The following chart patterns are
patterns you will find in a trend. As the market takes a break from
the big moves and rests a bit, you will find one of these patterns
emerge. They are a good indication that the market hasn’t finished
its trend and the next trade you should be looking at will be with
the recent trend direction.
Poles
Continuation patterns almost always
have a "Pole" attached to them. This means that prior to
the pattern, the market leading up to it will have moved into the
pattern form above or below. The market was clearly trending in one
direction andthe pattern that follows is a resting phase of that
market before it carries on it's way.
The market occasionally just wanders
its way into some chart formations. Theseformations are still good
setups, but they don't have continuation momentum a pattern with a
Pole will have.
Pennants
As the market is pausing, you will find
price retracting into a narrower and narrower configuration. The
market squeezes itself from both the top and bottom. The Pennant show
up just before the market takes off in its original direction. Making
this a Pennant, you will find that market leading into the formation
creates a pole, a strong move that leads in to the pattern itself.
Bearish Pennant formation
Bullish Pennant formation
Flag
A Flag pattern is a take-a-break
pattern as well. It starts off generally with a large quick move
forming a fairly steep “pole”. Next comes the Flag formation as
it gently moves up and down slightly against the initial move. To be
a true Flag, the formation takes place between two equally separated
lines, a small support and resistance channel. The Bear Flag is
formed as a slightly rising formation while a Bull Flag is a slightly
falling formation. After a large initial market move, there is a
period of “covering”. That basically means traders who were in
the initial large move are closing their positions. Some are closing
their positions while others are opening new positions in the same
direction as the initial move. This simultaneous buying and selling
is like a tug-of-war between the bulls and the bears and the market
doesn’t have the momentum to move in either way. Once the open
positions are covered, the remaining open positions and with the
addition of the new positions will usually force price to take off in
its initial direction.
Bearish Flag formation on a real
chart:
Bullish Flag formation on a real
chart:
Rectangle
A rectangle is a fancy term for a
range. As price slows down after a bigger move, it will want to drift
sideways for a bit. This drifting will have price floating up and
down as regular business in the world influences price, but it’s
pretty stable. A rectangle is price action that you can sandwich
between two horizontal lines, support and resistance levels. You will
find this after a big move, but also after the major
marketparticipants go to sleep on a smaller timeframe. Rectangles are
periods of equilibrium, and others say it’s a period of indecision.
Either way it’s a pause in the market that has a clearly defined
high and low.
A Rectangle can be very narrow as in a
consolidated market, or a little wider where there is actual price
movement inside of it. This is the classic formation for a “breakout”
type of trade.
Bearish Rectangle formation
Bullish Rectangle formation
Flag and Pennat Indicator MT4
Below the link for download the flag
and pennant indicator MT4
https://drive.google.com/file/d/0Bwjv2Pbf48itZEdtTXN6UE1vaDg/view?usp=sharing
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