There are dozens of chart patterns, but it’s always about studying the ups and downs via the Dow theory and concluding accordingly with a bullish opinion, or a bearish opinion, or a neutral opinion. .
The principle of the “decoding” of the graphic figures remaining the same for all the figures, we propose here to be interested in the main graphic figures and their interpretation.
The triangle represents an undecided configuration of the path, it is assimilated to a phase of psychological consolidation by investors.
There are mainly 3 types of triangles:
* Ascending triangles
* Descending triangles
* The symmetrical triangles
Generally, an ascending triangle appears after an upward movement and vice versa for the descending triangle. As for the symmetrical triangle, it can appear in any type of configuration. One of the common points of these 3 triangles is that the oscillation of the path decreases between the two limits of the figure.
The ascending triangle:
The ascending triangle is represented by an uptrend line connecting the previous low points of the price to the top, this line acts as a dynamic support.
The upper limit of the triangle is represented by a resistance that connects the high points of the same level. This figure is considered a consolidation phase within a bullish movement, the pressure therefore remains bullish within this figure as the pair manages to align a succession of rising lows.
The descending triangle:
The descending triangle is represented by a downtrend line connecting the previous highs of the price to the downside, this line acts as a dynamic resistance.
The lower boundary of the triangle is a support that connects the previous lows of the price at the same level.
This triangle is considered a consolidation phase within a bearish movement, the pressure therefore remains bearish as the price aligns a succession of downward peaks.
The symmetrical triangle:
The symmetrical triangle is also a figure of consolidation and indecision, however it is difficult to establish the psychological bias of investors within the figure as the price aligns a succession of bearish highs and a succession of rising lows.
It is still believed that the price is more likely to exit this triangle in the direction it entered.
In other words, if the movement was bearish prior to the formation of this triangle, the price is more likely to come out of this figure from the bottom.
How to trade Triangles?
The first thing to remember is that when it comes to trading, the most appropriate thing to do is to position yourself in the direction of the trend in a solid and directional pattern.
Dow’s theory is to evaluate the “credibility” of a trend at the time T.
If the price aligns a succession of high and low points on the rise, the trend is bullish and “healthy” according to the Dow theory.
If the price aligns a succession of highs and lows to the downside, 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 a triangle since the price does not align the high and low points in the same direction.
The least risky situation therefore consists in waiting for the exit of the triangle to position oneself in the direction of the exit. It is important to know that an exit from a triangle very often generates volatility and it is therefore advisable to position yourself in this scenario.
The expectation of your takeprofit on this type of scenario can reach the detected amplitude between the high and low points furthest from the triangle.
After noticing an exit of the triangle, it is also advisable to anticipate a correction in exchange for the previous upper or lower limit of the triangle to plan a potential “pullback / backward” on this resistance that has become support or on this support that has become resistance.
The shoulder-head-shoulder is a well-known chartist figure, it is very often significant of a turnaround.
This data will be different depending on the configuration of the trend, in case of an uptrend we will evoke the “classic” Shoulder-Head-Shoulder (ETE) while within a downtrend we will talk about “inverted” Shoulder-Head-Shoulder (ETEI).
“Classic” Shoulder-Head-Shoulder (ETE):
Shoulder-Head-Shoulder “inverted” (ETEI):
The TEE is a chartist figure that forms most often at the end of the trend, thus offering a high probability of reversing the trend that preceded its formation.
It is however possible to find an ETE within a bearish movement as it is also possible to observe an ETEI within a bullish movement.
These cases are very rare indeed but it is important to know as the meaning is quite different. In these two cases, the data will be interpreted as a continuation of the trend and not as a trend reversal.
The TEE consists of three successive peaks.
The second vertex is called “Head” and must always be higher than the other two vertices corresponding to the “Shoulders”.
The “Shoulders” of the figure should ideally reach the same level, however if the second shoulder (the one on the right) is lower than the first, the figure remains valid.
Conversely, if the second shoulder is wider than the first, precautions should be taken.
In fact, let’s say that we are reading an ETE in a bullish configuration, if the height of the right shoulder is equal to or less than that of the left shoulder, it means that traders have difficulty in continuing 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 low points reached between the vertices allow to materialize a horizontal support called “Neck line”.
The breaking of this “Neck Line” will serve as a sales notice, the goal is determined by reporting the height of the head from the neck line.
Note that returns on breakouts and crosses are quite frequent (Pullback for ETE and Throwback for ETEI). Investors can take advantage of this to strengthen their position.
The goal completion time is usually half the model training time.
The Double Top / Triple Top
The double top is a graphical reversal of the trend that occurs at the end of a bullish move.
This chart pattern illustrates an invalidation of the uptrend as the price now aligns its previous highs at the same level on a resistance zone.
Psychologically, this shows that the bias is reversing as the bulls are no longer able to continue buying at the level of the last peak reached.
The inability of the price to break out of the latest high reflects a general weakness of buyers and this indicates a potential bearish reversal on the way.
The Double Top is represented by 2 almost identical peaks in terms of duration and amplitude. It is worth noting that the 2nd peak may be slightly lower than the 1st. This nuance lends credence to the pattern as the second high gives us another clue as to the weakness of the upside at the current price.
The low point reached between the “2 peaks” allows to represent a support area called “Neck Line”. The breakout of this Neck Line will reveal the formation of this pattern and the “Pullback” on this Neck Line will confirm the trend reversal.
The study of the volume in the figure:
The volume generally decreases over the whole figure. Down periods are often supported by more volume than up periods.
The vertices of the figure are often represented by “volume peaks” and the 2nd vertex is usually less supported by volumes than the 1st.
The break in the Neck Line is often accompanied by a large volume.
The variant: the Triple Top
The Triple Top is rarer, this figure is a derivative of the double top with an extra top. Its psychological and graphic interpretation is exactly identical to that of the double-top. The analysis of the volumes is also similar to that of the Double-Top.
Application in Trading and Graphic Representation of the Double-Top
1 / Wait for the neck line to break
2 / Anticipate a pullback on this neckline
3 / Positioning for the sale after the formation of the Pullback
4 / Adjust your stoploss above the last highest point
5 / Adjust your takeprofit according to the “swing” method by counting the difference in pips between the peaks and the neck line.
The “V” top is a graphical representation we see in the long run of an upward movement on a top. This configuration reflects an acceleration of the uptrend that leads investors to finally continue buying at levels that are no longer justified.
Traders have been caught up in the bullish craze and the “herd effect” is allowing the market to reach significant levels which it will hurry to correct.
The formation of this figure therefore derives from the greed of the participants which leads to a frenzy of buying on the market.
Volumes are generally soaring during this pattern, it may be wise to monitor them to confirm the formation of this pattern.
How to exchange the V-Top?
The most prudent position is to wait for the “pullback” to form to confirm the pattern.
The entry into position is therefore on the rebound, the trader will use the “swing” method to determine his goal.
You will then need to count the number of pips between the neck line and the top and then place your takeprofit according to this figure.
The stoploss can be positioned slightly above the neck line, this opportunity will often offer you an attractive risk / reward ratio.
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