Greetings traders from all around the world.
Thank you for joining me yet
again.
Chris here, bringing you another Survival Guide episode.
Today,
we're going to be covering chart patterns.
This is one of the subjects that is extremely enjoyable for
me because those of you that know me, know I am a strongly
technical analysis based trader myself.
So without further adue, let's dive on over into the material
and learn a thing or two about some chart patterns.
Beginning at the beginning,
we must start with the definition of what a chart pattern
is. A chart pattern is nothing more than a way of identifying
a particular path displayed by the historical price of an
asset, as it is plotted on a chart. To be a pattern,
naturally,
it has to have occurred more than once in the past.
The idea is through the use of past statistics,
we are able to potentially show what is likely to happen
when the market exhibits this type of behavior again
in the future.
In the trading world, there's two general categories in which
analysis falls.
We have technical analysis,
and we also have fundamental analysis. Analyzing chart patterns
falls under the technical analysis category. Technical
analysis is nothing more than the study of past market data
to forecast the direction of future price movements.
This process is considered to be the brother of fundamental
analysis. On the opposite side of the coin as technical analysis,
we have our fundamental analysis. Fundamental analysis
is the process of analyzing the intrinsic value of an asset.
This entails the study of economic growth, inflation, credit
cycles, interest rate trends, capital flows between countries,
labor and resource utilization, demographic trends, central
bank and political policies and behavior, geopolitical
matters, consumer and business trends, and soft data such as
sentiment or consumer confidence surveys.
So there's a lot that goes into the fundamental analysis
side of everything, and there are some things that I probably
didn't mention here as well.
But I wanted to give you guys a strong example of what fundamental
analysis is at its core.
Conceptually speaking, the patterns that an instrument's
price forms can help display the transitions between upward
and downward market trends or their continuation, which is
important to remember as well. Technical analysts usually
find that analyzing chart patterns is a strong way to potentially
identify or confirm supply and demand, as well as support
and resistance levels.
When we throw patterns into categories, there are two broadly
accepted types of patterns, with a third category being a
little bit more controversial.
The first category would be continuation patterns. Continuation
patterns are something along the lines of if we see the market
trending upwards and a continuation pattern arises, we would
expect at the end of that pattern, that the market would continue
trending upwards. Then we have reversal patterns. Reversal
patterns, just like the continuation name implied, reversal
patterns imply that if the market was trending upwards and
a reversal pattern arose, we would then expect at the end
of that pattern for the market to begin trending downwards,
which would be changing direction or reversing. Then the
third category that is a little bit more controversial would
be the bilateral patterns category.
The bilateral patterns category implies that when these
patterns arise, we may see market volatility increase in such
a way that we may see price go both directions a great deal.
Now, we're going to go ahead and move over to some on-screen
examples of some of the most commonly accepted and recognized
chart patterns out there.
The first pattern on our chopping block is the ascending
triangle chart pattern.
This is a pattern where we expect resistance to remain flat
with price action, while support continuously rises into this
area of resistance.
The expectation is that price will ultimately have nowhere
to go as the pattern continually tightens on itself, leading
to a breakout. After the breakout,
we naturally would expect price to continue rising, as
we already had bullish momentum going into it, with our support
levels continuously getting higher along the way.
Just like we have an ascending triangle pattern,
we also have a descending triangle pattern.
It's going to be the same thing, with the rules just inversed.
We're going to have the lower highs continuously getting
lower, while we have a support area that is holding steady.
This causes price to tighten and ultimately break out with
an expectation that the market will continue in a bearish
manner lower.
Our next triangle based pattern is this symmetrical triangle
pattern. This is also another pattern that is very similar
to the first two, and very common throughout a regular trading
day on most assets. The difference between this and the first
two, is we actually have both the resistance getting lower,
and the support getting higher at the same time.
Essentially,
what happens is it puts a squeeze on price as it bounces
back and forth from the support and resistance getting closer
and closer
until ultimately, we have a break. We'll expect price
to go in the direction of the break, which usually is a continuation
style. That means if the market was trending upwards going
into this pattern, we would expect a break to the upside
with a continuation of bullish trajectory.
The cup and handle chart pattern is a fun one both to say,
as well as identify. Once familiar with this pattern,
it usually stands out pretty well on any given chart. In this
scenario, we are going to have price rising higher where
we then see it reach a plateau, followed by a sell-off. Then,
we have sideways activity with a support drawn at the bottom,
where then new buyers enter the market pushing price higher.
After price goes higher,
we then have a short sell-off
yet again, attempting to push price back down,
but unfortunately, the sellers fail, causing the handle to
be formed, followed by a bullish run thereafter.
Our next pattern is the diamond top and bottom variation.
I only have a picture here of the bottom, and that's what's
on screen
so let's talk about that one first.
The diamond bottom is going to happen when we see an area
of support broken, leading to a drop in price followed by
another area of support.
This is going to be the first point to our diamond. As support
is built at this area,
we then expect to see price rise, where we'll then hit another
wall, resistance forming, which leads to a downturn in the
market, where we then set an even lower low and another area
of support, triggering price to then rise back up to an area
that should be roughly similar to where price initially rose
to. After this,
we're going to drop back down and create a higher area of
support than our center point, working our way back up to
where we're finally going to break out of our diamond and
look for some long opportunities
if we're trading a diamond bottom. The diamond top variation
is going to be this
exact image, just flipped the other way around, which means we
would look for shorts with the diamond top.
Moving along, our next pattern is going to be the double bottom
chart pattern. The double bottom usually occurs at the peak
of a downtrend market movement.
This is a pattern that usually would indicate the start of
a bullish trend.
Our first requirement is for price to hit a new low. After
hitting this low, support is built, causing the market to go
up temporarily, where it then finds an area of resistance. After
finding resistance,
we then need the market to come back down
and find support yet again. After the support has been
found again,
this creates our second bottom,
hence the name double bottom.
We then want price to rise and break the previous area of
resistance to the left, which represents our neckline. At the
break of the neckline,
we expect bullish activity to follow. Our next pattern is
going to be the inverse of the double bottom.
Naturally, that would mean it is the double top.
The double top is just like the double bottom in the sense
that it is also a reversal pattern.
We want price to hit a new high, finding resistance before
heading back down and creating an area of support, which would
begin our neckline. After the neckline is created,
we want to see price rise to another top, hitting resistance
around a similar area as our previous resistance, sending
price down
one more time for it to finally break the neckline, where
we would be anticipating a short opportunity.
Next we have the falling wedge pattern.
This is a fun one because it's kind of confusing for me to
explain to traders at first, because it requires a temporary
downtrend, and it then reverses at the end of the pattern,
but it's not a reversal pattern.
It's actually a continuation pattern at its core because
price is continuing with the overall direction of the market.
This means price was rising before it started falling
to create the pattern. At the end of the pattern, we expect to break
in a continuation of the overall
bullish trend. What we want to see is support getting lower
all the way down, and we want to see the resistance area getting
lower as well, putting a squeeze on the support, very similar
to our triangle patterns at the beginning.
The rising wedge is just going to be the inverse of the falling
wedge, which means we have a down trend going into the pattern.
The pattern represents a temporary bullish move, where the
resistance and the support are squeezing into each other
until ultimately, the support breaks, leading to a return to
bearish activity.
The flag pattern is another wildly popular pattern.
This is a bearish variation
and naturally, we have a bullish variation waiting for you
as well.
What we need is a downward push in the market, where we
have a very consistent decline.
We don't want to see a whole lot of bullish activity along
the way down, and this creates our flag pole. After the flag
pole comes the flag, and to create the flag,
we want a slight incline in price.
We want price to temporarily start pulling its way back upwards,
trading in a range bound manner, giving us a tight box
that we can put around the pattern. After this happens, we'll
be looking for the break in the pattern and a return to bearish
activity like we had going into it.
This is a pattern that provides traders an opportunity to
add more contracts in to an already working position.
Our bullish version of the flag pattern is obviously quite
similar. We want a smooth flag pole going up, followed by some
slightly sideways to downward range bound activity creating
our flag, followed by a break that leads to more bullish activity,
giving us an opportunity to add to an already working bullish
position. Next comes my all-time favorite pattern, the head
and shoulders chart pattern.
This is a pattern when used and identified correctly, can
be extremely powerful.
The first thing we're looking for is a shoulder.
That is, a new high created in the market. After the shoulder's
created, we need some resistance to send the market back
down, where support is then found, beginning our neckline process.
After support is found at the neckline,
we need a push that gets us even higher
than our shoulder, where we find resistance again, creating
the head. After the head is created,
we need the market to push back down, touching our neckline
yet again, bouncing off of it, using it as support, and pushing
towards our second shoulder. After our second shoulder, we're
expecting price to come back down to the neckline,
but this time, this is where we're on the lookout for the
break. At the break,
we're expecting price to continue hard in the direction of
the break.
The pennant chart pattern is quite similar to both the symmetrical
triangle, as well as the flag pattern. The key exception and
thing to look out for with a pennant pattern, is we want a
sharp incline or a sharp decline at the beginning of the
pattern. When we say sharp, that is relative to the way
price was trading before the pattern began. In this scenario,
we have a sharp incline, followed by some resistance, followed
by some higher support, followed by some lower resistance,
followed by some higher support, followed by some lower resistance,
ultimately leading to a break, and a continuation in the direction
of the trend that existed before the pattern began.
Our final chart pattern of the day is going to be the rectangle
chart pattern.
This is a pattern that looks very very similar with the top
and bottom variations.
The only difference is how the pattern enters it. With a bottom
variation, price will be traveling down before it enters,
and that is what we have on screen.
The top variation would be the same thing,
just the other way around. Price would be traveling up before
it begins its consolidation period. During the consolidation
period, we're going to see price kind of aimlessly work its way
back and forth, finding support and resistance along the way,
much like a flag, but with no incline or decline that's readily
apparent. At the end of all of it,
we're looking for a break that occurs in the direction of
which we came into it. A bottom,
we're hoping for a break to the downside, leading to some
possible sell activity. A top would be looking for a break
to the upside, leading to some possible buy activity.
In conclusion, I'm very excited to see how many of you have
your eyes open to some of the patterns that are hiding in
front of you, and have been hiding in front of you in plain
sight all along.
There are patterns that are occurring every day in the market
that are not being taken advantage of by those that don't
see them. As with everything, experience and time with practice
is a crucial aspect to the results that we can expect to
achieve with any trading strategy.
I always encourage using a demo account when trying anything
new, but thank you for joining me yet again folks during this
Survival Guide episode.
It has been a pleasure as always.
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Thank you again, over and out.