Reversal Patterns and trading strategies
An Introduction to Chart Patterns - Double Top and Double BottomA double bottom is also a reversal pattern in the futures, forex, or stock markets which is the exact opposite of a double top.
First lets look at the a common trading strategy for the double top. For confirmation that a double top has actually formed and that a reversal in the uptrend is at hand, a common strategy is to look for declining volume going into the second peak and rising volume on a break below the bottom of the trough which has formed between the two peaks (support).
Once these things line up a common trading strategy is to enter the trade on the break of support with a target which is equal to the distance between the bottom of the trough and the top of the two peaks projected downward from the bottom of the trough. The stop order is then placed just above the last peak.
Enter-after two troughs are gone, at the level of third trough
target- highest difference
Stop- second top crest
Charting Patterns: The Head and Shoulders Pattern
A Head and Shoulders pattern is defined by one peak, followed by a higher peak, which is then followed by a lower peak, and finally a break below the support level established by the two troughs formed by the pattern
Upon the break of the neckline support level the chart pattern is said to be in place so this is where traders will commonly look to enter a short position. Their target will be calculated by measuring the distance from the head of the pattern down to the neckline and then projecting that distance downward from the breakpoint of the neckline. The stop will then be placed just above the right hand shoulder of the pattern which is considered resistance. The idea here is that once the neckline support has been broken sellers will theoretically remain in control but if this does not happen then you are protected with a stop loss just above the nearest resistance level.
Enter-where neckline intersects the curve
target- highest difference
Stop- lower second shoulder crest
Charting Patterns: wedge pattern
which forms when the market makes lower lows and lower highs with a contracting range
trend wedge tendency result
up rising same reversal
down rising opp continuation
down falling same reversal
up falling opp continuation
Enter-upper line lowest point
target- upper line highest point
Stop- lower line lowest point
Typically seen after a big move in one direction in a particular financial instrument, flags and pennants represent brief consolidations or pauses in the market before a resumption of the trend in which they occurred.
Enter-upper line lowest point
target- upper line highest point
Stop- lower line lowest point
posted by maxi @ 9:57 AM
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