There are a number of top chart patterns which are present in the charts and recur again and again. Knowledge of these chart patterns can help our trading as it provides a likely direction for future moves. Chart Patterns can provide some quality trading setups and opportunities and can also help us to exit from a stock, Contracts for Difference (CFDs), option or Forex position.
Today we’ll will look at four chart patterns and how you can get the most out of these opportunities as they occur in the market. There are many more patterns that exist, however these four are relatively easy to identify and trade.
The rounding bottom is formed by a number of small candles that get longer and longer as the days go on. This forms a rounding shape and can lead to very strong rise in the share or CFD price. Entry is as soon as the pattern is identified to make the most of the steeper portion of the rise that follows. The early stages are marked by a series of small green candles. The rounding bottom shows a gradual shift in sentiment with buyers accumulating the shares.
Try an experiment next time you are in the bathroom. Take a tube of toothpaste and squeeze it hard then take off the lid. What happens? The toothpaste squirts out under pressure. A similar effect is clear in the share market with a share price being squeezed into a wedge or a triangle.
The number of share CFDs available for sale is less and less as the point of the wedge is approached, volume decreases until the only way that a buyer can get more CFDs is to pay a higher price. Beware; wedges give no clear direction of the likely breakout. They can break up or down. Ideally you want to place a contingent order for a break in either direction to increase your chances of getting on the right side.
Ascending triangles are very similar to wedges except the top of the triangle is horizontal, known as a resistance level. The same effect is occurring as in a wedge that the CFD price is being squeezed and can break out strongly from the triangle. Ascending triangles, unlike wedges, give a clear direction of the likely breakout with ascending triangles in up trends breaking up more than 80% of the time.
Using a conditional buy order is the best way to enter your CFD trade if it breaks through resistance. An ascending triangle will typically break out strongly for 1-3 days before falling back or resting. This rest can take the share back to the resistance level before the CFD continues to climb. If the CFD drops below the resistance level the break out has failed and it is time to exit the trade.
V formations form after a rapid drop in the share CFD price. The CFD then often rebounds very quickly, however this rebound does not always end in the share regaining its previous levels.
This style of trading is aggressive and suited to short term traders only as the CFD can continue to fall even after strong declines. The terrorist attacks on September 11 created this pattern in many stocks over the next month. Entry is made after a strong drop in the CFD price and as soon as the CFD starts to rise. A tight trailing stop is essential and this position may have to be monitored on an intra day basis.
Take note of these chart patterns and use them as opportunities to build into your trading plan. Studying history is no guarantee of future performance but it does give a map indicating the right direction to take. Identify a chart pattern you are comfortable trading, then follow through on the signals as they arise.