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Symmetrical Triangle
(Profitable Pattern Number One)
Symmetrical triangles are very reliable. You can profit from upwards or downwards
breakouts.
If you see a symmetrical triangle forming, watch it closely. The sooner you catch the
breakout, the more money you stand to make.
Watch For:
Ascending Triangle:
When you notice a stock has a series of increasing troughs and the price is unable
to break through a price barrier, chances are you are witnessing the birth of an
ascending triangle pattern.
An ascending triangle is the bullish counterpart of a descending triangle.
DEFINITION of 'Ascending Triangle'
A bullish chart pattern used in technical analysis that is easily recognizable by the distinct
shape created by two trendlines. In an ascending triangle, one trendline is drawn
horizontally at a level that has historically prevented the price from heading higher, while
the second trendline connects a series of increasing troughs. Traders enter into long
positions when the price of the asset breaks above the top resistance. The chart below is an
example of an ascending triangle:
Descending Triangles:
The descending triangle is the bearish counterpart to the ascending triangle.
DEFINITION of 'Descending Triangle'
A bearish chart pattern used in technical analysis that is created by drawing one trendline
that connects a series of lower highs and a second trendline that has historically proven to
be a strong level of support. Traders watch for a move below support, as it suggests that
downward momentum is building. Once the breakdown occurs, traders enter into short
positions and aggressively push the price of the asset lower. The chart below is an example
of a descending triangle:
As with many of our favorite patterns, when you learn to identify ascending and
descending triangles, you can profit from upwards or downwards breakouts. That
way, youll earn a healthy profit regardless of where the market is going.
Watch For:
The first trough is a signal that buying demand is starting to weaken. Investors who
believe the stock is undervalued respond with a buying frenzy, followed by a flood
of selling when traders fear the stock has run too high. This decline is followed by
another buying streak which fizzles out early. Finally, the stock declines to its true
worth below the original price.
Short sell as soon as the price moves below the neckline after the descent
from the right shoulder.
Entry price minus the patterns height (distance from the top of the head to
the neckline).
Purchase When:
Watch For:
A price increase of 10% to 20% from the first trough to the middle peak.
Entry price plus the patterns height (distance from the peak to the bottom of
the lowest trough).
Watch For:
A price decrease of 10% to 20% from the first peak to the middle trough.
Entry price minus the patterns height (distance from the trough to the top of
the highest peak).
React Or Anticipate?
One criticism of technical analysis based on chart patterns is that setups always look
obvious in hindsight but anticipating them as they are occurring in real time is
particularly difficult. Double tops and double bottoms are no exception. However,
these patterns appear frequently, successfully identifying and trading a majority of
them is no simple feat.
Anticipate
There are two approaches to this problem and both have their pros and cons. In
short, traders can either try to anticipate these formations, or wait for confirmation of
the pattern and then react to them. The approach you choose is more an indication of
your personality or trading style than relative merit. Those who have a fader
mentality - who love to fight the tape, sell into strength and buy weakness - might try
to anticipate the pattern by stepping in front of the price move.
React
On the other hand, reactive traders, who want to see evidence or confirmation of the
pattern before entering, have the advantage of knowing that the pattern exists but
there's a tradeoff: their entry point is later than an anticipatory trader that results in
worse prices and greater losses should the pattern fail.
Double tops and double bottoms are common reversal patterns every trader
should keep an eye out for, as they can signal a reverse in the trend
Purchase When:
Watch For:
Entry price plus the patterns height (distance from the resistance to the
bottom of the lowest trough).
Triple Bottom
This bullish reversal pattern has all of the same attributes as the triple top but signals a
reversal of a downward trend. The triple-bottom pattern illustrates a security that is trading
in a downtrend and attempts to fall through a level of support three times, each time moving
back to a level of resistance. After the third attempt to push the price lower, the pattern is
complete when the price moves above the resistance level and begins trading in an upward
trend.
This pattern begins by setting a new low in a downtrend, which is followed by a rally to a
high. This sets up the range of trading for the triple-bottom pattern. After hitting the high,
the price again comes under selling pressure, which sends it back down to the previous low.
Buyers again move back into the security at this support level, sending the price back up
again, usually to the previous high.
This is repeated a third time, but after failing again to move to a new low, the pattern is
complete when the security moves above the resistance level to begin trading in an uptrend.
In this pattern, volume plays a role similar to the triple top, declining at each trough as it
tests the support level, which is a sign of diminishing selling pressure. Again, volume should
be high on a breakout above the resistance level on the completion of the pattern.
The price objective will also initially be calculated as the distance of the chart pattern added
to the price breakout.
Purchase When:
The price falls below the support that formed from the prior troughs.
Watch For:
Entry price minus the patterns height (distance from the support to the top
of the highest peak).
Triple Top
This bearish reversal pattern is formed when a security that is trending upward tests
a similar level of resistance three times without breaking through. Each time the
security tests the resistance level, it falls to a similar area of support. After the third
fall to the support level, the pattern is complete when the security falls through the
support; the price is then expected to move in a downward trend.
The first step in this pattern is the creation of a new high in an uptrend that is stalled
by selling pressure, which forms a level of resistance. The selling pressure causes the
price to fall until it finds a level of support, as buyers move back into the security. The
buying pressure sends the price back up to the area of resistance the security
previously met. Again, the sellers enter the market and send the security back down
to the support level.
This up-and-down movement is repeated for the third time; but this time the buyers,
after failing three times, give up on the security, and the sellers take over. Upon
falling through the level of support, the security is expected to trend downward.
This pattern can be difficult to spot in the early stages as it will initially look like a
double top pattern which was discussed in a previous section. The most important
thing here is that one waits for the price to move past the level of resistance before
entering the security, as the security could actually just end up being range-bound,
where it trades between the two levels for some time.
In the triple-top formation, each test of resistance at the upper end should be marked
with declining volume at each successive peak. And again, when the price breaks
below the support level, it should be accompanied by high volume.
Once the signal is formed, the price objective is based on the size of the chart pattern
or the price distance between the level of resistance and support. This is then
deducted from the breakout point.
Meaning Behind Triple Tops and Bottoms
The significance of these two formations is that an established trend has hit a major
section of support/resistance, which stops the trend's ability to continue. This is an
indication that the buying or selling pressure that is supporting the trend is beginning
a built-in, abandon-ship trigger. That is, you need to know when to cut your
losses and move on to brighter prospects.
I set its stop-loss trigger around 3%. So if a trade starts to go sour, you will almost never lose
more than 3% of your investment.
speculation, or by the desire to hedge the downside risk of a long position in the same
security or a related one. Since the risk of loss on a short sale is theoretically infinite, short
selling should only be used by experienced traders who are familiar with its risks.
Short selling is the secret to making cash in a down market. Here is how it works:
1. Identify a stock pattern that suggests a stock is headed down.
2. Borrow shares of the soon-to-decline stock from your brokerage..
3. Immediately sell these borrowed shares.
4. Wait for the stock to drop to your target price.
5. Buy the shares at the target price.
6. You return the shares to your brokerage.
7. Enjoy your profits.
CONCLUSION
Important Links
http://www.investopedia.com/walkthrough/forex/intermediate/level4/movingaverages.aspx
Analyzing Chart Patterns: http://www.investopedia.com/university/charts/
Stop-Loss Order: http://www.investopedia.com/terms/s/stop-lossorder.asp?
layout=orig
Short Selling Tutorial: http://www.investopedia.com/university/shortselling/