If you have studied Forex market over any period of time, then you have definitely heard about chart patterns and their implications in technical analysis.
If you want to learn more about chart patterns and their respective trading signals, then this article will give you a starting point from which to increase your knowledge of classic chart pattern trading.
Today we will go through the most important Forex chart patterns and discuss their potential.
What are graphic models
Forex chart patterns are price patterns on a price chart that have a higher probability of completion in a particular direction. These trading patterns provide significant clues in trading activity that we will use to technical analysis prices in the process of making trading decisions. Each chart pattern has the potential to push the price into a new move. As such, traders tend to identify chart patterns in order to take advantage of upcoming price fluctuations.
Type of graphic models
Forex trading models are divided into groups depending on the potential price direction of the model. There are three main types of chart patterns classified in Forex technical charts.
Continuation Models
A continuation trend pattern appears when the price is in a trend. If you notice a continuation pattern during a trend, it means that the price is correcting. Thus, continuation patterns show that a new step in the same direction is likely to be taken. Some of the more popular continuation patterns are pennant, rectangle, and corrective wedges.
Reversal patterns
Trend reversal patterns appear at the end of a trend. If you see a reversal pattern forming while the price is trending, in most cases the price action will reverse after the pattern is formed. In other words, reversal patterns show that the current trend is coming to an end! The most popular reversal patterns are: double (or triple) top/bottom, head and shoulders, reversal wedges, ascending/descending triangle.
Neutral Models
These are chart patterns that are likely to push the price to a new move, but in an unknown direction. Neutral patterns can appear during a trend or a flat. You may be wondering what value neutral patterns might have since we don't know the likely direction. But in fact, the definition of a neutral pattern is quite valuable, since you can still trade the past trend. When the price confirms the neutral pattern, you can open a position in the direction of the breakout!
Types of continuation patterns
Graphic figure - Vympel
A pennant is a corrective price pattern that appears during a trend. In shape, it resembles a symmetrical triangle, since both of its sides are connected by a line of support and resistance. The difference is that pennants usually occur during the phase of a trend, while triangles can form during both tendencies (trend) and general consolidation periods. Pennants can be bearish or bullish depending on the direction of the trend. When a pennant occurs during a trend, it has the potential to push the price in the direction of the overall trend. The expected move is usually equal to its move, i.e. the target from the breakout point is equal to the size of the pennant itself. Below is an illustration of Pennants:
The green lines indicate the size of the pennant and measure the expected price movement that equals the size of the pennant.
When trading a pennant, you should open your position after the price closes the candle outside the pennant, which will indicate the confirmation of the pattern. At the same time, a stop loss should be placed directly at the opposite level of the pennant.
Graphic figure - rectangle
The formation of a rectangle shape is a continuation of a trend that resembles price consolidation within horizontal support and resistance levels. During a trend, when price starts to move towards a rectangle formation, another deviant move is likely to occur once price eventually breaks out of the rectangle formation. This movement is likely to be as large as the height of the rectangle. The rectangles can be bearish or bullish depending on the direction of the trend. Look at the figure below for understanding the shape of a rectangle:
When trading rectangles, you should place your stop loss on the opposite edge of its formation. Please note that this trading pattern is similar to a pennant, the difference is that the formation of a rectangle occurs within the same price zone.
Corrective wedge
We have a rising wedge where price closes with high tops and even higher bottoms. A falling wedge is when price closes with a low bottom and even lower tops. Wedges are very interesting chart patterns. The reason is that wedges can be a continuation or the formation of a trend reversal. Thus, I decided to distinguish two types of wedges in order to provide a more detailed classification - Thus, wedges have two types: corrective wedges and reversal wedges. There is no difference in formation between these two types of wedges. They look exactly the same - for example, a regular rising wedge and a regular falling wedge. The nature of the corrective / reversal is determined by the previous price movement.
Corrective wedges form in the opposite direction of the trend. Thus, if an upward trend is visible on your chart and a corrective falling wedge is formed, it means that the trend may continue. The same can be said about the rising wedge, just the other way around. If a corrective wedge occurs during a trend, it has the potential to push the price into another trend move equal to the size of the wedge itself. Below is a picture of the formation of wedges:
When you trade corrective wedges, the stop loss should be placed just outside the opposite side of the breakout.
Types of graphic patterns of reversal
Reversal wedge
I'll start with reversal wedges since the previous chart patterns we discussed were corrective wedges. Thus, you will see the difference between these two figures.
Reversal wedges look exactly the same as corrective wedges. The difference, however, is in the relationship between the wedge and the direction of the trend.
Each rising wedge has a bearish character. This means that the rising wedge is reversing the bullish trend and continuing in the bearish direction. At the same time, every falling wedge is bullish. Thus, falling wedges reverse the bearish trend and continue in the bullish direction.
Look at the image below:
You see? The reversal wedges are exactly the same appearance, as well as corrective wedges. The difference is where they appear relative to the trend. When a reversal wedge occurs at the end of a trend, it has the potential to push price into an opposite move equal to the wedge itself. When trading reversal wedges, you should place a stop order just above the level that is opposite the breakout of the wedge.
Models: double top and double bottom / triple top and triple bottom
This is another example of price reversal patterns. We can see the picture double top after the uptrend creates two tops at about the same level. Conversely, we have a double bottom pattern where, after a downtrend, the price creates two bottoms at about the same level. Absolutely the same with a triple top and a triple bottom. The difference, however, is that there are three tops and bottoms, not two. Here's what these formations look like:
The green lines indicate the size of the formation and its corresponding potential. To determine the size, we take the highest top and the lowest bottom of the formation. When we validate these trading patterns, we expect a price move equal to the size of the formation.
But how do we confirm formation? When we trade double and triple tops and bottoms, we should look at the formation signal line. The double top signal line is a horizontal line that runs through the bottom between two tops. The double bottom signal line is a horizontal line that runs through the top between two bottoms. With triple tops and bottoms, almost the same thing. This time, the signal line passes through the lowest bottom for a triple top formation and through the highest top in the case of a triple bottom formation. When the closing price of the candle is outside the signal line, we have a pattern confirmation. You can then enter a position and place a stop loss order at about half the size of the pattern.
Model - Head and Shoulders
This is one of the most reliable chart patterns in a technical analyst's arsenal. The head and shoulders is a reversal formation and indicates a change bullish trend. At the same time, this model has the opposite pattern - an inverted (or reversed) head and shoulders. An inverted head and shoulders usually appears after a bearish trend and calls for a downtrend. Below you will find examples of this model:
As you can see, the formation of the head and shoulders really looks like a head with two shoulders. After an uptrend, the price creates a top, but with a correction in the form of a bottom. Then she creates a second higher top, and then she makes a third bottom, and after that she corrects it by going to the top. This is the same with reversed head and shoulders, but instead of an uptrend, we have a downtrend and instead of a top, the price creates a bottom, as shown in the picture above.
The bases that form the head are two points that create a signal formation line. This signal line is called the neck line. When the price closes the candle beyond the neck line, the head and shoulders formation is confirmed and we can enter the market with the appropriate position. This position should be short in the case of head and shoulders and long in the case of an inverted head and shoulders. Your stop loss should be placed just above the last arm of the formation.
Patterns: Ascending Triangle / Descending Triangle
An ascending triangle has vertices that lie on the same horizontal line and has higher bottom bases. The Descending Triangle is the opposite. Although many people consider these chart patterns to be neutral, they have the potential to reverse the price trend. So I use them on a chart with trend reversal chart patterns. Look at the image below for a visual picture of these triangles:
As you can see, the ascending and descending triangles are very similar to corrective and reversal wedges. The difference is that corrective wedges have higher tops and reversal wedges have lower bottoms, while ascending triangles have horizontal tops and descending triangles have horizontal bottoms. When the ascending/descending triangle is confirmed, we expect a price reversal momentum equal to the size of the formation. This is shown in the image above with green lines. The stop loss should be placed just outside the horizontal level of the triangle.
Neutral Chart Pattern - Symmetrical Triangle
Symmetrical triangles have two sides that are approximately the same size. Since both sides of the triangle are the same, this creates a technical equivalence of force that creates a neutral character of the formation. The figure below shows what a symmetrical triangle looks like:
When a symmetrical triangle occurs on the chart, we expect the price to move in an amount equal to the size of the formation. However, the direction of the breakout is generally unknown, due to the equivalence of the two sides of the triangle. Thus, gj Price Action traders typically wait for breakouts to confirm a potential trade direction. If you are trading symmetrical triangles, you should place a stop loss just beyond the opposite end of the breakout side.
Model trading
Now that I've introduced you to the most important price reading patterns, it's time to show you an example of patterns in action on a chart. Look at the image below:
This is the daily chart of the EUR/USD pair from October 29, 2012 to October 12, 2013. Our chart analysis shows seven successful chart patterns. The green lines show where we could open our positions. The red lines show where stop losses should be placed.
First, we start by forming a double bottom. The green line is the figure's signal line and a long-term entry point. The red line is the stop loss, which is located approximately in the middle of the model. The EUR/USD pair rose by 187 pips within 5 days.
The rise in price subsequently turns into a rising wedge. Since the wedge forms after the price rises, it has a reversal character. The lower level of the wedge breaks in bearish direction and will be short potential on EUR/USD. Proft can be closed after two days when the price reaches the model size. The increase in profit would be equal to 190 pips.
The price starts a new growth, which leads us to a symmetrical triangle. See how the sides are about the same size and at the same angle. Since the symmetrical triangle is neutral, we are waiting for a breakout. And here it is going in a bearish direction. We could go short and place a stop loss right above the pattern. On the same day, the price completes the size of the pattern - +137 pips on the same day.
The decline after the symmetrical triangle brings us to the first bottom of a double bottom formation. When we spot a second bottom, we place a signal line above the upper bottoms of the two bottoms. The price breaks the signal line and is confirmed long position. We will place a stop loss in the middle of the pattern. In this particular case, we could stay in the market twice over size model formation!
Shortly thereafter, the price starts consolidating. Notice how the consolidation looks like a rectangle? Indeed! It's a bullish rectangle! The price breaks the upper level of the rectangle and the EUR/USD pair is set to buy. We could have stayed in this position longer than the rectangle's potential suggests because we didn't get bearish after the bullish potential was fulfilled. The price starts to fluctuate and we see a bearish trend on the lower timeframe (H4). In addition, on our daily chart, the price is closed by a Doji candle, which has a potential reversal pattern.
Suddenly, the price finally starts to fall.
Do you see something? Look at the black line in the example. The last double bottom followed by a bullish rectangle creates a head and shoulders. The next low after that creates a second shoulder. This is a good formation of the head and shoulders. In order to confirm the pattern, we need a price that will break and close the price beyond the neck line formation. Thus, we connect the two bases that create the head and we get our neck line. The opportunity to sell EUR/USD occurs immediately after the price has broken through the neck line. We could sell EUR/USD and place a stop loss just above the pattern's last shoulder, as shown in the image. We want to stay in short position until the price completes the size of the pattern.
Then a corrective rising wedge appears. And you have options: close the head and shoulders position, and then open another short position to trade the rising wedge. Another option is to stay in the head and shoulders short position until the wedge is completed. In both cases, you will make a solid profit from the head and shoulders pattern.
Conclusion
Forex chart patterns are technical patterns on the chart that give us clues about possible price movements.
Graphic models are classified into three types:
- Continuation Models
- Reversal patterns
- Neutral Models
Some of the most important trend continuation patterns are:
- Pennants
- Rectangles
- Correction wedges
Some of the most important trend reversal patterns are:
- Double/Triple top/bottom
- Reversal wedge
- Ascending and Descending Triangles
One of the most popular neutral shapes is the Symmetrical Triangle.
All of these chart patterns have a price movement trend equal to the size of the pattern itself.
In Forex, a descending triangle appears when currency pair is in a downtrend and is trying to reverse. At this time, the currency pair is supported by enough demand from buyers to lock in the price, while making consistently lower highs. This results in a drop in volatility as the price contracts into a narrowing range. This forms the characteristic Descending Triangle.
After that, the market usually breaks the lower boundary of the triangle. This pattern indicates a trend continuation, not a reversal.
In markets that are less liquid than Forex, traders usually only pay attention to patterns covering longer periods of time (weeks or months).
However, in Forex, these patterns can appear and trade profitably on different time frames.
A descending triangle is a classic bearish signal.
Descending Triangle formation.
A descending triangle is a classic bearish signal. Make sure the triangle is in a downtrend. It should have a flat or nearly flat base line on the bottom and a falling top line which is the resistance level. The price range should narrow. The decrease in volatility can be checked using the indicator (Average True Range).
In order for the Descending Triangle pattern to be valid, the price must form “teeth”, which must become smaller and lower.
When you trade Sell, the first thing to do is to confirm the downtrend. This is because the Descending Triangle usually appears as part of a small corrective wave during a stronger trend.
The structure itself does not have to be the whole trend or a large part of it. Use to confirm a trend.
Zooming in allows you to check below and above the emerging Descending Triangle. If there is a strong support level nearby, then sell transactions should be refrained from.
An example of a descending triangle on a chart.
As with the Ascending Triangle, there is a lot of subjectivity in interpreting and reporting the exact shape of the Descending Triangle, especially on the smaller timeframes. Triangle patterns can appear throughout a trend. You can see them from the beginning of the trend to the middle, and then to the very reversal.
The descending triangle can be found in two different forms.
1. The first is when the triangle formation ends with a strong bearish breakout. An example is in the figure below. This picture is often found in downtrends. An area of price consolidation is formed with a decrease in volatility.
2. The second form is a smooth continuation of the downtrend. It differs in that after the formation of a triangle, the trend resumes without serious breakdowns. The figure below shows such an example.
Direction and strength of the breakthrough.
Once the Descending Triangle completes its formation, there is no way to know exactly how and when a bearish breakout will develop.
One of the popular ways is to wait for the close of the candle that breaks the lower support line. This creates a specific input signal.
As with other triangle patterns, the size and orientation of the pattern is a useful guide to the possible breakout size and is used to set stop loss and take profit targets.
How to use the Descending Triangle in trading?
When trading a Descending Triangle, expect a breakout shortly after it completes its formation. At this moment, volatility is compressed the most, and the market is ready for a new burst of activity.
The total take profit is set according to the depth of the triangle pattern. Let's assume that the distance from the highest to the lowest point is 200 points. Take profit is set equal to or slightly less than this value.
Triangles are technical breakdown patterns. Therefore, if there is no fundamental reason to hold the position, it is better to close the position if a bearish breakout has not occurred.
Also, you should use no more than ¼ of the total length of the triangle to set the expiration date of the order. For example, if the triangle takes 8 days, then this means that the expectation of a breakout is no more than 2 days.
When trading the Descending Triangle, you can use pending orders. They can be placed below the support level (lower line of the triangle).
You can get acquainted with other models of graphical analysis
Japanese candlesticks are mainly used as patterns that indicate market weakness that is conducive to a reversal. However, there is a whole group among them that views the market in terms of a trend continuation pattern. These tendencies are very strong and can often help a trader open a trade at the right time. It is about continuation models that we will talk in the framework of this article.
What are the patterns of continuation of the trend
Candlestick patterns of trend continuation indicate areas of the market where the price of an asset, after a certain period of correction, is ready to continue the trend that previously dominated the market. This is their main strength, since trading is carried out in the direction of the trend, which greatly increases the final chances of success. The Japanese themselves often say that it is important to be able to buy on time, sell on time and rest on time.
Within the framework of this material, we will talk about such candlestick figures continuations like:
- Three white soldiers
- Three Methods
Windows - a strong candle combination
The window in Japanese candlesticks completely coincides with Gap concept(gap) in Western technical analysis. If we talk about the Western school, then the main belief there is that the price should close the gap. The Japanese in this case speak of closing the window. But very often it is these windows that give signals to continue, which we will talk about further.
A window is a price gap between two candles. a gap is any serious distance that has formed between the extreme values of both candles. In fact, the basis of the trend is taken.
Traders often talk about the following trading opportunities:
- Windows provide opportunities for long-term trading, and you need to trade in the direction of the window. That is, if the window appeared upwards, we trade for an increase. The window appeared down - we trade for a fall.
- The levels at which the windows have formed are strong support and resistance levels, which also provide an opportunity for trading.
At the same time, the appearance of the window gives an unambiguous signal for trading, and the end - the closing of the gap.
An example of how the price of an asset reacts to a window by forming a move in the same direction. We see a clear trend.
We see the appearance of a gap, after which the price continued its movement in its direction with a further fall in quotes. This is the first opportunity for trading. But do not forget that very often the price returns to the window, tests its level, and only then starts a trend movement. Some traders use 2 long-term positions in such cases. The figure below shows an example of such a situation when it was possible to open at least 2 trades, since the price tested for 3 days maximum values signal zone of discontinuity without fixing above it.
Next important point- The Japanese argue that windows are most effective at times when the market "wakes up". That is, for some time the market is in the stage of correction, after which a window appears. In this case, you can immediately open a deal in the direction of this window - the trend. Even without additional tools and without confirmation. This is one of the strongest signals that this formation only gives. Pay attention to the following figure. where such a situation is presented.
At the same time, the stronger and narrower the flat, the more significant the signal will be. You can even say that the approximate time of an open transaction should coincide with the time of the formation of a trend correction. It is after this time that you can safely limit your profit to the breakeven zone, or simply close the deal.
Three Methods
These continuation patterns are different for rising and falling markets. In fact, we will talk about the three methods of bears and the three methods of bulls. these are classic trend continuation patterns, which are formed according to the following features:
- A long candle with a large body (in any direction).
- Two or more small body candlesticks that are not larger than the body of the previous large candlestick. The ideal model consists of 3 candles with a small body, but in practice it is possible different situations. These candles can be of different colors, but they are usually unidirectional and move against the body of a large candle.
- A new long candlestick whose body exceeds the extremum point of the previous large candlestick. The direction of these two candles is the same. If we are talking about a rising market, then the second candle exceeds the high of the first. If we consider a falling market, then the closing price of the second candle exceeds the low of the first. As a rule, it appears after the trend.
Below is not classic example such a candlestick model, where 3 candles with a small body, but of different directions, act as three methods. This, by the way, does not weaken the signal in any way.
But in any case, this is a fairly accurate demonstration of how this candlestick pattern of the trend continuation pattern is formed. For an uptrend, the rules will be equally reversed. Either way, it's great for trending.
Three white soldiers
These patterns are continuations of an uptrend based on three successive uptrend candles. In Japanese analytics, this model is called Three white soldiers or Three advancing white soldiers. The main condition for the formation of these three candles is that their highs and closing prices must consistently increase.
Trend continuation patterns are one of the main components of graphical technical analysis, by which traders can evaluate the most likely further trend behavior. Their appearance is associated with a short pause, when it may seem that the trend has weakened, because the current trend is suspended. But this is not so at all. This is just a pause, after which a trend movement is most likely expected. The ability to see and distinguish trend continuation models from reversal formations, after which the price can suddenly radically change its direction, will help you trade against the current trend in the most efficient way, getting the most profit from trading with the trend. When the following patterns are formed, trading is suspended, and traders are looking forward to a good moment to open a position.
Flags and pennants
Flags and pennants are figures that can be seen quite often. The flag is visually a rectangle, whose borders were formed by two parallel lines of support and resistance. When this figure appears on the chart, you can most likely hope for a further increase or decrease in price. Also, before the start of the flag, there is always a strong jump that looks like a “flagpole”, the figure resembles the likeness of a real flag. Further price movement is determined by the direction set by the flag.
The pennant plays an equally important role and is in many ways similar to the flag. Its appearance and influence on the behavior of the trend remains the same, but the graphical form of the model itself is more reminiscent of a symmetrical triangle. As a rule, this is a model that is more often caught in the foreign exchange market.
Triangles and their types
There are 4 types of triangles at once: descending (1), ascending (2), symmetrical (3), diverging (4). Each of them has its own characteristics, and from the exact recognition of one or another type of triangle, one can judge the continuation of the existing trend or its possible reversal.
For a descending triangle, the position of an acute angle, which is directed downward, is characteristic. If before the figure was formed, there was an upward trend, then there is every chance that it will remain so. That is, the breakthrough of the triangle will be directed in the direction opposite to the angle of its inclination. If an uptrend was not seen before the figure, then the descending triangle will be a herald of a break in the direction of the downtrend. Within a symmetrical triangle, price movement can be unpredictable, but once the line is broken, a clear move in one of the directions can be seen, so this is a good chance to open a position.
When analyzing any of the figures, it is worth considering several factors that may further affect the behavior of the current trend. Important role plays the trend preceding the formation of the figure, the presence of support and resistance lines in this area, etc. In the immediate period of model formation, the indicator of trade volumes is also important. At this time, active trading is not conducted, and a sharp increase in the number of transactions indicates the imminent breaking of the triangle - the time is suitable for opening a position. If during the formation of a triangle there is an increase in prices together with an increase in trading volumes, we can safely say that the uptrend will continue, but the reverse trend also takes place.
The most common trend continuation patterns are "flag" ("flag") and " pennant " ("pennant "). Identification and analysis of these graphic figures are carried out on a bar "bar" price chart (Fig. 14.12).
"Flags" and "pennants" are formed only inside the trend, they are a sign of a trend correction confirming its continuation ("the trend is accompanied by ups and downs"), and are formed as two parallel straight lines drawn above and below, falling in an uptrend or rising in a downtrend day bars. The slope of the "flag" is always directed in the direction opposite to the main price movement.
Rice. 14.12. Graphic models "flag" and "pennant" on the chart of shares of OAO "Lukoil"
It is noticed that after the completion of the correction (completion of the formation of the "flag" figure), the subsequent rise or fall in prices will be minimally equal to the average value of the bars in the figure (numbers 1 and 2 in Fig. 14.12). This property of the "flag" is reflected by the saying "the flag always rises to the middle of the flagpole" and if the "flag" or "pennant" patterns stop appearing in the trend, then the investor needs increased attention, as the strength of the trend is depleted. The duration of the formation of models is from four to 10-12 days.
Graphic model "triangle" are quite common, but their identification requires certain skills. There are three types of triangles - symmetrical, ascending and descending. All of them belong to the trend continuation patterns, and their identification on the price chart indicates the continuation of the trend in which they arose. The triangle pattern is formed within the current trend, and its duration is from two to six-seven weeks. A schematic model of a symmetrical triangle forming on an uptrend is shown in fig. 14.13.
As is obvious from Fig. 14.13, the formation of a symmetrical triangle begins with the fact that the peaks numbered 3 and 5 are lower than the previous peaks, and the bottoms slowly rise. At first glance, this behavior of prices indicates the end of the uptrend, and only the analysis of this price model allows us to draw a more reasonable conclusion. To do this, two straight lines are built on four points of local extrema - two peaks 1 and 3 and two bases 2 and 4, the intersection point of which is called "vertex" ("apex"). These lines act as a support line (line 2–4) and a resistance line (line 1–3). To make the figure complete, a perpendicular is dropped from vertex 1 (" base" – "base") to line 2-4. The result is a figure "lying on its side a symmetrical triangle." The formed model covers the period of price consolidation, when, after a rapid rise or fall, market participants stop and evaluate their positions.
If approximately in the interval from 1/3 to 1/4 of the height of the ascending symmetrical triangle, the price breaks through the upper line 1-3, then the uptrend will continue, but if the breakdown does not occur, then the price will go into a side trend or even a trend reversal will occur. At the same time, it is possible to estimate the minimum value of further price growth after the breakdown of the 1–3 line. For this, a perpendicular rises from the breakdown point h, equal to the base. Its peak will be the desired minimum value of the rise in prices. Another method allows you to identify the direction of price movement. To do this, in our case, a line is drawn from point 2 in the direction of line 2–4. The corridor formed in this case is directed towards the price movement. In a similar way, the analysis of a symmetrical triangle, which is formed on a falling trend, is carried out.
Let's consider the formation of a symmetrical triangle on the example of the prices for the shares of OAO Lukoil (Fig. 14.14). At the beginning of May 2006, after a long rise, the company's shares began to fall sharply. Their fall stopped on May 22, and the same rapid rise began. As a result of subsequent price changes, a "symmetrical triangle" pattern was formed (tops 2–4 and bottoms 1–3). The significant range of price fluctuations in the triangle led to the fact that the magnitude of the fall in prices after the completion of the formation of the figure was also significant.
Rice. 14.13. Scheme of the graphical model "symmetrical triangle"
Rice. 14.14. Symmetrical triangle on the price chart of OAO "LUKOIL", May-June 2006
"ascending" and descending triangles. Already by the name, it can be assumed that these models are formed respectively on an uptrend and on a downtrend. Although these triangles are a variation of the symmetrical triangle, at the same time, unlike the symmetrical triangle, they can be used to accurately determine the development of a trend. The scheme of the ascending triangle is shown in fig. 14.15.
Rice. 14.15.
An ascending triangle is formed on an uptrend when prices temporarily stop rising. An ascending triangle is built, like a symmetrical one, by four points - two vertices (points 1 and 3 in the diagram) and two bases (points 2 and 4). At the same time, the top line 1–3, which acts as a resistance line, is usually close to horizontal, and the perpendicular to line 2–4, lowered from top 1, completes the formation of the “right triangle” model. The horizontality of the upper line is explained by the continued high activity of buyers, which ensures the subsequent price growth, therefore the ascending triangle is considered a "bullish" model.
A breakout of the closing price of the upper line of the triangle is considered a signal for the completion of the pattern. In turn, a descending triangle is a mirror image of an ascending triangle in a falling market and is considered a bearish pattern. The period of formation of both models is from 2 to 10 weeks.
Graphic model "expanding formation" or " expanding triangle is a model of price changes, conditionally related to triangles. Occurs when two strong groups of "bulls" and "bears" are formed in the market, consisting largely of private investors, each of which wants to turn the market in its own direction. The model is relatively rare and is characterized not by the convergence of the sides of the triangle, as described above, but by their divergence. In other words, this model describes the state of the market when "bulls" and "bears" begin to "rock" this market, raising and lowering prices in waves.
At the same time, the volume of trade also increases, i.e. the market becomes spontaneous. The pattern is formed at the top of an uptrend. This is a bearish pattern as it ends with a trend change i.e. market fall (Fig. 14.16). The model consists of two or three successively emerging vertices (in the scheme 1.3,
5) and two or three bases (2,4,6). The model formation period is 6–10 weeks.
Graphic model "diamond" or "rhombus". Sometimes called "diamond formation". The model consists of two triangles - an expanding one and a symmetrical one following it (Fig. 14.17). It occurs at the top of the market and forms within 4-10 weeks. In the first half of the model, trade volumes consistently increase, while in the second half they decrease. This model is formed rarely and is considered completed when the price breaks through the lower side of the symmetrical triangle.
Rice. 14.16. Schematic of an expanding triangle or "expanding formation"
Rice. 14.17. Scheme of the graphical model "diamond"
Graphic model "wedge" ("wedge ") can also be considered as a kind of triangles. It is formed inside an active uptrend or downtrend and confirms its continuation with its appearance. a sharp downward angle is considered a bullish pattern, as it forms on an uptrend and confirms its continuation (Fig. 14.18).
A wedge, like other continuation patterns, is a stage in the development of a trend after a rapid rise or fall, during which market participants assess the trend. Typically, the wedge travels 2/3 to 3/4 of its length before breaking through.
Graphic model "rectangle" represents a period in the development of a trend, after which the trend continues its movement. The figure is a chain of successive ups and downs with the same amplitude that occur during the development of a trend. When analyzing, the analyst draws straight lines along the tops and bottoms of the figure, often parallel, which gave the name of the graphical model. Another name for a rectangle is a "price corridor". The resulting figure may be parallel to the x-axis of the graph or slightly inclined. Refers to medium-term models that form over one to two months (Fig. 14.19).
Rice. 14.18. Scheme of the graphical model "wedge"
Rice. 14.19. Scheme of the graphical model "rectangle" on a downtrend
Rectangles of various durations are formed on both uptrends and downtrends. Their emergence is a consequence of the market struggle between two equal groups of "bulls" and "bears". As a rule, after the end of this struggle, the market movement continues in the direction of the previous trend. Based on the amplitude of price fluctuations h in the rectangle, you can estimate the minimum value of the subsequent price change after the breakthrough. For this, as shown in Fig. 14.19, the height of the rectangle h is transferred to the breakout point of the lower line of the rectangle, which acts as a resistance line on a downtrend.
There is another way to measure the magnitude of the future price change after a breakout. It is used in case of excessively long lateral price movement in a rectangle. The length of the rectangle is measured and transported to the breakout point in the form of a price change height. In this case, it is assumed that the protracted struggle between bulls and bears leads to the accumulation of significant market energy, which is expressed in a strong jerk after a prolonged pause (Fig. 14.20).
Rice. 14.20. The scheme of price changes after the completion of the graphical model "rectangle" on a downtrend
