From Trend lines to Chart pattern – Secrets of asset price movements!
Thank you for reading this posts. You learned in the last guide how to use the trend to increment your winning rate. The subject Chart pattern was short mentioned. Chart Pattern are one of the eldest known technical indicators. That it is still in use today proofs the unbelievable power, and you need nothing more than a chart software. With a bit theory and training should you have no problem to create trend lines fast in your head, only using your eyes. This post will continue Chart pattern, trends in general and how to use them right. It covers beside of the basic principles and the finding of pattern the drawing of great trend lines. The knowledge in this text gives you more control about market conditions. It will not handle each small detail, this would be far too much; the interests are to teach you the best ways for earning money.
All about Trends
Trends are not the same. There are uptrends, downtrends, sidewards, short-term, long-term and far more. The trick is not only to determine in which direction the trend moves, rather to figure out how profitable it is. Especially Forex trader place only less winning trades if they don’t follow the trade, but even as a binary option trader brings understanding the trend a lot new trading opportunities. The basic of a trend is simple stupid: If you are in an uptrend, buy or place a CALL trade, if you are in a downtrend, sell or place a PUT trade.
There are various ways to detecting trends. The most common are two or more simple moving average with different periods. This indicator is with his name self-explaining. The SMA over a period of 3 bullish candles with the size of 3, 5 and 10 pips is mathematical (3 + 5 + 10) / 2 = 9. The exact periods depending on your trading strategy, but 50 and 100 are a good in most cases working compromise.
Moving averages to determine trends is very simple. If the shorter period MA above the longer one, the asset is in an uptrend, else it is in a downtrend. If the distance between both MA’s grow, the trend become stronger, if both crossing the trend reverse. This is already a great starting point. The Alligator trend following strategy base exactly on this trend changes. You should this use primary with binary options, with Forex do you need to determine the periods because you fall very fast for a bubble (read below).
Real trends and bubbles
This is mentioned very often, but it is one reason most traders fail. That is why it gets repeated over and over again. You must always remember to keep protected. The bubble (mostly known from the big real estate bubble around 2000 to 2008) is the result of overrating of an asset. The price raise if anybody buy a good, while vise versa the price fall if more people sell them. That is why the price of most assets get created by traders expectations. If traders think the asset is good and the price will rise, they buy them and the price really rise. It is called a self-fulfilling prophecy.
The problem in fact is, that the asset often is not worth it and many other traders sell it with the higher price to earn profits: The price fall rapid down again. A famous example is Facebook, that stock was extreme overrated. Most bubbles appears while newstime. That is why you should never trade at least a half hour before and after news. (Except you trade fundamentals) If you see a big price jump, then stop! A real trend move slowly and over a longer time, only some few pips each candle. A big fast price change looks first as a perfect entry condition, but it is in nearly all cases only a bubble and fall down again still faster.
Trend lines moves to chart pattern
Trend lines sounding very simple: You may draw some lines at a chart and know what happening. But without deeper knowledge will you never work out how to earn really profits and may invest into the wrong assets. If you draw trend lines carefully, you have the potential to predict market movements very accurate and earn a lot cash. When trading Forex, the most interesting is a trend line breakout, because it often ends in a very huge price movement. In binary options leads the breakout to a deep ITM, but it is mostly no problem to trade against the line and earn money multiple times, always when the trend line doesn’t break.
Plain trend line
This is, beside of Support and Resistances, the basic. It is simple a direct line above (candle’s high) or below (candle’s low) to connect the maximum or minimum prices. A bullish trend line always connects the lows and sloping upwards. This means the lows are steadily higher. A bearish trend line connect only highs and sloping always downwards. This applies only to plain trend lines, chart pattern contains other lines too. Please note that the prices don’t need to match the lines exactly one hundred percent, especially because most chart software and broker don’t have always the exact same prices. Each pattern follows these rules:
A longer line is better. Ignore too short ones, it should be at least 40 to 50 bars long.
The more times the price touch the line, the better it is. Focus at three or more times touched lines.
Ignore too closed touches. If the price touches the trend line multiple times in few candles, treat it as one single touch.
Triangle, Falling wedge and Flag
You know now how to draw trend lines, now it is time to learn how these lines forming chart pattern. We will focus at the three pattern which promise the most profits: Triangle, Falling wedge and Flag.
A triangle is, like the name suggest, made from a bullish- and a bearish trend line. Seller and buyer are undecided and the prices moves between these lines and become steadily closer. Both trend lines must not to be connected, in most cases breaking the trend before. That is the greatest pattern. You trade with binary option when the price bounds the trend lines in the direction of the center, because the price get more squeezed the longer the price is into the triangle. While the price moves up and down, nobody knows where it ends. To trade Forex, get ready for a breakout in any direction. The valid trend lines at the image above forms a triangle. This triangle broke out to bottom few candles after the screenshot was taken, caused in a movement of around 100 pips.
A falling wedge is like a triangle, but both lines moving downwards. Never forget, that a downward sloping lower trend line is alone not valid. That means you have to find first a downwards upper trend line and may extends them with a sloping downwards lower trend line to a falling wedge. Recall that the price probably fall after it touch the upper trend line, while it rise or fall after touching the lower one.
A flag is mostly treated as the trend take a break. They are roughly parallel trend lines. The price get not squeezed, but it moves in the hallway, formed by both lines. It is comparable with in the same angle slopped Support and Resistance. The market often continue the trend. Was for example the market before the flag appeared in an uptrend, expect a breakout at the top, even if the flag is slopped downwards.
Trend reversing pattern
Some patterns announce reversing trends. For Forex working these candles as a warning that the trend may breaks to make dispositions. With binary options is such a trend reverse a great trading opportunity. Forex traders need a lot experiences to trade against the trend, please be carefully. When you trade trends, always keep attention to these few candle formations.
Doji is Japanese and means big mistake. A doji is a candle with very small body and long shadows. The shadows are areas where the price moved. All here described reverse chart pattern are special forms of doji’s, because they are very easy to see and very simple to understand. Recall from top of this text that how buying and selling affect the market price. A doji in chart means to be carefully. The price moved up and down, but became in both cases pushed back. That means buyer and seller are both equal strong, and which of both push the price in a direction is unspecified. It is a signal that the trend probably stops, but not what will happen next.
Hanging man and hammer doji
Hanging man and the hammer doji’s have like a real hammer a small body and a long bearish shadow. A bullish shadow is very small or doesn’t exist. They appear only in downtrends and means, that the seller pushed the price down, but the buy become stronger and pulled it up again. This imply that the buyer could keep their strength and stop the trend or reverse them. The different between both is that the hanging man doji has a bearish body while the hammer doji has already none or a bullish body. Hence, the price of a hammer doji was even pulled over his opening price, make it to a much stronger signal. The shadow of a valid hanging man or hammer doji is at least three to five times longer than the body. A longer shadow is better.
Shooting star and gravestone doji
The shooting star- and his stronger type gravestone doji are the opposite to hanging man and hammer doji. You find they only in uptrends. The bullish shadow is at least three two five times bigger than the body and a bearish shadow is very small or doesn’t exist. The sellers became in this case stronger than the buyers and push the price down again. This indicates that the trend may stop or reverse. A shooting star doji has a bullish body, while the gravestone doji is already bearish.
Trend lines and chart pattern conclusion
Thank you very much for reading this guide. You should now know how to handle most trends and draw and trade chart pattern easily. If you have further questions, email to [email protected], the fast contact form or leave a comment below.
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