Part 12 Technical Analysis – Confirming price action reversals

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ETH/USD Technical Analysis: Is Price Action Reversal Building? – 24 September 2020

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Volatility in cryptocurrencies has increased once again. A strong rally in ETH/USD took price action through its entire Fibonacci Retracement Fan sequence, turning it from resistance into support. Bullish momentum stalled inside its resistance zone from where the current sell-off was emerged with a price gap below resistance. Sellers quickly executed more downside pressure which resulted in a breakdown below its ascending 38.2 Fibonacci Retracement Fan Support Level, turning it back into resistance. A second breakdown occurred which took ETH/USD into its 50.0 Fibonacci Retracement Fan Support Level.

The Force Index, a next generation technical indicator, preceded the breakdown below its resistance zone with the formation of a negative divergence. A negative divergence forms when price action ascends while the technical indicator descends. As the double breakdown in price action materialized, a downtrend in the Force Index accompanied ETH/USD to the downside. Selling pressure is now easing as this technical indicator started to ascend following the breakdown in the cryptocurrency pair below its 38.2 Fibonacci Retracement Fan Support Level. The Force Index is now trading at its descending resistance level and an unconfirmed ascending support level emerged; this is marked by the green rectangle. You can learn more about the Fibonacci Retracement Fan, the Force Index and the Support Zone here.

A successful move in the Force Index above its descending resistance level would confirm the 50.0 Fibonacci Retracement Fan Support Level and result in a price action reversal. The current magnitude in selling pressure may take ETH/USD into its short-term support zone, located between 182.23 and 188.52 as marked by the grey rectangle, which is also housing the 61.8 Fibonacci Retracement Fan Support Level. Such a move should be viewed as a good buying opportunity if the Force Index will maintain its position above the unconfirmed ascending support level.

The intra-day low of 183.64 should also be monitored if the sell-off extends. This level is located inside the support zone and represents the low of a price gap to the upside which fueled the rally in ETH/USD prior to the breakdown in price action. A price action reversal is expected to take this cryptocurrency pair back into its resistance zone which is located between 210.08 and 219.72 as marked by the red rectangle in the chart. Further upside is unlikely without a fundamental catalyst providing the necessary incentive. You can learn more about a Breakout, a Breakdown and the Resistance Zone here.

ETH/USD Technical Trading Set-Up – Price Action Reversal Scenario

Long Entry @ 195.00

Take Profit @ 219.50

Stop Loss @ 183.60

Upside Potential: 2,450 pips

Downside Risk: 1,140 pips

Risk/Reward Ratio: 2.15

Should the Force Index fail to push above its descending resistance level as well as above its horizontal resistance level, a price action reversal will not be sustained. A drop below the unconfirmed ascending support level in the Force Index could attract more net sell orders which may result in a breakdown below its 61.8 Fibonacci Retracement Fan Support Level as well as below its short-term support zone. This will then extend the sell-off into its next long-term support zone which is located between 158.80 and 168.69.

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Торговля по Price Action используя WRB Analysis [Перри] [Повтор]

Тема в разделе “Форекс и инвестиции”, создана пользователем eduard1, 6 дек 2020 .

Introduction to Technical Analysis Price Patterns

In technical analysis, transitions between rising and falling trends are often signaled by price patterns. By definition, a price pattern is a recognizable configuration of price movement that is identified using a series of trendlines and/or curves. When a price pattern signals a change in trend direction, it is known as a reversal pattern; a continuation pattern occurs when the trend continues in its existing direction following a brief pause. Technical analysts have long used price patterns to examine current movements and forecast future market movements.

Key Takeaways

  • Patterns are the distinctive formations created by the movements of security prices on a chart and are the foundation of technical analysis.
  • A pattern is identified by a line that connects common price points, such as closing prices or highs or lows, during a specific period of time.
  • Technical analysts and chartists seek to identify patterns as a way to anticipate the future direction of a security’s price.
  • These patterns can be as simple as trendlines and as complex as double head-and-shoulders formations.

Trendlines in Technical Analysis

Since price patterns are identified using a series of lines and/or curves, it is helpful to understand trendlines and know how to draw them. Trendlines help technical analysts spot areas of support and resistance on a price chart. Trendlines are straight lines drawn on a chart by connecting a series of descending peaks (highs) or ascending troughs (lows). A trendline that is angled up, or an up trendline, occurs where prices are experiencing higher highs and higher lows. The up trendline is drawn by connecting the ascending lows. Conversely, a trendline that is angled down, called a down trendline, occurs where prices are experiencing lower highs and lower lows.

Trendlines will vary in appearance depending on what part of the price bar is used to “connect the dots.” While there are different schools of thought regarding which part of the price bar should be used, the body of the candle bar—and not the thin wicks above and below the candle body—often represents where the majority of price action has occurred and therefore may provide a more accurate point on which to draw the trendline, especially on intraday charts where “outliers” (data points that fall well outside the “normal” range) may exist. On daily charts, chartists often use closing prices, rather than highs or lows, to draw trendlines since the closing prices represent the traders and investors willing to hold a position overnight or over a weekend or market holiday. Trendlines with three or more points are generally more valid than those based on only two points.

  • Uptrends occur where prices are making higher highs and higher lows. Up trendlines connect at least two of the lows and show support levels below price.
  • Downtrends occur where prices are making lower highs and lower lows. Down trendlines connect at least two of the highs and indicate resistance levels above the price.
  • Consolidation, or a sideways market, occurs where price is oscillating between an upper and lower range, between two parallel and often horizontal trendlines.

Continuation Patterns

A price pattern that denotes a temporary interruption of an existing trend is known as a continuation pattern. A continuation pattern can be thought of as a pause during a prevailing trend—a time during which the bulls catch their breath during an uptrend, or when the bears relax for a moment during a downtrend. While a price pattern is forming, there is no way to tell if the trend will continue or reverse. As such, careful attention must be placed on the trendlines used to draw the price pattern and whether price breaks above or below the continuation zone.   Technical analysts typically recommend assuming a trend will continue until it is confirmed that it has reversed. In general, the longer the price pattern takes to develop, and the larger the price movement within the pattern, the more significant the move once price breaks above or below the area of continuation.

If price continues on its trend, the price pattern is known as a continuation pattern. Common continuation patterns include:

  • Pennants, constructed using two converging trendlines
  • Flags, drawn with two parallel trendlines
  • Wedges, constructed with two converging trendlines, where both are angled either up or down

Pennants

Pennants are drawn with two trendlines that eventually converge. A key characteristic of pennants is that the trendlines move in two directions—that is, one will be a down trendline and the other an up trendline. Figure 1 shows an example of a pennant. Often, volume will decrease during the formation of the pennant, followed by an increase when price eventually breaks out.

Flags

Flags are constructed using two parallel trendlines that can slope up, down or sideways (horizontal). In general, a flag that has an upward slope appears as a pause in a down trending market; a flag with a downward bias shows a break during an up trending market. Typically, the formation of the flag is accompanied by a period of declining volume, which recovers as price breaks out of the flag formation.

Wedges

Wedges are similar to pennants in that they are drawn using two converging trendlines; however, a wedge is characterized by the fact that both trendlines are moving in the same direction, either up or down. A wedge that is angled down represents a pause during a uptrend; a wedge that is angled up shows a temporary interruption during a falling market. As with pennants and flags, volume typically tapers off during the formation of the pattern, only to increase once price breaks above or below the wedge pattern.

Triangles

Triangles are among the most popular chart patterns used in technical analysis since they occur frequently compared to other patterns. The three most common types of triangles are symmetrical triangles, ascending triangles, and descending triangles. These chart patterns can last anywhere from a couple weeks to several months.

Symmetrical triangles occur when two trend lines converge toward each other and signal only that a breakout is likely to occur—not the direction. Ascending triangles are characterized by a flat upper trend line and a rising lower trend line and suggest a breakout higher is likely, while descending triangles have a flat lower trend line and a descending upper trend line that suggests a breakdown is likely to occur. The magnitude of the breakouts or breakdowns is typically the same as the height of the left vertical side of the triangle, as shown in the figure below.

Cup and Handles

The cup and handle is a bullish continuation pattern where an upward trend has paused, but will continue when the pattern is confirmed. The “cup” portion of the pattern should be a “U” shape that resembles the rounding of a bowl rather than a “V” shape with equal highs on both sides of the cup. The “handle” forms on the right side of the cup in the form of a short pullback that resembles a flag or pennant chart pattern. Once the handle is complete, the stock may breakout to new highs and resume its trend higher. A cup and handle is depicted in the figure below.

Reversal Patterns

A price pattern that signals a change in the prevailing trend is known as a reversal pattern. These patterns signify periods where either the bulls or the bears have run out of steam. The established trend will pause and then head in a new direction as new energy emerges from the other side (bull or bear). For example, an uptrend supported by enthusiasm from the bulls can pause, signifying even pressure from both the bulls and bears, then eventually giving way to the bears. This results in a change in trend to the downside. Reversals that occur at market tops are known as distribution patterns, where the trading instrument becomes more enthusiastically sold than bought. Conversely, reversals that occur at market bottoms are known as accumulation patterns, where the trading instrument becomes more actively bought than sold. As with continuation patterns, the longer the pattern takes to develop and the larger the price movement within the pattern, the larger the expected move once price breaks out.

When price reverses after a pause, the price pattern is known as a reversal pattern. Examples of common reversal patterns include:

  • Head and Shoulders, signaling two smaller price movements surrounding one larger movement
  • Double Tops, representing a short-term swing high, followed by a subsequent failed attempt to break above the same resistance level
  • Double Bottoms, showing a short-term swing low, followed by another failed attempt to break below the same support level

Head and Shoulders

Head and shoulders patterns can appear at market tops or bottoms as a series of three pushes: an initial peak or trough, followed by a second and larger one and then a third push that mimics the first. An uptrend that is interrupted by a head and shoulders top pattern may experience a trend reversal, resulting in a downtrend. Conversely, a downtrend that results in a head and shoulders bottom (or an inverse head and shoulders) will likely experience a trend reversal to the upside. Horizontal or slightly sloped trendlines can be drawn connecting the peaks and troughs that appear between the head and shoulders, as shown in the figure below. Volume may decline as the pattern develops and spring back once price breaks above (in the case of a head and shoulders bottom) or below (in the case of a head and shoulders top) the trendline.

Double Top

Double tops and bottoms signal areas where the market has made two unsuccessful attempts to break through a support or resistance level. In the case of a double top, which often looks like the letter M, an initial push up to a resistance level is followed by a second failed attempt, resulting in a trend reversal. A double bottom, on the other hand, looks like the letter W and occurs when price tries to push through a support level, is denied, and makes a second unsuccessful attempt to breach the support level. This often results in a trend reversal, as shown in the figure below.

Triple tops and bottoms are reversal patterns that aren’t as prevalent as head and shoulders or double tops or double bottoms. But, they act in a similar fashion and can be a powerful trading signal for a trend reversal. The patterns are formed when a price tests the same support or resistance level three times and is unable to break through.

Gaps occur when there is empty space between two trading periods that’s caused by a significant increase or decrease in price. For example, a stock might close at $5.00 and open at $7.00 after positive earnings or other news. There are three main types of gaps: Breakaway gaps, runaway gaps, and exhaustion gaps. Breakaway gaps form at the start of a trend, runaway gaps form during the middle of a trend, and exhaustion gaps for near the end of the trend.

The Bottom Line

Price patterns are often found when price “takes a break,” signifying areas of consolidation that can result in a continuation or reversal of the prevailing trend. Trendlines are important in identifying these price patterns that can appear in formations such as flags, pennants and double tops. Volume plays a role in these patterns, often declining during the pattern’s formation, and increasing as price breaks out of the pattern. Technical analysts look for price patterns to forecast future price behavior, including trend continuations and reversals.

The Complete Guide to Technical Analysis Price Patterns

Table of Contents

What do Price and Chart Patterns Tell Us?

Technical Analysis Price Patterns make strange shapes and outlines in all markets. It may seem weird to the uninitiated that such shapes could have any value.
But the fact is that these patterns created by price action on market charts repeat themselves over and over again when certain interactions occur between market forces.
These patterns signal those market conditions where a statistical edge exists for a trader to take advantage of.
So, while they are not foolproof, price patterns do provide an edge that can be utilized over the long-term, which is how all successful Forex traders make their money and beat the market.

Trendlines in Technical Analysis

Trendlines are straight lines that trace the movements of the market. An uptrend is defined by higher highs and higher lows.
An uptrend line is drawn below the price levels to show the support levels or is drawn above price levels to show the resistance holding price down.

Downtrends occur when the market makes lower lows and lower highs. Downward trendlines drawn above the prices illustrate the resistance levels.
At least two points must be used to form the line. The more points that fit on the line, the more valid the trendline will typically be found to be.
A sideways market can also be illustrated by two parallel horizontal lines representing both the resistance and support of the range, respectively.

Candlesticks are composed of a part called the body, which represents the open and close of the price for that period.
Another part of the candle extends above and below the body representing the high and low for that period.
These long, thin projections are called shadows.
Sometimes, a period high or low will coincide with an open or closed, in which case there will be no shadow extending beyond the body.

Some may advocate the drawing of trendlines based on the shadows, but the fact remains that these shadows are outliers and the price action generally spends most of the time in the body of the candle.
When drawing trendlines, stick to the closing prices of the periods for the most part.

Continuation Patterns

Sometimes, during a trend, the prevailing movement pauses.
There are various logical reasons for this. As a rally continues, long buyers will start selling to take profits, creating selling pressure that drives price downward.
This selling pressure combined with buying pressure creates sideways price action.
Conversely, when a large downward motion will trigger short selling to cover creating buying pressure to counteract the downward trend. Market conditions occur constantly throughout all markets and create recurring patterns in the price chart.

Pennants pattern

A pennant is usually foreshadowed by a sharp rise in price. This almost completely vertical rise in price is called the flagpole or mast.
The two converging trendlines are a downward trendline representing the lower highs and an upward trendline representing the lower lows.
A pennant that follows a sharp downward move will tend to continue downward and be considered a bearish pennant, while a pennant forming after a sharp upward move will be considered a bullish pennant.
Pennants usually appear about halfway through the entire price move, so the move after the pennant is broken will typically be about the same magnitude as the mast.

bullish pennant pattern bearish pennant pattern

Flags pattern

Flags are composed of parallel trendlines that buck the current larger trend.
These can be upward trending, downward trending, or sideways. Unlike wedges (mentioned below), the trendlines do not converge.
Flags that slope upwards appear in a downward trending market, while downward-sloping flags will appear in an upward-trending market.
The trend will tend to continue after the flags have materialized and price progresses out of the pattern.

upward flag downward flag

Wedges pattern

Wedges are similar to pennants except that both trendlines are moving in the same direction.
Rising wedges tend to foreshadow upward breakouts while falling wedges give rise to both upward and downward breakouts.
This means that, particularly for falling wedges, confirmation should always be obtained before trading the breakout.

rising wedge falling wedge

Triangles pattern

One common chart pattern is the triangle. There are three types of triangles:

Symmetric Triangles pattern

Symmetric triangles are created when the line connecting the highs converges with the trendline connecting the lows to form a triangle.
those patterns are defined by a downward trendline and an upward trendline converging together.
Since both lines of the ascending triangle have essentially the same slope, the direction cannot be predicted.
With any likelihood, a breakout in one direction or the other is likely. But the direction of the triangle is not upward or downward, because the slope of both lines more or less mirrors each other.
This pattern suggests that the trend in place before the pattern formed will continue, once price breaks out of the triangle.

Symmetrical Triangle

Ascending Triangles pattern

An ascending triangle is formed by a flat line that comes with the highs staying at pretty much that same price, and a sharp upwards trendline that comes with the higher lows.
In other words, the highs will stay constant while the lows will rise.
This pattern suggests that buying pressure exceeds selling pressure, which will essentially result in a breakout to the upside.

Ascending Triangle

Descending Triangles pattern

Descending triangles are like upside-down ascending triangles. Instead of pointing upward, they point downward.
This pattern is caused by the flatness of the slope of the bottom trendline and the sharper downward slop of the top trendline.
This pattern suggests that sellers are overtaking the buyers and pushing prices downward.
This is a bearish continuation pattern that indicates a breakdown (downward breakout) once the pattern is broken.

descending triangle

Cup and Handles pattern

A cup and handle pattern is a bullish continuation pattern.
The pattern is defined by a U-shaped cup or bowl which then transitions into a downward trend, which is called the handle.
Cups with more of a U-shape give a stronger signal, while cups with a pronounced V-shape should be avoided.
The depth of the handle should not exceed beyond half the depth of the cup.

Cup and Handles

Reversal Patterns

Just as continuation patterns signal the continuation of a trend, reversal patterns signal the reversal of a trend.
While continuation patterns suggest that the market is pausing before another push in the same direction, a reversal pattern foreshadows that the trend has exhausted itself and the market is about to go in the opposite direction.

Head and Shoulders pattern

A Head and Shoulders pattern consists of a peak, following by a larger peak, following in turn by a peak of a similar size to the first.
This pattern suggests that the market is at a top and will turn in the other direction.

Head and Shoulders

Inverse Head and Shoulders pattern

The inverse head and shoulders pattern is simply an upside-down version of the same pattern.
That is, it is defined by a trough, following by a bigger trough, which is then followed by a trough of a similar size to that first trough.
This signals that a downtrend is about to turn up.

Inverse Head and Shoulders

Double Tops and Double Bottoms pattern

Double tops and double bottoms are shaped like Ms and Ws respectively and are a sign of price attempting to break through support or resistance and failing to do so.
They suggest that the price is unable to penetrate further and is about to move in the opposite direction.

Double Top double bottom

Triple Tops and Triple Bottoms pattern

These are a similar concept to double tops and double bottoms, but even more powerful because the price was denied the breakthrough three times instead of only two.
The more often a support or resistance level holds when being tested, the stronger than support or resistance level is.

Tripple Top Tripple Bottoms

price Gaps

Gaps occur in the Forex market when there is space between trading periods. Normally, the close of one chart period coincides with the open of the next.
Gaps are often seen in the market open after the weekend, but can also be seen when there is a significant rise or fall in price in a very short time.
Gaps can be classified into three types: breakaway gaps, runaway gaps, and exhaustion gaps.

Breakaway Gaps

Breakaway gaps occur at the start of a new trend. This usually happens when the instrument is in a sideways consolidation phase and some news event takes place.
Breakaway gaps can be considered a trend continuation gap due to the strength of the newly-formed trend.

Runaway Gaps

Runaway gaps are a trend continuation signal.
Trading runaway gaps for the continuation of the current trend is one of the safest of all trades and this safety can be enhanced by confirming with other signals.

Exhaustion Gaps

Exhaustion gaps occur at the end of a trend and signal that the trend is about to end or even reverse.
This pattern can be used as evidence that a trend is ending.
Positions trading with that trend should be evaluated in light of other signals that may suggest that the trend is reversing.

gaps

Candlesticks and Price Action


The relationships between the parts of candlesticks create regular patterns. Long shadows can indicate the rejection of a price move.

Pin Bars

A pin bar is a candlestick whose shadow is long on one side, and whose body is small and closes on the opposite side of the candlestick.
When a long shadow extends up from a small body, this is a bearish pin bar.
The long shadow at the top of the candlestick suggests that price attempted to move up and was rejected by the market as indicated by the close at the body of the candlestick near the bottom of the candlestick.

bearish pin bar

Hammer Candlesticks

When a long shadow extends down from a small body at the top of a candlestick, this is a bullish pin bar, also known as a hammer candlestick.
The logic here is the same as with the bearish bin par, only reversed.
Price was rejected at the long shadow end of the candlestick, suggesting that the market will continue moving away from it.

How to study technical Analysis Price Patterns professionally

Forums are one of the most popular places for sharing knowledge between people.
Sign in and follow opinion leaders and Take advantage of their experience and learn their ways of trading.

You can also find quite a few online courses but check carefully before you sign up, look for recommendations.

Of course, you can also learn independently with YouTube and the technical Analysis educational site.

But remember there is no substitute for experience, so be patient and use the Demo account to improve and practice in the technical analysis.

Conclusion for technical Analysis Price Patterns

Price patterns are quite logical when you learn them and understand what they can tell you about what is happening in the market.

It is not recommended to rely only on price patterns.
The right way to use price patterns, combined with price action, like support/resistance or supply/demand.

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