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Chart Patterns Tutorial - Forex Trading, Currency Forecast, FX Trading Signal, Forex Training Course, E...
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Bar or line chart Perhaps the most popular type of chart, the bar chart adds new information for the trader, showing the
high and low prices for a time period in addition to a horizontal notch on the right side of the vertical bar indicating the close.
Many chart services also show the opening price with a horizontal notch on the left side of the vertical price bar.
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Here is what respected technical analyst John J. Murphy says about trend lines in his excellent book, Technical Analysis of the
Futures Markets: "The importance of trading in the direction of the major trend cannot be overstated. The danger in placing
too much importance on oscillators, by themselves, is the temptation to use divergence as an excuse to initiate trades contrary
to the general trend. This action generally proves a costly and painful exercise. The oscillator, as useful as it is, is just one tool
among many others and must always be used as an aid, not a substitute, for basic trend analysis."
The definition of a trend is pretty simple. An uptrend is a series of higher highs and higher lows. A downtrend is a series of
lower highs and lower lows.
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Markets typically fluctuate between periods of high volatility and periods of low volatility, and that is how flag patterns are
formed as the market seems to take a breather to reassess the situation before resuming its upward climb.
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buyers decide they can no longer hold the price at the level on the horizontal side of the triangle and the breakout eventually
occurs, prices are expected to move in the direction of the dominant trend.
Ascending triangle - The ascending triangle reverses the appearance of the descending triangle. Sellers keep the lid on price
movement at the horizontal side of the triangle but buyers keep pressing the market higher, causing the lows to be higher
each day until the breakout above the horizontal line occurs. As the chart indicates, it may take a few more days of trading as
buyers and sellers retest the breakout. As with other triangles, the expected move after the breakout is in the direction of the
dominant trend.
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The neckline again is an important point. When prices break through the neckline, the reversal pattern is complete and a
potential uptrend may begin. As with the head-and-shoulders top, there is likely to be some trading back and forth on either
side of the neckline as the market makes its decision on which way to go, and the distance between the neckline and the head
can be used to project how high prices might go.
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hourly, daily, weekly or monthly. Many times a bunch of highs or lows will be concentrated in a small price area but not at one
specific price. Instead, you have a support or resistance "zone" that should be rather narrow to be effective.
Major price tops and bottoms are also major resistance and support levels. Unfilled price gaps on charts also qualify as very
good support and resistance levels. Moving averages, especially longer-term ones, can also provide support or resistance. Still
another way that support and resistance levels can be identified is through geometric angles from a certain key price point, a
concept most often associated with W.D. Gann, a legendary stock and commodity trader who died in 1955.
Finally, support and resistance levels can be determined by "psychological" price levels. These are usually round numbers that
are very significant in a market. For example, in crude oil, a psychological price level might be $60 per barrel. For soybeans,
that might be $5 or $6 per bushel or in cotton, 50 cents a pound. These levels mark clear step-up or step-down prices where
the market often pauses to reassess the situation.
Many chart patterns develop as a result of price action at support and resistance areas. For example, a double bottom may
form because prices find support from an earlier bottom, or a triangle may form as prices are unable to overcome short-term
trend line support or resistance until a breakout eventually does occur.
One important point to note about support and resistance is that when a key support level or zone is penetrated on the
downside, that level or zone will likely become key resistance. Likewise, a key resistance level or zone that is penetrated on
the upside will then likely become a key support level or zone.
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for sure until a move is complete so these gaps are a little tricky to use in analysis. However, you may be able to combine a
gap projection with a well-defined support or resistance area such as a previous high or low to arrive at a potential price
target.
Exhaustion gap. This gap appears at the end of an extended move and reflects a last burst of buying in an uptrend or
selling in a downtrend. Once this exuberant buying or selling has occurred, there are no new buyers or sellers to maintain
the trend the force that was driving the trend has been exhausted. As a result, the turn in the trend can produce some
dramatic moves in the opposite direction as the late buyers or sellers scramble to unload their losing positions. This is the
type of situation that sometimes produces island tops or island bottoms on a price chart. One day or several days of price
action may be isolated by an exhaustion gap and then a breakaway gap during the market's sudden turnabout.
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