Each trader gains in his experience a good knowledge of support and resistance levels, trends and corrections and a range of technical indicators. With every month of active trading, it becomes easier to spot candlesticks and chart patterns. However, you have to develop your skills in some complex matters to advance further, so let's get to know them together.
1. Wolf waves
Sometimes price forms structures that go beyond the simple consolidation pattern or wedges. Price action reflects such a battle between buyers and sellers: There are periods when the first or second prevail but there are other periods when their power is roughly equal. Example of a falling wolf wave pattern.
Looking for a wedge shape, pay attention to the stage of the trend line. You will have to be alert once the price forms the first four points - in other words, the range that narrows. After that, there are likely to be three scenarios:
# The price breaks through the 1-3 line and then continues moving in the direction of the breakout.
# The price keeps dropping from the 1-3 line.
# The price rises slightly above the level of the 1-3 line and then reverses.
The third scenario reflects what we call 'Wolf waves'. If points 3 and 4 are above points 1 and 2 respectively, then be prepared for the formation of a bearish wolf pattern. It is very important that waves No. 1-2 and 2-3 are equal (symmetric). Fibonacci tools will help a lot in confirming the pattern: Point 3 is usually at 127.2% or 161.8% of 1-2 wave extensions.
Pay attention to point # 5. Beginners may mistake it for a breakthrough, and that's the hard part. Point 5 is often at the 127.2% or 161.8% extension of wave 3-4. In addition, there is a specific chart area between line 1-3 and line parallel to line 2-4 drawn from point No. 3: if the price reverses down in this 'sweet zone' or 'sweet zone', then this is a sell signal. If not, then the bearish Wolf model has not been confirmed.
The pattern provides clear goals for traders and that's the nice part about it:
TP1: Support Line 2-4
TP2: Draw a line between points 1 and 4: Target 2, point 6 should fall on it. The movement between pips 5 and 6 will be long and thus will allow traders to get enough profit points.
You can place a stop-loss order above point No. 5.
If you see a reversal candlestick pattern in the 'sweet zone', cheer up and consider trading with a big target (point 6). If the price breaks out of the 'sweet zone', it is another pattern, so consider trading in the direction of the breakout.
Not much complicated after all this explanation? The main thing you have to train is your eye: You will have to do a visual analysis of the price chart to find out which Wolf waves are on it.
2. Gartley harmonic pattern
The Gartley pattern belongs to a group called harmonic patterns. These patterns (crab, butterfly, bat, and shark) look exactly the same. The difference between them lies in the exact percentages of price fluctuations. As for the logic of recognizing these patterns, start by learning the Gartley pattern, and the rest will come easily.
The main difficulty with the Gartley model is that it is very similar to the top of the market, however there will be an upcoming price rally. Note that in all bullish harmonic patterns, the second high is lower than the first high. In addition, the structure of the bullish pattern resembles the letter M, while the bearish pattern resembles the letter W.
Once you notice a figure like this on the graph, you should quickly tell yourself: It may not be as simple as it seems. Act instantly: use Fibonacci retracement ratios to check key point locations.
# Point B lies at 61.8% retracement of XA. This is the most important condition.
# Point C could be at 38.2% -88.6% retracement of AB.
# Point D can be found at the 127.2% -161.8% extension of AB or the 78.6% retracement of XA.
Take profit and stop loss
TP1: CD 61.8%.
TP2: the size of XA expected from D.
The stop loss order may be placed below X for a bullish Gartley pattern (above X for a bearish Gartley pattern) or according to your risk management rules.
The problem with harmonic patterns is that in real life, the patterns you find on the charts often do not match the above ratios exactly. As a result, the greater the difference between the Gartley model, as I theoretically studied it, and the pattern you want to trade, the greater the risk ratio that must be taken into account.
Improve your market outlook. Even if you decide not to use Gartley patterns for entry signals, you still need to be aware of their shapes to avoid being confused with the highs or lows of the market. You will be surprised at how frequently these patterns are.
3. The three impulsive waves pattern
Here's another tricky pattern. A beginner trader might mistake it for a healthy market trend. However, advanced traders are able to avoid such a mistake.
A pattern like this occurs in a distinct direction. In other words, a market that has had a trending trend for a while. Later, I noticed that the price fluctuations began to look really similar in size and shape. Then say to yourself: Pay attention, the trend will often change direction!
As with the previous two patterns, you will find some Fibonacci retracements here:
# Point A is at 61.8% retracement of leg 1.
# Point B is at 61.8% retracement of leg 2.
# Leg 2 at 127.2% -161.8% expansion from point A.
# Leg 3 at 127.2% -161.8% expansion from point B.
Of course, you don't have to memorize these percentages or anything like that. The 61.8% correction is completely natural and you can visually preserve it.
You can trade on the 3 leg. Enter the market when you are confident that point B has formed (buy in the downside of the three waves, and sell in the uptrend from them). The take profit should be placed close to the 127.2% - 161.8% expansion of B.
You can also trade when the pattern is complete. Enter the market on the 127.2%-161.8% expansion of B (sell in the bearish three wave pattern, and buy in the bullish one). Take profit can be placed at 61.8% retracement of the entire pattern.
Trends sometimes end with double tops or head and shoulders patterns, but it happens that the trend ends with three similar swings. It is very important to recognize this pattern. Because it offers you excellent opportunities to open trades.
Good Luck To All ...