Inverted head and shoulders

Hi, I am happy to continue writing on my series of chart analysis. Last time we analyzed bullish and bearish pennants that are continuation patterns and today I want to expand on one specific reversal pattern. I covered head and shoulders pattern a few years ago and today I want to discuss its’ twin: inverted head and shoulders. It is often formed after a security has been in a prolonged downtrend. The pattern indicates that the downtrend is most probably over and we are going to see higher prices soon. It is a very powerful formation as prices often start trending for a prolonged period of time when the structure is eventually broken upwards. 

The pattern consists of three lows: left shoulder, head and right shoulder. The structure is joined by a neckline that constitutes resistance. 

Watch a video showing you how to trade the formation:

How is inverted head and shoulders pattern formed?

Firstly, there has to be a downtrend in order for the pattern to be formed. After a prolonged collapse prices start to go (sort of) parabolic and at some point suddenly shoot up. At this point (usually) the left shoulder and the point for a neckline are formed. Then the previous downtrend resumes and prices go below previous low (the left shoulder). Then the security rises again, but fails to go beyond previous resistance. It falls back again, but this time lower low is not achieved. At this point the right shoulder is usually formed. All the other attempts to go lower fail and the security starts going upwards bit by bit till it reaches the highs of previous rally after the left shoulder was formed. It my bounce off the level or break it (the neckline). When a break upwards occurs new uptrend usually starts. If the break does not occur and prices go below the right shoulder the pattern is distorted and you may justly call it a failure. 

False breakouts

False breakouts are a repetitive thing in financial markets and prices often come back to the range. However, you should have specific entry rules and you either you risk and jump on the trade or you stand aside and continue waiting when the breakout occurs. In the latter situation you will be sure that it was the true head and shoulders pattern after the move up have gone so far that it is no longer useful for you to join it. So, you go long after the neckline (resistance) is broken.

Various time frames

If you read classical technical analysis you will be told that these type of patterns last from six months to a few years. However, you can find both ‘head and shoulders’ and ‘inverted head and shoulders’ patterns on various time frames. These patterns might be formed on hourly charts and the patterns can stretch a few days’ or a few weeks. And you can successfully trade both long and short term patterns. At least my experience confirms the fact. 

How to trade the formation

The best way to trade the pattern is to buy the break of the necklace. The chart above shows you how you could enter the market with long orders. The necklace (or resistance) was at 80.67 point. That’s the place to enter your first package of orders (if you are a serious trend trader). The ideal place for a stop loss order was below the low of the breakout day. In our case it was 80.12 level. So, you could place your stop at 80.07 (five pips below the lowest point of the day). How could you have exited the market? There are plenty of ways to do that. Much depends on the size of your position, number of orders and the state of the market. I like moving my stop as the market makes new highs by placing the stops below clusters of daily candles. These spots are marked with blue rectangles on the chart above. Finally, market stops going upwards and starts going sideways. This is one of the signs that the tendency is about to end. Eventually, your stop loss is hit and you are out of the market with nice profits. What a nice way to trade the pattern!

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts. 

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

Related posts:

Pennants

Flags

Wedges

How to do technical chart analysis

Six key elements of technical analysis

Triangle formation

Trading head and shoulders

Ifyou want to see and experience what real investing in financial markets such asForex, stocks and commodities is all about I recommend trying innovative socialinvestment platform of Etoro. Initial deposits are as low as a few hundredbucks. The best dealer I have heard of so far!

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Pennants

Let me continue my series on chart patterns in the post. Last time I wrote on flags and now I want to discuss about pennants. In the same fashion as flag, a pennant is a continuation technical structure. It means that when the formation is broken you will most often see a thrust in the direction of a previous move. While a flag is a rectangular in shape a pennant resembles a triangle. It should not be confused with triangle as its duration is much shorter and it actually is a short respite before current trend resumes itself. Triangles tend to be longer in duration before they are broken. 

As it is a triangle in shape a pennant has two converging trendlines. This shows that prices are consolidating after a previous move and now the range inside the pennant is narrowing putting pressure for price to go out of the pattern and continue the trend. A pennant will have a pole that would end at the top or bottom of the pattern (depending whether the pattern bullish or bearish) and it marks the point of the first trendline that we expect to be broken. As the prices start consolidating the second point is made that marks the point from which the second trendline is drawn that will probably not broken and hold counter trend moves. 

When you are through with the article, read my other posts on the topic and watch the video below:

Bullish and bearish flags

Wedge technical pattern

How to do technical chart analysis

Triangles

Head and shoulders

 

Watch a video on how you can trade this specific technical structure:

Bullish pennants

Bullish pennants are bullish continuation patterns that break out in the upward direction when the consolidation of the structure is over. A break of the upper trendline is a sign that current trend will resume itself after a short break. One should be ready to jump into a trade at the break of the upper trendline. 

How to trade it

You can look at gbp/jpy chart above to see how the bullish formation looks like and where you can enter your long trade. After a strong move upwards gbp/jpy started consolidating and formed a bullish pennant in a period of four days (from 27^th of December 2012 till 31^st of December 2012). The breakout point was marked by 139.28 level which the pair reached and retraced a little. So, you should have bought the pair at the break of the above mentioned level. Our stop level was a few pips below the retracement at 138.87. As you may see the pair broke the level and rallied around 350 pips before reversing and forming another pattern: bullish flag. You could exit your position in portions at even numbers (if you had two or three positions) or move your stop loss order by placing them below 4 hour candle clusters till your stop loss was closed when prices reversed. 

Bearish formations

Bearish pennants are bearish continuation patterns that break out in the downward direction when the consolidation of the pattern is over. A break of the lower trendline is a sign that current trend will resume itself after a short break. One should be ready to jump into a trade at the break of the lower trendline. 

How to trade a bearish structure

You can look at Gold chart above to see how the bearish pattern looks like and where you can enter your short trade. After a strong move down xau/usd started consolidating and formed a bearish pennant in a period of five days (from 15^th of February 2013 till 20^th of February 2013). The breakout point was marked by 1600.00 (per ounce) level which the security reached and retraced a little. So, you should have sold Gold at the break of the above mentioned level. Our stop level was ten bucks above the retracement at 1610.00. As you may see the pair broke the level and collapsed around 45 bucks before finding support. You could exit your position in portions at even numbers (if you had two or three positions) or move your stop loss order by placing them below 4 hour candles till your stop loss was closed when prices reversed. It may have been around 1563 area. 

Conclusion

A pennant is a continuation pattern that might help you to enter extra positions in the direction of the trend or open your first one if you accidentally missed the initial move. The pattern indicates that the security is in a stage of rest (consolidation) and the prices will move pretty soon. In forex market pennants often last five days or even less and present you with great trading opportunities. 

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts. 

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

If you want to see and experience what real investing in financial markets such as Forex, stocks and commodities is all about I recommend trying innovative social investment platform of Etoro. Initial deposits are as low as a few hundred bucks. The best dealer I have heard of so far!

http://www.etoro.com/A41516_TClick.aspx 

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Bullish and bearish flags

This week I started a series of articles on chart patterns and I discussed a wedge pattern on Wednesday. Today I want to continue the topic and talk about flag technical patterns. I hope that you learned something from previous post and I expect you to learn from this one even more. Flags are among my favorite patterns and when I recognize them in the charts I start preparing for a big move as these often result in strong breakouts and consequently nice money (if I jump into a trade). So, let us look what flags are and how you can trade them. 

Some tend to put flags and pennants into the same category, but I do not want to confuse you and therefore I will analyze pennants separately in my next post. 

I also suggest you read other articles on the topic and watch a video on how you can trade flags:

Wedges

How to do technical chart analysis

Triangles

Head and shoulders

The video:

What is a flag pattern?

It is a trend continuation pattern that can be on various time frames and may last from a few days to a few months. It is rectangular in shape and can be formed in various angles. A flag indicates that a security is in consolidation pattern and market is searching for direction. Most often than not, when the pattern is broken the price will move in the direction of the prevailing trend. Flags are often formed after a very sharp advancement of prices and appearance of a flag merely indicates that the market is in the state of ‘rest’. 

Now, the initial move from previous consolidation or range to the top of the flag is often called the flagpole. For a pattern to be valid there has to be another breakout of the pattern in the same direction as the previous one. We already know that the pattern is in the shape of a rectangle. The rectangle is ‘caged’ by two trendlines (upper and lower). They might be more or less horizontal (flat) or falling (if the flag is bullish). That is not very important. What important is that the pattern should be followed by continuation of a previous move. (Of course, it is better when the trendlines that act as support and resistance would be slopping, not entirely flat). 

Bullish structure

Bullish flag is a bullish chart pattern that usually results in an upward breakout of the pattern. It is formed after a strong move upwards and indicates that prices are consolidating before another move up. 

The example above shows us two examples of bullish flags in gbp/jpy currency pair. As you may know Japanese Yen  has been in a strong downtrend for quite a long period of time. Pound has been very strong against Yen. So, the first example shows us a bullish flag that was formed and broken in one week (from 19-12-2012 to 26-12-2012). After a breakout the pair rallied for about 600 pips. It formed a small bullish pennant in the middle of the move, but let us not concentrate on that today. 

After the move stalled the second bullish flag started to form. The second flag wasn’t really longer in terms of time than the first one. It started on the 2^nd of January, 2013 when the top was formed and ended with a breakout upwards on the 10^th of January, 2013. This move wasn’t as strong as the first one. However, from the breakout point the pair rallied around 350 pips. Still nice move, huh? 

How to trade it

Coming back to the chart of gbp/jpy above you can see the point for long entries on both examples. You go long when the upper trendline of the flag is broken. So, by knowing this information you must have your long entry ready before the breakout occurs. In the first case it was 136.84 level (to buy the pair). Market opened with a gap after Christmas, so you had to readjust your position and enter a long with the first available price of 137.73. I usually place stop loss order a few pips below the low of the day market broke the pattern. In this case it was 136.26. Of course, you had to move your stop as fast as market progressed higher as this initial stop was kind of big if you are a day trader. It is ok for swing and trend traders though. What about exits? Nobody can give you the best way to exit the market. One way is to move your stops below daily candles or 4-8 hour candles, or support zones or simply calculating the size of the pattern and add the number to the breakout zone and exit the market when market hits the area. Another possibility is to exit at even numbers. So, in my opinion it is best to open a number of trades 3-4 and keep on exiting (at even numbers) as market progresses upwards. 

Follow the same procedure with the second pattern to find out the best entry, stop loss and exit areas. Let it be your homework. You will be surprised how much you can learn from such a simple exercise as this. 

Bearish flag formation

Bearish flag is a bearish chart pattern that usually results in a downward breakout of the pattern. It is formed after a strong move down and indicates that prices are consolidating before another move down.  

The example above shows us two examples of bearish flags in Gold (XAU/USD). The first bearish flag formed from the 5^th of April (2013) to the 10^th of April (2013) when the pattern was broken. After the breakout down gold collapsed more than 160 dollars per ounce. Wow! It then regained some of what it has lost, but the gains were short lived and the commodity started going down after some horizontal range trading. On the 10^th of May it broke the horizontal channel and formed a bearish flag in a period of four days. On the 15^th of May Gold broke out of its’ bearish flag pattern and collapsed around 80 bucks per ounce. Nice move, huh? 

How to trade a bearish pattern

We have to reverse the process of how we trade a bullish flag. We have to trade a break of a lower trendline of the flag. If you look at the first example you can clearly see that the break came at around 1576 level. Depending on your trading style you could have place your stop loss above 4 hour candle (1583) when the breakout occurred. Alternatively, you could have placed your stop above the highest point of the flag, which was 1591. Now, if you are not very patient you still would have got a very good risk reward ratio by simply waiting and placing your stop above daily candles and when 1540 level was broken you would have stayed till the end of the move by simply moving your stop above 4 hour candle. Check it out for yourselves.

Follow the same drill to find out how you should have traded the second bearish flag pattern in Gold. Let it be your homework assignment. Do it to make your trading better. 

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts. 

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Vytas.

Wedges

How to do technical chart analysis

Triangles

Head and shoulders

If you want to see and experience what real investing in financial markets such as Forex, stocks and commodities is all about I recommend trying innovative social investment platform of Etoro. Initial deposits are as low as a few hundred bucks. The best dealer I have heard of so far!

http://www.etoro.com/A41516_TClick.aspx 

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.

Wedge chart patterns

I want to start a series of articles on various technical chart patterns. I do believe that if you learn them and start applying in your trading you will significantly increase your chances of making stable money in financial markets. I have recently finished one series on different market conditions: calm trend, calm range, volatile trend and volatile range and I would suggest that you read those very carefully at least once. You should find a lot of useful practical tips in each article. Now, this article will cover a pretty power technical pattern: wedge. I like trading this one as we usually have a very powerful breakout out of the pattern and prices move very strongly and fast when a wedge is broken. So, let us analyze what this pattern is and how you can successfully trade it. 

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What is a wedge? It is a technical pattern with a narrowing range within two converging trendlines (that slant in upward or downward direction (depending on the type of a pattern: upward or downward)) and that usually indicates an end of a trend that can be traced in the pattern itself. It means that if you have a falling wedge (prices are going down) the breakout will most probably be upwards. Price moves between the two trendlines and the narrowing range builds pressure for an upcoming breakout. If you have a rising wedge (prices are going down) the breakout will most probably be upwards. Well, maybe the explanation was kind of difficult, but when you see the examples you will clearly understand what the pattern is like. 

When you finish reading the post I recommend reading other related posts and watch a video below:

How to do technical chart analysis

Triangles

Head and shoulders

Falling wedge

Falling wedge is recognized as a bullish technical chart pattern. You can clearly see converging trendlines in the pattern that has a downward direction. The range is narrowing towards the end of the pattern and most often than not prices break upwards starting a new trend or continuing a previous one. 

The example above in usd/jpy pair clearly shows us a nice falling wedge pattern. As the price was moving down and the range of the wedge narrowing increasing pressure and finally causing the pattern to be broken upwards with an explosive move. The pair moved around 600 pips when the upper trendline of the wedge was broken. That is precisely what you are looking for. You expect the upper trendline to be broken in a wedge. If it is not, the pattern is finally distorted and loses its’ validity. 

How to trade the pattern?

You need to place a buy stop order above the closest point where the price hit the upper trendline and then retraced. If it failed to reach the lowest low (of the pattern) you place the stop loss a few pips below the retracement (from the upper trendline). In the example above you can see that the point for entry in usd/jpy was 93.68 level (a few pips above that) since that was the place where the price hit upper trendline and retraced. The price however failed to reach previous low and started rising again. The lowest point of retracement marked a level where we need to place our stop loss order. In our case that would be 92.71 level (a few pips below that). Open your chart to find out yourself entry and stop levels for the trade. You either exit your trades by moving stop loss as the price moves in the direction of the trend till the stop is hit or you exit your trade at a predefined level. In the latter case you still need to move your stop in order to protect your profits. 

Rising formation

Falling wedge is recognized as a bearish technical chart pattern. You can clearly see converging trendlines in the pattern that has an upward direction. The range is narrowing towards the end of the pattern and most often than not prices break downwards starting a new trend or continuing a previous one. 

The example above in eur/usd pair shows an excellent rising wedge pattern. As the price was moving up and the range of the wedge narrowing increasing pressure and finally causing the pattern to be broken downwards with an explosive move. The pair moved around 900 pips (with minor retracements) when the lower trendline of the wedge was broken. That is precisely what you are looking for. You expect the lower trendline to be broken in a wedge. If it is not, the pattern is finally distorted and loses its’ validity. 

How to trade it?

You need to place a sell stop order below the closest point where the price hit the lower trendline and then retraced. If it failed to reach the highest high (of the pattern) you place the stop loss a few pips above the retracement (from the lower trendline). In the example above you can see that the point for entry in eur/usd was 1.3203 level (a few pips below that) since that was the place where the price hit lower trendline and retraced. The price however failed to reach previous high and started falling again. The highest point of retracement marked a level where we need to place our stop loss order. In our case that would be 1.3243 level (a few pips above that). Again, you either exit your trades by moving stop loss as the price moves in the direction of the trend till the stop is hit or you exit your trade at a predefined level. In the latter case you still need to move your stop in order to protect your profits. As you may see your stop loss was only 45 pips and the potential profit very big (900 pips). So, when you see a wedge forming next time get ready to take a trade.

Time frames

Some say that the pattern has to be three or six months in length and I could not agree less. You will notice those patterns on various time frames. If it is a continuation pattern and a wedge is formed in a counter trend move you would usually see it on hourly chart and that may last a few days. And then you have a nice breakout in the direction of the prevailing trend. On a longer term chart (lasting months and weeks) the pattern will probably signal a reversal and a change of trend. 

Ok, I will finish now. Be sure to read related articles to learn more on technical analysis. I promise to expand on this in my future posts. 

I hope you benefited from the post. If you liked the post I would also be happy if you gave a plus on Google+, tweeted, liked it on Facebook and other social platforms. Have a nice day. 

Disclaimer

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog http://trend0.blogspot.com/ is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.