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Trade Less, But Wisely; Get Rich Step by Step
Master The Art of Trading
Advanced Chart Pattern (continued)
Let us study some important Neutral Chart Pattern
Anchor 3.1
Rising Channel ≡
Rising channel pattern is formed by two upward slopping parallel trend lines representing resistance and support. It is characterized by higher highs and higher lows.
It acts as a continuation pattern if the price breaks upside and acts as a reversal pattern if the price breaks downside.
This pattern indicates that even though the price is rising, there is a tug of war between buyers and sellers and eventually one of them win the battle depending on the placement of the breakout.
If the price breaks the resistance line on upside, then a trader can take a long trade assuming the continuation of the existing uptrend. And if the price breaks the support on the downside, then the trader can take a short trade assuming the reversal of the existing uptrend.
The potential target for this pattern is normally calculated projecting the height between the two parallel trend lines above or below the break out point, depending on the placement of the breakout.
Similarly stop loss can be put as per the placement of the breakout. If the price breaks the resistance on upside, then stop loss can be placed just below the upper resistance and if the price breaks the support on downside, then stop loss can be placed just above the lower support.
The pattern is more reliable if there is significant rise in volume when price breaks the resistance or support.
Anchor 3.2
Falling Channel ≡
Rising channel pattern is formed by two downward slopping parallel trend lines representing resistance and support. It is characterized by lower highs and lower lows.
It acts as a continuation pattern if the price breaks downside and acts as a reversal pattern if the price breaks upside.
This pattern indicates that even though the price is falling, there is a tug of war between buyers and sellers and eventually one of them win the battle depending on the placement of the breakout.
if the price breaks the support on the downside, then the trader can take a short trade assuming the continuation of the existing downtrend. And if the price breaks the resistance line on upside, then a trader can take a long trade assuming the reversal of the existing downtrend.
The potential target for this pattern is normally calculated projecting the height between the two parallel trend lines above or below the break out point, depending on the placement of the breakout.
Similarly stop loss can be put as per the placement of the breakout. If the price breaks the resistance on upside, then stop loss can be placed just below the upper resistance and if the price breaks the support on downside, then stop loss can be placed just above the lower support.
The pattern is more reliable if there is significant rise in volume when price breaks the resistance or support.
Anchor 3.3
Rising Wedge ≡
Rising wedge is a bearish pattern. It begins wide and contracts as the price moves higher and trading range is becoming more and more narrow
The pattern comprises of two converging lines ( an upper resistance line and a lower support line) in such a way that the slope of the wedge will remain in upward direction. These two converging lines indicates that bullishness is decreasing.
It acts as a continuation pattern if it occurs during the downtrend and acts as a reversal pattern if it occurs during the uptrend. In both the cases, when rising wedge occurs, price is breaking the support line on the downside. This pattern shows that even though the price is rising inside the wedge, there is a tug of war between buyers and sellers and eventually sellers win the battle.
After the completion of rising wedge pattern, when price breaks the lower support line on the downside, a trader can take a short entry.
In case of rising wedge, trading range is becoming more and more narrow, it is difficult to calculate potential target. Hence it is advisable to use a trailing stop loss or use other aspects of technical analysis to forecast price target. While taking a trade as per rising wedge pattern, a trader can put a stoploss at just above support line and then goes on trailing it.
This pattern is considered to be more reliable if there is a significant rise in volume when the price breaks the support line on downside.
Anchor 3.4
Falling Wedge ≡
Rising wedge is a bullish pattern. It begins wide and contracts as the price moves lower and trading range is becoming more and more narrow
The pattern comprises of two converging lines ( an upper resistance line and a lower support line) in such a way that the slope of the wedge will remain in downward direction. These two converging lines indicates that bearishness is decreasing.
It acts as a continuation pattern if it occurs during the uptrend and acts as a reversal pattern if it occurs during the downtrend. In both the cases, when falling wedge occurs, price is breaking the resistance line on the upside. This pattern shows that even though the price is falling inside the wedge, there is a tug of war between buyers and sellers and eventually the buyers win the battle.
After the completion of falling wedge pattern, when price breaks the upper resistance line on the upside, a trader can take a long entry.
In case of falling wedge, trading range is becoming more and more narrow, it is difficult to calculate potential target. Hence it is advisable to use a trailing stop loss or use other aspects of technical analysis to forecast price target. While taking a trade as per falling wedge pattern, a trader can put a stoploss at just below resistance line and then goes on trailing it.
This pattern is considered to be more reliable if there is a significant rise in volume when the price breaks the resistance line on upside.
Anchor 3.5
Symmetrical Triangle ≡
The symmetrical triangle pattern is a consolidation pattern that occurs when the price action trades sideways. Two converging lines i.e. resistance line and support line gets narrower symmetrically in relation to the horizontal line.
The symmetrical triangle pattern can either be a continuation or reversal pattern depending upon the preceding trend and the placement of the breakout.
This pattern is characterized by a falling resistance line and a rising support line which converge at a point and the pattern has at least two lower highs and two higher lows. This pattern indicates that there is a good completion of war between buyers and sellers, nobody is giving up and as a result there is formation of lower highs and higher lows. Like other triangle pattern, here also the breakout is seen before the apex is reached, almost after 2/3rd length of the pattern is formed. Apex is the point where both falling resistance line and rising support line meet.
In this pattern, during the uptrend, if the price breaks the resistance line on upside, then it is known as Bullish Continuation Symmetrical Triangle.
Similarly, if the price breaks the support line on downside during the downtrend, then it is known as Bearish Continuation Symmetrical Triangle.
In this pattern, if price breaks the resistance line on upside during ongoing downtrend, then it is known as Bullish Reversal Symmetrical Triangle.
Similarly, if the price breaks the support line on downside during ongoing uptrend, then it is known as Bearish Reversal Symmetrical Triangle.
In case of Symmetrical Triangle Pattern, traders can take trade depending on the placement of breakout. If the price breaks the resistance line on upside, then a long trade can be taken and if the price breaks the support line on downside, then a short trade can be taken.
The potential target for this pattern is normally calculated projecting the height of the symmetrical triangle at its thickest point above or below the breakout depending on placement of the breakout. If a trader has already taken a trade as per previous ongoing trend, he may choose to exit his trade at the apex point.
Stoploss can be put below or above the breakout point, depending on the placement of the breakout. If the breakout occurs towards upside, then stop loss can be put just below the breakout and if breakout occurs towards downside, then stop loss can be put just above the breakout.
During the formation of this symmetrical triangle pattern, there is a reduction in volume, at the breakout point there is an increase in the volume. Therefore a trader has to pay attention to the volume movement for further confirmation.
Important To Note
It should be noted that chart patterns are only one of the important tools to guide us about the trend of the market and to help us in forecasting potential price movement. They should be used along with other tools like moving averages, volume etc.
Always remember to look at the volume activity to confirm whether the breakout is real or fake. Real breakout is always associated with increased volume at the breakout point.
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