the participants.
Volumes usually rise sharply during this pattern, it may be wise to monitor them to confirm the formation of this pattern.
How to trade V-Top?
The most prudent position is to wait for a “pullback” formation to confirm the pattern.
Entry into the position therefore rebounds, the trader will use the “lead” method to determine his objective.
So count the number of pips between neck line and top and then position your take profit according to this diagram.
The stops can be placed slightly above the neck line, this opportunity will often offer you an attractive risk/reward ratio.
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