TRADING-How to increase usability of trading style ? - PART-1

 If you are smart enough then you will understand the following line in a minute :

You will significantly increase the usability of each style by combining the two together.

Many try to master one style and use them in isolation (as I did) but they will create independent problems for your analysis and trading. By blending the two together you will create a more structured and comprehensive view of price.

 

Combine these two styles of patterns recognition with trends, support and resistance and you will never look at a price chart the same way again.

    Why do chart pattern occur ?

The concept is similar to support & resistance: At any one time market participants have one of three choices -­‐ to buy, sell or stand aside. As this ratio between the three groups change over time, so does the supply and demand for any given market. As this force changes, so does price. This is all based upon participants (and groups of) opinions of where price ‘should’ be.

 

As the battle towards the ‘correct’ market price unfolds we see trends and oscillations develop, which when combined form familiar patterns.

 

If we can identify familiar patterns, technical analysts believe that [to a certain degree] price can become predictable.

 

The collective individuals within any market constantly changes, along with personal opinions of where price ‘should be’, or why they should move in the first place.

 

Regardless… a Technical Analyst always takes comfort in the fact that history does repeat itself as long as prices are always governed by supply and demand.

Long-Term Patterns (LT)

I refer to long-­‐term patterns as those which take several (and usually much more) bars of data to create and they are also commonly referred to as Western Chart Patterns.

 

They are not related to the trading timeframe they are seen on, as LT patterns can be seen on any timeframe. However a rule of thumb is that the higher the timeframe you see a chart pattern it is generally consideredto be more relable, and the lower the timeframe tends to generate more fale signals.

 

You can see the same (or similar) patterns on a 1-­‐minute chart which may only take 5 minutes to create, whilst also seeing patterns which last years or decades on the Monthly timeframes.

 

Below is an example of a Double Bottom pattern which took 18 bars to create. I have hidden the timeframes as it is irrelevant – this could be a 1 minute chart or a 1 day chart, but the concept is the same.                

LT Pattern Provides

• Structure (Once combined with trends and S/R)
• Future Direction
• Price Objectives (Targets)

 Examples:

• Double Bottom (pictured), Triple Bottom, Double Top, Triple Top,
• Wedge, Head & Shoulders,
• Symmetrical Triangle, Ascending Triangle, Descending Triangle,
• Pennant, Flag

Short-Term Patterns(ST)

Short-­‐term patterns can be produced from a single bar of dataor more and require either Bar Charts or Candlestick charts to identify them. As with LT patterns they appear on all trading timeframes and generally considered to generate more reliable signals the higher the timeframe.

Short-­‐Term Patterns (ST)

ST Provide

• -          Signs of potential strength or weakness
• -          Entry Signals
• -          Exit Signals
• -          Trade Management