Chart Patterns : Trends & Breakout

Trends & Breakout

An important measure of the quality of a pattern is the trend that precedes it. It does not matter whether the trend is bullish or bearish, but the consistency and duration of the initial trend partly determines the well-formedness of the pattern.

The pattern is said to have "broken out" once it has crossed either the support or resistance line. If the pattern broke out in the same direction as the preceding trend, it is called a continuation pattern. If breakout is in the opposite direction, it is called a reversal pattern.



For example, a pattern described as Bullish Reversal Triangle would mean that it is a bullish signal, that is, the breakout was through the resistance line, upward. Because it is a reversal pattern that means the preceding trend was in the opposite direction as the breakout, that is, the preceding trend was bearish.

Source:http://www.interbankfx.com/Tools/PRS/Tutorials.aspx

Chart patterns

Introduction

Chart patterns are well documented phenomena in technical analysis literature and are said to be based on psychological phenomena that occur between the buyers and sellers of financial instruments in liquid markets. They include but are not limited to head-and-shoulders, channels, triangles and wedges.

Pattern formations do not form a trading system, but rather provide an indication of the potential future trend as the security's price breaks key psychological barriers in the form of support and resistance lines.

Identifying chart patterns and using technical analysis does not guarantee success in the off exchange foreign currency market. Trading in this market is risky and only suitable for the sophisticated investor.

Pattern Types

There are numerous types of patterns, all named according to the shapes that the price graphs form between the support and resistance lines. The general types of patterns include Triangles, Channels, Wedges, and Head-and-Shoulders.

Triangles

A triangle is formed between converging support and resistance lines. A negative sloping resistance line indicates a reducing level of profit taking or more uncertainty about the value of the stock. With a positive sloping support line the price levels are squeezed into a corner. Once the support or resistance line is broken, pressure that has built up as a result of uncertainty is released and a certain amount of momentum is added to the price change in the direction of the breakout.



There are specific variations of triangles that can occur, namely ascending and descending triangles. An ascending triangle has a horizontal resistance line and a descending triangle has a horizontal support line.



An ascending triangle usually occurs as a continuation of a bullish trend, while a descending triangle usually occurs as a continuation of a bearish trend.

Channels & Rectangles

A channel is formed between parallel support and resistance lines. This pattern usually indicates a relatively strong trend (up or down) with the price staying within the lines until breakout. A breakout from a channel indicates either a reversal in the trend or a change in the slope of the current trend.



Similar to a channel, a rectangle is a pattern formed between horizontal support and resistance lines.



Rectangles and Channels are sometimes referred to as Flags and Pennants depending on the slope of the initial trend and the slope of the breakout. A Flag would be defined as a Bullish Continuation Channel Down, or a Bearish Continuation Channel Up. A Pennant would be defined as a Bullish Continuation Triangle, or a Bearish Continuation Triangle.

Wedges

Wedges are similar to triangles in that these patterns are formed between converging support and resistance lines. However, where the support and resistance lines in a triangle have one positive and one negative slope, the support and resistance lines of a wedge would both have either a positive or negative slope. Wedges with positive slopes are called Rising Wedges and ones with negative slopes are Falling Wedges.



The most common wedges are found as breakouts in the opposite direction of the wedge. That is, bearish breakouts in a rising wedge, and bullish breakouts in a falling wedge.

Head & Shoulders

A Head and Shoulders pattern describes a share price movement that depicts the head and shoulders of a person. Head and Shoulders is a reversal pattern from a bullish trend to a bearish trend. The pattern starts when the price graph crosses the support line upwards before formation of the left shoulder, and is completed once the graph crosses the support line downwards after formation of the right shoulder.



An Inverse Head and Shoulders is similar in shape except that it is upside down and indicates reversal from bearish to bullish trend.

article source: http://www.interbankfx.com/Tools/PRS/Tutorials.aspx

Learn to Trade Triangle Chart Patterns Part 1

Last Year, I've learned a lot about indicators.. but then, I realize that i become obsessed with indicators. Well, the pro said, indicators are only value added tools. The Charts n Technical Analysis are the main things..
mmm.. o.k then.. lets study about charts..




Triangle Patterns can be broken down into three categories: The ascending triangle, the descending triangle, and the symmetrical triangle. While the shape of the triangle is significant of more importance is the direction that the market moves when it breaks out of the triangle. Lastly, while triangles can sometimes be reversal patterns they are normally seen as continuation patterns.
The Ascending Triangle:

The ascending triangle is formed when the market makes higher lows and the same level highs. These patterns are normally seen in an uptrend and viewed as a continuation pattern as the bulls gain more and more control running up to the top resistance line of the pattern. While you normally will see this pattern form in an uptrend if you do see it in a downtrend it should be paid attention to as it can act as a powerful reversal signal.
The Descending Triangle:

The descending triangle is formed when the market makes lower highs and the same level lows. These patterns are normally seen in a downtrend and viewed as a continuation pattern as the bears gain more and more control running down to the bottom support line of the pattern. While you normally will see this pattern form in a downtrend, if you do see it in an uptrend it should be paid attention to as it can act as a powerful reversal signal.
The Symmetrical Triangle:

The symmetrical triangle is formed when the market makes lower highs and higher lows and is commonly associated with directionless markets as the contraction of the market range indicates that neither the bulls nor the bears are in control. If this pattern forms in an uptrend then it is considered a continuation pattern if the market breaks out to the upside and a reversal pattern if the market breaks to the downside. Similarly if the pattern forms in a downtrend it is considered a continuation pattern if the market breaks out to the downside and a reversal pattern if the market breaks to the upside.

source:http://www.informedtrades.com/3557-learn-trade-triangle-chart-patterns-part-1-a.html

Trading Plan - could help to rectify trade problems

After nearly 2 weeks using the Trading Plan and Paper Trade. Finally, i found my biggest problem, while trading FX..
This Trading Plan is really useful.. Why?..
(On this Particular Case). I noted each of our position entry, plus the reason why i did open the post.
Last Saturday, I have 4 floating positions (E/U and U/J).. Total of -200 pips..
Then, I check the reasons on why I opened the post, one by one..
Then later I found out, My problem is
"I try to hit the top of E/U and bottom of U/J and didn’t wait for enough confirmation. I trade against the market and as soon as I saw a small reversal signal,I enter the opposite pos,t whereas the market yet to change its direction.

Today, I found the solution, how to improve my trading style (of course, from the internet).

"If this is your problem, then it is very easy to resolve:

First way: Do not wait for a reversal signal. Go long when it has already started to go up. Go short when it has already started to go down. Do not try to hit the top and bottom of the market. Enter to the trade when the market is on its way and is moving to a special direction.

Second way: Act against your primary decision. For example if you came to this conclusion that the price wants to go down, don’t go short. Go long!!!

and visa versa …" Mr Vahid http://www.weboma.com/about/

Discipline

To be a good trader, they said.. you need to be disciplined.. My self told me " If you really serious about trading forex, be discipline. or else forget about forex trading". For a week i thought about discipline that relates my current situation as a newbie in forex trading and as a human being in general. I wonder, what should i do now??.. I used to heard about it during my school days time....

I know, need to acquire this... but how to start?.. then, i thought.. how about, go back to the roots... what does discipline really means..

"In its most general sense, discipline refers to systematic instruction given to a disciple. This sense also preserves the origin of the word, which is Latin disciplina, "instruction."

To discipline thus means to instruct a person or animal to follow a particular code of conduct, or to adhere to a certain "order," or to adopt a particular pattern of behaviour. So for example, to discipline a child to wash its hands before meals. Here, 'washing hands before meals' is a particular pattern of behaviour, and the child is being disciplined to adopt that pattern. 'To disciple' also gives rise to the word disciplinarian, which denotes a person who enforces order. An ideal disciplinarian is one who can enforce order without coercion. Usually however, the phrase 'to discipline' carries a negative connotation. This is because enforcement of order - that is, ensuring instructions are carried out - is often regulated through punishment.

To be disciplined is then, subject to context, either a virtue (the ability to follow instructions well) or a euphemism for punishment (which may also be referred to as disciplinary procedure). As a concrete noun, the discipline refers to an instrument of punishment, for example in mortification of the flesh (see also: flagellation). Such an instrument may also be applied to oneself, for example in penitence for not being sufficiently self-disciplined.

Self-discipline refers to the training that one gives one's self to accomplish a certain task or to adopt a particular pattern of behaviour, even though one would really rather be doing something else. For example, denying oneself of an extravagant pleasure in order to accomplish a more demanding charitable deed. Thus, self-discipline is the assertion of willpower over more base desires, and is usually understood to be a synonym of 'self control'. Self-discipline is to some extent a substitute for motivation, when one uses reason to determine a best course of action that opposes one's desires.

School discipline refers to regulation of children and the maintenance of order ("rules") in schools. These rules may, for example, define the expected standards of clothing, timekeeping, social behaviour and work ethic. The term may also be applied to the punishment that is the consequence of transgression of the code of behavior. For this reason the usage of school discipline sometimes means the administration of punishment, rather than behaving within the school rules.

Church discipline is a response of an ecclesiastical body to some perceived wrong, whether in action or in doctrine. Its most extreme form in modern churches is excommunication. Church discipline can also refer to the rules governing some ecclesiastical order, such as priests or monks, such as clerical celibacy.

An academic discipline refers to a body of knowledge that is being given to - or has been received by - a disciple. The term may then denotes a 'sphere of knowledge' that an individual has chosen to specialise in. In an institute of higher learning, the term 'discipline' is often a synonym of 'faculty'.

In unionised companies, discipline may be a regulated part of a collective bargaining agreement and subject to grievance procedures."

Source:http://en.wikipedia.org/wiki/Discipline

My Learning Platform (FX)

People ask me... Why do i have this blog?.. "Do wanna be a forex guru?", "Do you want to sell something on it?" and bla,bla,blabla...
As for me, this blog is like a diary or a bookmarks for me..
I'll put the on-line articles, lesson or video (in future) or anything about FX that trigger me while I'm browsing fx websites/forums.. Its like, when i go to a bookshop, buy a few books, then read a bit by bit..LOL
Since I'm a slow reader, sometimes I need to read a few times the same statement, before i could understand it. I can also refer back, anytime i want..
But now I'm really serious about learning FX, its like preparing for my final exam during my Uni. days.. Why?.. because i have already lost quite handsome of money in FX :-(

"There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to leam." quotes taken from Reminiscences of a Stock Operator, written in 1923 by Edwin Lefèvre

THIS VERY UNUSUAL AND RARELY USED STRATEGY (Jacko's Way)

Happy New Year 2008!! Hope to see more GREEN Pips coming...
I'm still searching for a method/system that suit me (of course profitable one:-), and hopefully I'll find it this year..

Well, I just found an interesting one, quite simple to understand but yet to test it.. I just called it "JACKO's Way" (sounds like a movie film..hehe).. have fun.

I divide them into 4 chapters:
Chapter 1 : I am a Trend Trader
Chapter 2: Jacko.. on alternative to Hedging..
Chapter 3 :Jacko..on the Time Frame..
Chapter 4 :Trading The News




Chapter 1 : I am a Trend Trader

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I am a Trend Trader

EVERYONE SHOULD TEST OUT THIS VERY UNUSUAL AND RARELY USED STRATEGY;

1. buy/ sell ONLY in the direction of the major trend and
2. buy/sell on dips.(Use support lines to guide you as to price...also "round" numbers ... I also use the 50% Fib ratio..)
3. bank your profits

Firstly, how do you know what the trend is?

DETERMINE THE TIME FRAME THAT YOU WANT TO TRADE.

1. If the graph on the chart starts in the bottom left hand corner and ends in the top right hand corner, the market is going UP.

2. If the graph on the chart starts in the top left hand corner and ends in the bottom right hand corner, the market is going DOWN.

3. If you are still confused, print it off and show it to a 5 year old...they will get it right EVERY time...LOL

The trend is the BEST friend you will ever have in the Forex market.

When you trade with the trend, even if you make a mistake, the market will get you out of your problem....If you make a mistake and you are fighting the trend ...YOU ARE STUFFED, BIG TIME !!!



Secondly,I think the round numbers (1.2900...1.3000...etc) are valuable. I only use minimal numbers of trend lines and the ONLY Fibonacci number I use is the 50% number....
That's the limit of my T/A...

KISS = Keep It Short and Simple
Note: I do NOT use any moving averages (or any other of the fancy measures). They are historical numbers!!!

The reasons that I use only Round numbers, trend lines, and the 50% Fib number is that the big players ALL use them. The more complex you make your trading parameters, the less number of people will be using them.


Forex is one of the most "trendy" markets. That is, it trends MUCH stronger than say metals, oils etc in futures markets. The pair that are the strongest "trend" market is the Euro/USD. Trending markets are soooo much easier to trade than choppy, volatile and erratic markets


Thirdly, Slow down... this market will be here for the rest of your life...
DON'T BET YOUR BANK...

It is better to get rich slowly...than to go broke spectacularly fast.


Fourthly, A much wiser man than me once said that "If you find yourself in a deep hole, then stop digging"

Do NOT throw good money after bad money...stop and accept the loss... then clear you head so that you can see more clearly...

You should either

1. Close out the trade, and let the market go up/down....but after the market starts to retrace, then put your "short"/"long" position back on at exactly where you closed it out. This ensures that you get back into the trade on the way down (the Jacko "alternative method" to hedging) or

2. Close the position and take the loss. Then look at getting back into a "good" trade next time. This market will be here long after you and I will be dead, so there is no need to rush in and try to get all your money back in one day.


Fifthly, the is a tendency for newbies to "PANIC" when the market goes a little against them This is due to:
1. Probably scared to lose money
2. Probably undercapitalised
3. New to industry....therefore probably uncertain about your own abilities
4. Unsure that the trend lines, 50% Fib line and "round numbers" are as reliable as they are in practice.
4. Probably inexperienced in business and investment from a practical aspect
5. Probably unsure who to talk to for guidance

There is a solution to all the above...... It is called "old age"........LOL

Finally, you ask why I prefer to use the longer term trades. The answer is that the shorter the time period, the more you are gambling and punting on tiny movements. The smaller the time frame, the less they will follow the trend lines, Fib numbers and "round number" rules.
The longer the time frame, the stronger will be the trend lines etc

Also, short term trading is emotionally much more draining.


Just some additional little things that I have remembered that may be of assistance to anyone looking to position trade:

Firstly, don't over-trade. Some people here seem to want to bet on every tic. The thing that kills new traders is the "wild punting" on everything that moves two ticks.

Secondly, stop thinking that you have to "outsmart" the market.
You don't have to..this business is very easy if you leave your brain at the door....just follow the trend = follow the money =going with the flow = barking with the big dogs.
Stop thinking that "it can't be that easy".......it is!!!


Thirdly,, you have to detach yourself emotionally from the money...that is the hard part...stop seeing it as money, and look at it as numbers.
Also, don't play with money you can't afford to lose...or alternatively, put the money aside and tell yourself that it is already lost. (You MUST detach yourself from the money

Finally, I am not saying anything different to what all the good trading books say...but it is amazing that every newbie wants to "take on" the market and then wonders which express freight train flattened them (and destroyed their trading accounts).
Most people are trading for the adrenaline rush rather than the boring concept of just maximising profits



The Forexmarkets are arguably the most "trendy" market there is, especially the Euro.

Once a trend is in place, it takes a lot of power to reverse it. Take a look at the weekly charts. This current "long" started back in early Dec 2005 at approx 1.1650. (nearly 1700 pips from where it is now) It had a relatively "minor" correction from approx 1.3000 to 1.2500 before continuing on to where it is today.

Even more strong evidence for the power of the trend is that the above "long" is part of an even stronger "long" from 0.8363 from July 2001.


Price does not like support or resistance levels. It mostly tests them and then moves away quickly. You’ll rarely find much price action in the vicinity of the line. If price is hanging around a support or resistance level, it’s likely to break in the opposite direction.
(For example we know that professional traders love round numbers to target...it brightens up their dull day to push and cajole the market to a target number. Now Euro/USD 1.3000 is the roundest number there is around those levels, so the pros have gotta be saying that the big game in the industry is to now grind and push the market to 1.3000. After that they don't care, they have had their fun...and thats why a market will whip and drop/rise dramatically straight after the target has been hit).

Smart Money is the Central Banks. They actually determine the trend by sheer weight of money. (Central Banks turn the long term currency markets to accomodate the relevant government's trade requirements). Then following them are the huge hedge funds."


Chapter 2: Jacko.. on alternative to Hedging..

"An Alternative to Hedging. Jacko's Anti-Hedging Strategy

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This strategy was invented by me as an alternative to "hedging" which was often discussed on Forums as a panacea to a losing trade.

"Hedging " to me is simply hiding a loss under another opposite trade...and sooner or later, when the hedge comes off, there is an ugly loss exposed...I don't like that concept !!! (However, to those who use them, I say, different strokes for different folks...that is, its a personal choice).


Currently, this is what seems to happen to some Traders...

1. you put a trade on and you put a stop loss of around 40- 50 pips
2. the market goes against you (horrors....I was wwwwwrong !! )
3. let the market continue...it will probably go say another 30 - 100 pips past your stop...who knows ???
4. FINALLY, the market comes back around and starts to head in the opposite direction
5. by now you are totally hacked off with the market and you let it go


The solution that that I found is a pretty simple one but one that has to be executed without fail...

Scenario 2

That strategy is:

1. you put a trade on and you put a stop loss of around 40- 50 pips
2. the market goes against you (horrors....I was wwwwwrong !! )
3. let the market continue...it will probably go say another 30 - 100 pips past your stop...who knows ???

4. PUT AN ORDER IN AT THE EXACT SAME FIGURE AS YOUR STOP LOSS (if you were originally "short" then place a "short" order) This ensures that when the market comes back, as it invariably does, you have a DEFINATE order in place to put you back in the market where you were originally...and you are now in the same direction as the market is moving..

5. FINALLY, the market comes back around and starts to head in the opposite direction
6. The market picks you back up on its new direction

7. THE ADVANTAGES OF THIS (THEORETICAL) STRATEGY IS THAT
a. IT HAS AN EFFECTIVE AND DISCIPLINED COURSE OF ACTION
b. IT GIVES YOU A SPECIFIC "ENTRY" POINT
c. IT REDUCES LARGE DRAWDOWNS
d. IT PUTS YOU BACK IN THE MARKET EXACTLY WHERE YOU GOT OUT

I know that there are DISADVANTAGES with this strategy, buy I think that the overall effect of the advantages outweigh the disadvantages.

I also think that this strategy is more appealing to my business sense of minimising risk than the original concept of "hedging" that initially set me off to discover an alternative strategy to hedging.

I have now been using this strategy for a couple of months and it is working brilliantly.

PLEASE NOTE: I am a medium to long term trend trader. The above method works best on those time frames. It works less well on short term time frames because of the volatile "noise" in the market.

When a stop loss has been triggered, I allow it to go past my SL by a minimum of 50 pips before I set the new order.

When the market has turned and is coming down in the "trend" direction, my order is then opened.


Try it...you will be surprised how good it is.

The key advantage is that you are not tempted to "hang on" to a losing trade....and therefore your drawdowns are minimised.

However this is a "default" trade. It is NOT the prime strategy to use.
DO NOT LOSE SIGHT THAT the prime strategy is to trade medium/ long term and trade with the trend, with a trailing stop."


Chapter 3 :Jacko..on the Time Frame..

Timeframes for Determining The Trend

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Time frames (for me) as a Trend Trader

I start with weekly, then move closer in using daily, 4 hour and 1 hour to help me make a decision. Less than 4 hours tends to be "noise" rather than a "trend". They are the "sucker" rallies and declines.
PS Don't be the sucker...

But I am also starting to notice that it doesn't really matter anymore where I buy or sell.
The anti-hedging strategy is FAR, FAR, FAR more important.

The anti-hedging strategy ensures that,... if you make a trade in the wrong direction,.... you can get your losses back ...AND you are in the direction of the trend.
Stick a trailing stop loss on it and you are guaranteed a profit.

So...
1. If your trade is a winner, you stick a trailing stop loss on it and let it run.

2. If your trade is a loser, employ the anti-hedging strategy, and at some time, you can get your losses back ...AND you are in the direction of the trend. Stick a trailing stop loss on it and let it run.

K.I.S.S. (keep it short and simple)


Chapter 4 :Trading The News

An Opinion on "Trading the News"

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In my opinion,

You have NO chance trying to trade the news (buy or sell as soon as the news is released)...the dealers will ALWAYS be in front of you. (you need a broker too that won't play unfair tricks during those high volatility times, those tricks include freezing the platform, some will widen the spread way too much, others will get you filled way to far from the price you wanted to).

Whichever broker you trade with, you are trading through their platform. Consequently, their brokers will therefore have an advantage over you.
To think otherwise is naive.
They are taking the other side of the trade (which they must in "trading the news" because they don't have time to spread their risk), and they will fight tooth and nail not to give away a business advantage to any trader. That's why they are doing all the things (plus much more) outlined above.

Its like poker, if you look around the room and can't see the patsy, then YOU are the patsy. The faster / shorter time frames that you try to play in this business the more you are at a disadvantage. Retail traders trading the news are like fish swimming with hungry sharks in blood-filled water.

(Source : taken from forexfactory.com.."Invented by Jacko, Jacko's Forex House of Pleasure and Pain")