Trading with chart patterns should be familiar to every trader. Technical analysis actually appeared very early, but it has only become popular among retail traders in recent decades.
The application of interpreting chart patterns and technical analysis is increasing because more people realize that the market is irrational. This irrationality still comes from the huge trading crowd. There are thousands of interpretations by a thousand people, creating such a volatile and unpredictable side of the market.
Think about it the last time you exited before the price reached your profit target. Why did you do this? Perhaps there is no lack of greed or fear in this decision. Reason tells you that this is not a decision you would make when you first started this transaction, but the illogical and irrational aspects of human beings urge us to go the opposite way. This is the case with trading.
The trading chart pattern is a key strategy practiced by every technical analysis trader. Therefore, there is no need to talk about theoretical things. Let's talk about the "footprint" left by the market. The chart will record every signal of price fluctuations, and these data will give us clues to interpret the market.
Looking back at the leading and lagging indicators course, we already have a sell signal from the intersection of the lagging moving average and momentum, and the signal is confirmed by momentum. Or, if you sell short according to another indicator earlier, you can set the target position just above the 1-2-3 line as a safe side, and once the 1-2-3 line is crossed, you can increase your position (Zoom).
The number of more traditional classic forms exceeds one hundred.
You will often see foreign exchange reviews refer to wedges, pennants and all forms of triangles. Triangles are formed when you can easily draw support and resistance lines, and the two lines can extend and converge to the same vertex. Obviously, the price should break through another line before reaching this point. You can see the GBP/USD ascending triangle in the chart below. We got an upward breakthrough here-in line with expectations. Usually, the top resistance line of the ascending triangle is horizontal. The descending triangle takes on its mirror image shape.
Triangle pattern-the most useful chart pattern in foreign exchange trading
When trading chart patterns, every experienced trader has his own set of methods for identifying patterns. After forming this method, no matter what kind of market they are trading, traders will pay more attention to price trends and the chart itself.
In foreign exchange trading, one of the most common patterns is the triangle state. This form is also divided into many different types.
1. Ascending triangle & descending triangle
The price accumulates and breaks upward (in the ascending triangle) or downward (in the descending triangle). Among them, the price change in the triangle state will surround a horizontal base. If there is no such horizontal base, then this form will evolve into other forms.
Taking the ascending triangle pattern as an example, first determine that there is a horizontal base in this pattern, and then higher lows will continue to appear, and finally enter the market to do more, and set the stop loss at the last low point, with a risk-reward ratio of 1. :3.
2. Symmetrical triangle
If there is no horizontal base in the triangle state, the shape will become a symmetrical triangle state. When the price breaks the triangle pattern, the trend will continue.
When trading symmetrical triangles, it should be noted that the first is that the triangle area will almost always be retested after the price breaks. If not, then the market volatility may be unusual. Secondly, the risk-reward ratio of entering the market after the price breaks through should be at least 1:3.
3. Restricted triangle
As the name points to, until the price breaks through this triangle, it will not pierce the area limited by the two trend lines. If there is a piercing situation, then this is no longer a restricted triangle state.
When trading various chart patterns, the details are everything. In this pattern, the price will eventually break through the triangle area and will not retest the area. The price will continue in the previous trend direction and create a new high or a new low, and finally reverse to the tip of the limiting triangle, that is, the intersection of the two trend lines.
4. Unrestricted triangle
The non-restrictive triangle pattern means that the pattern does not have any restrictions on subsequent price changes. This is mainly a reversal pattern.
The difference between the unrestricted triangle state and the restrictive triangle state is that the former always retests the trend line that breaks through. In addition, the tip of the unrestricted triangle state is not related to the resistance or support level of the subsequent price fluctuations.
5. Running triangle
The definition of the running triangle is still controversial. However, this is indeed one of the most common and powerful forms in foreign exchange.
Its biggest feature is that the end point of the pattern is above the start point (in an uptrend). In other words, the market seems to be changing rapidly during the integration period. Therefore, the risk-reward ratio can reach 1:5 or even more when the transaction runs in the triangle state.
6. Special shape triangle
This pattern is a bit like another head and shoulders pattern mentioned below. This particular shape of the triangle usually appears at the top or bottom of the wave, which is a strong reversal pattern. In fact, this time can also be regarded as a kind of triangle state, but it is more special.
Among the most common forms of foreign exchange trading, the wedge has to be mentioned. There are two types of wedge: rising wedge and falling wedge. An ascending wedge means that the price is bearish and will fall when the price breaks through the lower trend line. Similarly, a descending wedge means that the price will rise.
Ascending & descending wedge
Most of the time, the wedge pattern is a reversal pattern. At this time, its characteristics include: the last part of the pattern is opposite to the trend line; waiting for the price to retest the trend line, this is also the most suitable place to enter the market. In wedge trading, the stop loss is set outside the highest or lowest point of the wedge, and the risk-reward ratio is at least 1:3.
The running triangle mentioned above is similar to a wedge, the difference is that it breaks in the opposite direction when it reaches an extreme point of the wedge.
Head and shoulders
The head and shoulders pattern is a reversal pattern, and many traders should know this. However, there are some characteristics of the head and shoulders pattern, which we should pay attention to.
For example, the time factor in the head and shoulders pattern is very important. When observing, pay attention to whether the time it takes to form the left and right shoulders is the same. The closer the time, the stronger the reversal signal pointed by the head and shoulders pattern.
Continuous head and shoulders
Is this possible? The answer is yes. I know that head and shoulders patterns are usually the price will reverse, but sometimes they are formed in unusual places, for example, an inverted head and shoulders pattern appears at the top of an upward trend, then this is a signal that the trend will continue to rise. .
Triple top and triple bottom
Here we will not talk about double tops and double bottoms, because the signals of triple tops and triple bottoms are more reliable. The triple roof requires a horizontal base, which is a necessary condition. In addition, the pedestal here refers to a region, not a price.
While learning chart pattern does take some time, but now, the form still has its relevance and purpose, like when they were invented in the course of the 20th century (and by Edwards and Magee in "Technical Analysis of Stock Trends" book It is clearly stated for the first time that the book was published in 1948 and is still in print). This is because the pattern reflects the underlying market psychology under price changes, and for decades, people have not changed their group psychology much, if ever. Therefore, for the same reason, the form repeats over time. Interestingly, some people support candlesticks and candlestick combinations and think they are meaningful, but turn around and reject the classic patterns, thinking they are outdated.
The real reason for rejecting these patterns is that there are so many types of patterns that it is difficult for them to distinguish patterns, and sometimes they will make mistakes like all indicators. It seems that a lot of effort has been put into it but only very little return has been received. Another reason is that candlesticks reflect recent information, such as one or two periods, and patterns often contain many patterns before they are recognizable. However, you should at least learn a few patterns, because they help you to identify impending reversals. The main purpose of the indicator to be reversed is to set the target profit level. This is your money-you should care about the maximum benefit.
True "secret" form
After breaking through the support or resistance level, the first pattern you need is Vic Sperandeo 's "1-2-3" pattern, which comes from the book "Trader Vic: Methods of a Wall Street Master" . Since Sperandeo published this book in 1993, this pattern is obviously no longer a secret, but traders often forget this.
According to the traditional method, when the support level is broken, it is represented by an inverted V, and when the resistance level is broken, it is represented by V. However, this only applies to textbooks. In real trading, the price often fluctuates after a breakthrough, and there is uncertainty. Sometimes, the price does not really break through the support or resistance level and then resume the current trend direction. How do you know when it is a real breakout of support or resistance, and when you should trade?
The chart below shows the same currency pair and time period (AUD/USD, daily chart) as the leading and lagging indicator course chart. The first step is to break the support line. The second step is to test the previous highest price-this intermediate movement caused a lot of anxiety and confusion that we often see in the foreign exchange market. However, if the previous highest price cannot be matched and surpassed, the second step is still stuck. Now, we see the price break above the horizontal line below the mid-low of the previous uptrend. This is step 3. Only when this line is broken can we be sure that the reversal to a short position is the correct operation.