Trading Trading Chart Patterns Trading Series I Education Hub Chart patterns provide a visual representation of the battle between buyers and sellers so you see if a market is trending higher, lower, or moving sideways. A good understanding of chart patterns will help you in making buy and sell decisions effectively. Learning Tip There are tons of chart patterns. Most can be divided into two broad categories—reversal and continuation patterns. Reversal patterns indicate a trend change, whereas continuation patterns indicate the price trend will continue after a brief consolidation. Comparison Continuation vs. Reversal Patterns Two basic principles of technical analysis are that prices trend and that history repeats itself.  An uptrend indicates that the forces of demand (bulls) are in control, while a downtrend indicates that the forces of supply (bears) are in control.  However, prices do not trend forever and as the balance of power shifts, a chart pattern begins to emerge.  Certain patterns, such as a parallel channel, denote a strong trend. However, the vast majority of chart patterns fall into two main groups: reversal and continuation. Reversal patterns indicate a change of trend and can be broken down into top and bottom formations. Continuation patterns indicate a pause in trend and indicate that the previous direction will resume after a period of time. Just because a pattern forms after a significant advance or decline does not mean it is a reversal pattern. Many patterns, such as a rectangle, can be classified as either reversal or continuation. Much depends on the previous price action, volume, and other indicators as the pattern evolves. This is where the science of technical analysis becomes the art of technical analysis. Steps to Apply Investing Using Trend Analyzing chart patterns and understanding how specific securities react to price patterns can help you determine whether the bulls or bears are in control. This, in turn, can help you strategize your trades by identifying entry points, exit points, and stops. Sometimes a chart pattern may fail to do what you expect. Other times you may have to exercise patience in waiting for a specific pattern to develop. Chart patterns are subjective and can be misinterpreted. Because of these caveats, you must practice looking at chart patterns by viewing charts of longer timeframes. Get PRO Get access to exclusive premium features and benefits. Subscribe a PRO plan. See More Related Topics Using Volume for Trading Fibonacci Retracement Load More

Trading Using Volume for Trading Trading Series I Education Hub When identifying potential price patterns on a chart, it is crucial to try and verify that the market psychology behind the price pattern is really happening at that point on the chart. One of the best ways to do that is to use volume to confirm things. Learning Tip Volume is one of the two fundamental data which drives technical analysis. It is extremely powerful indicator when used in conjunction with price. So always make sure to include in your trading strategy. Use of Volume Using with Price Patterns In the case of a rectangle pattern, volume should be decreasing while the rectangle is forming. There may be volume spikes whenever prices get near the top or bottom of the pattern, but in general, as a rectangle pattern continues to develop, volume should decrease. Volume will probably spike up heavily immediately after the breakout as people realize that the support or resistance line has been broken. Triangle patterns should have a similar volume pattern – decreasing volume while the triangle is forming with a sharp increase in volume once a breakout is achieved. Use of Volume Using Volume to Confirm Trend In an uptrend, volume should expand as the prices move higher and contract as the prices pull back. As long as this pattern continues, volume is confirming the uptrend. The opposite is true for downtrends. Volume should expand as prices decline and contract during rallies to confirm a downtrend. Negative divergences can occur if new price highs in an uptrend take place on declining volume. This type of volume activity is an indication of diminishing buying pressure. If the volume also begins to pick up on price pull backs, prices may begin consolidating or reversing into a downtrend. The same concept is true for positive divergences in downtrends. If volume begins to contract on new price lows but expands during rallies, prices may begin consolidating or reversing into an uptrend. Conclusion Important Points The two price patterns we’ve looked at – Rectangles and Triangles – are examples of Consolidation Patterns, also known as Continuation Patterns. They are called that because, in general, after the pattern completes, prices will usually continue whatever trend they were in prior to the pattern forming. In order words, if prices are in an uptrend prior to a rectangle pattern forming, prices will usually resume the uptrend once the rectangle pattern finishes. Basically, consolidation patterns are places where the bulls and the bears have another short-term argument about the stock, but it is a half-hearted one. The bigger picture doesn’t really change. Get PRO Get access to exclusive premium features and benefits. Subscribe a PRO plan. See More Related Topics Trading Chart Patterns Fibonacci Retracement Load More

Trading Fibonacci Retracement Trading Series I Education Hub Fibonacci retracement levels are based on ratios used to identify potential reversal points on a price chart. These ratios are found in the Fibonacci sequence. The most popular Fibonacci retracements are 61.8% and 38.2%. Note that 38.2% is often rounded to 38%, and 61.8 is rounded to 62%. Learning Tip After an advance, chartists apply Fibonacci ratios to define retracement levels and forecast the extent of a correction or pullback. Fibonacci retracement levels can also be applied after a decline to forecast the length of a counter-trend bounce. These retracements can be combined with other indicators and price patterns to create an overall strategy. Crucial Levels Fibonacci Levels as Alert Zones Retracement levels alert traders or investors of a potential trend reversal, resistance area or support area. Retracements are based on the prior move. A bounce is expected to retrace a portion of the prior decline, while a correction is expected to retrace a portion of the prior advance. Once a pullback starts, chartists can identify specific Fibonacci retracement levels for monitoring. As the correction approaches these retracements, chartists should become more alert for a potential bullish reversal. Keep in mind that these retracement levels are not hard reversal points. Instead, they serve as alert zones for a potential reversal. It is at this point that traders should employ other aspects of technical analysis to identify or confirm a reversal. These may include candlesticks, price patterns, momentum oscillators or moving averages. Classification Types of Retracement Levels The Fibonacci Retracements shows four common retracements: 23.6%, 38.2%, 50%, and 61.8%. From the Fibonacci section above, it is clear that 23.6%, 38.2%, and 61.8% stem from ratios found within the Fibonacci sequence. The 50% retracement is not based on a Fibonacci number. Instead, this number stems from Dow Theory’s assertion that the Averages often retrace half their prior move. Based on depth, we can consider a 23.6% retracement to be relatively shallow. Such retracements would be appropriate for flags or short pullbacks. Retracements in the 38.2%-50% range would be considered moderate. Even though deeper, the 61.8% retracement can be called golden retracement. It is, after all, based on the Golden Ratio. Fibonacci retracement levels are often used to identify the end of a correction or a counter-trend bounce. Corrections and countertrend bounces often retrace a portion of the prior move. Fibonacci retracements can be combined with other indicators such as candlesticks, price patterns, momentum oscillators, or moving averages to create a robust trading strategy and confirm potential reversals. Get PRO Get access to exclusive premium features and benefits. Subscribe a PRO plan. See More Related Topics Trading Chart Patterns Using Volume for Trading Load More

Trading Trading Gaps Trading Series I Education Hub Price charts often have blank spaces known as gaps. They represent times when no shares were traded within a particular price range. Gaps result from extraordinary buying or selling interest developing when the market is closed. When the market opens, the price is raised or lowered enough to satisfy all of the buying or selling orders. Learning Tip Trading Gaps happen quite frequently in the stock market. These gaps can significantly affect the stock price and its movements. So, it is quite crucial to learn them. Understanding Trading Gaps For an up gap to form, the low price after market close on the day of the up gap must be higher than the high price of the previous day. Up gaps are generally considered bull. A down gap is just the opposite of an up gap; the high price of the down gap day after market close must be lower than the low price of the previous day. Down gaps are usually considered bearish. A price chart with gaps almost every day is typical for very lightly traded securities and should be avoided. Prices often gap up or down at market open and then close the gap before market close. Such temporary intraday gaps should not be considered as having anything more significance than normal market volatility. Many investors mistakenly believe that gaps influence future prices to the point of eventually filling the gap. Instances where gaps close within a few days of forming can be significant. However, gaps have little to no influence on price action weeks or months after forming. Classification Types of Trading Gaps Breakaway gaps signal a change in market psychology about the future prospect of a security, especially when accompanied by above average volume. A bullish breakaway gap forms when a security gaps up after an extended decline, extended base or a consolidation period. A bearish breakaway gap forms when a security gaps down after an extended advance, an extended top or a consolidation period. Common gaps occur within a trading range or shortly after a sharp move as a reaction. These gaps do not reflect a change in market psychology, but rather represent price volatility or temporary imbalance of supply and demand. For instance, if a security has declined 20% in a week and gaps up, it would be considered a common gap and not likely to signify a change in trend.  Continuation gaps form near the middle of a short or intermediate trend in the same direction. These gaps signal a continuation of the preceding trend. Continuation gaps are also known as measuring or runaway gaps. These gaps can be triggered by news events that bring more market attention to a security. Exhaustion gaps occur in the direction of extended trends. For an exhaustion gap to be considered valid, prices should reverse soon after the gap and close the gap. In the later stages of a trend, the extent of the trend becomes widely reported; eventually causing a surge in trading that cannot be sustained. These events often mark the end of the trend. Conclusion Important Points Price gaps can be crucial indicators of shifts in trading activity. Gaps provide valuable insights into market sentiment and potential trading opportunities.  Recognizing and understanding the different types of gaps can be an invaluable asset for traders at all levels. Each type signifies different market conditions, with implications for strategy and risk management. Get PRO Get access to exclusive premium features and benefits. Subscribe a PRO plan. See More Related Topics Trading Chart Patterns Using Volume for Trading Load More

Trading Trading Trend Lines Trading Series I Education Hub The psychology of fear and greed of market participants ultimately determines the direction of prices in a market. Prices rise with greed (demand) and fall with fear (supply). A price trend is simply a sustained directional price move. It can be thought of as a tilted support/resistance zone. Learning Tip A trend will continue as long as either fear or greed is in control of a market. Trends fade or change direction as the balance of fear and greed changes. The extent of fear and greed in a market can be seen by how quickly prices are trending down or up. Understanding Types of Trends As stated earlier, a trend is a sustained, directional price move. Rising peaks and troughs constitute an uptrend; falling peaks and troughs constitute a downtrend. A trading range is characterized by horizontal peaks and troughs. Trends are generally classified into major (longer than six months), intermediate (one to six months), or minor (less than a month).  Long term investors are most interested with identifying long-term trends where short-term investors are more interested in minor and intermediate trends.  Triangle patterns should have a similar volume pattern – decreasing volume while the triangle is forming with a sharp increase in volume once a breakout is achieved. Understanding Trend Lines A trend line is a straight line that connects two or more low or high price points and then extends into the future to act as a line of support or resistance. The first two points establish the trend line while additional points validate it. An uptrend line has a positive slope and is formed by connecting two or more low points. Uptrend lines act as support. As long as prices remain above the trend line, the uptrend is considered intact. A break below the uptrend line indicates that demand has weakened and a change in trend could be imminent. A downtrend line has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as prices remain below the downtrend line, the downtrend is intact. A break above the downtrend line indicates that supply is decreasing and that a change of trend could be imminent. Trend line breaks should not be the final arbiter, but should serve merely as a warning that a change in trend may be imminent. By using trend line breaks for warnings, investors and traders can pay closer attention to other confirming signals for a potential change in trend. Get PRO Get access to exclusive premium features and benefits. Subscribe a PRO plan. See More Related Topics Trading Chart Patterns Using Volume for Trading Load More