Chart technique: Chart analysis for everyone – Every investor should know these constellations of technical analysis | message
Many people assume that the market is always in an upward or downward trend. In reality, however, the price of the market can move in three directions – down, up and sideways. A directionless market is called a sideways trend. The three directions of the trend can be classified into three further categories. These categories consist of long-term, medium-term and short-term trends. So in reality there are an infinite number of trends that may only last for a few minutes, hours, or even days, weeks, and months. In chart analysis it is of great importance to recognize the trend correctly, because this is the only way to identify a reversal formation (trend change) or continuation formation (the trend remains).
These formations indicate that a trend is likely to reverse. The prevailing trend changes and a reversal formation forms. In this context, there is often talk of resistance and support. A support is a price range below the current price, here a higher demand will slowly exceed the supply. This will stop a further decline in the share price. Resistance is the direct opposite of support. Resistance is a price barrier and can keep the price rising. In this area, the supply slowly exceeds the demand and the price does not rise any further.
Shoulder-head-shoulder reversal pattern
The shoulder-head-shoulder pattern is one of the most well-known reversal patterns in chart analysis. In a long-term upward trend there is a succession of rising peaks and valleys, but these gradually lose strength and speed. Here, the previous upward trend flattens out for a certain period of time. At this moment supply and demand are in relative equilibrium. As soon as this equilibrium changes, the lower resistance line is broken and a new downtrend is established. The break in the upward trend is the first warning signal for the investor, after which the price only reaches a lower high. This movement forms the right shoulder of the formation, which is roughly level with the left shoulder. The maximum course between the two shoulders is considered the head. The connection of the lows before and after the high are viewed as the neckline. If this neckline is not reached, a sell signal is generated. The dissolution of a shoulder-head-shoulder is the significant breakthrough in this neckline.
This formation can also take the form of a soil formation. The inverse shoulder-head-shoulder formation is a reflection of the summit formation.
The triple tips
This formation is also known as a triple top or triple bottom. It differs only slightly from the shoulder-head-shoulder formation. In the triple top formation, all three highs are at the same level. This level acts as a strong resistance line and price will not break it. A sell signal is issued when the support line of the previous lows is undershot.
Such a formation can also be designed as a triple bottom. The three consecutive lows are on the same level. These lows are considered a strong support line and are not undershot by the price.
The double tips
One of the most common reversal formations in chart analysis is the double top or double top. This formation can be most easily identified by the investor. The constellation is identical to the triple-peak formation, only here two peaks are formed on the resistance line before the sell-signal is generated.
There is also a ground formation for this constellation. In a double bottom formation, the price encounters a strong resistance line twice and then forms a new buy signal.
These chart patterns are also known as trend confirmation patterns. The continuation patterns indicate that subsequent price movements are moving in the same direction as the previous trend.
Pennants and flags
The pennants and flags are very common formations. They are very similar in their arrangement and for this reason are also treated together. As a rule, pennants and flags represent short pauses during dynamic trading. The formations are preceded by an almost vertical price movement, which analysts refer to as the flagpole. After the rapid increase, there is a brief consolidation. This then forms the shape of a pennant or a flag. When the consolidation phase is over, the flag or pennant is broken upwards. This is followed by another rise in price that is roughly the same length as the rise before the formation. The formation of the flag should always be against the direction of the trend. After the formation is complete, the flag should fly at half-mast, which means that the steep price increase after the consolidation is followed by another steep price increase. This keeps the pennant or flag in the center of the formation.
Pennants and flags can also develop when prices are falling. This leads to an extreme slump in price, followed by a further slump after a brief consolidation. Here, the second price dip has approximately the same length as the price slide before the formation.
The rectangle formation
The rectangular formation represents an interruption of the prevailing trend. The course encounters a resistance line, which it can only break through after several attempts. In a short sideways movement, the price oscillates between two parallel horizontal lines. The price moves back and forth between the upper resistance and the lower support. If the price breaks the upper resistance line, the actual upward trend will continue. Investors can then bet on further price gains.
The rectangle formation can also form in a downtrend. In this case, the price hits a support zone several times, which is broken after a short consolidation phase. If this support line breaks, the initial downtrend will continue.
These continuation formations host the ascending, descending, and symmetrical triangles. The symmetrical triangle shows an interruption in the current trend, which will continue after the formation. If the trend was upward before the triangle, it will continue in this direction after the formation. The symmetrical triangle has two converging trend lines, with the top line falling and the bottom line rising. The point at which the lines meet is called the tip. In the consolidation phase of the trend, lower high prices and higher lows are formed. This constellation leads to a symmetrical triangle. The original trend will continue when prices break the triangle to the upside. Investors can use the phase before the breakthrough to buy.
In the case of a symmetrical triangle in a downtrend, the triangle is broken down and continues the negative trend. Investors can use the phase before the breakout to sell their position.
The ascending triangle forms in a predominant uptrend with price repeatedly encountering a resistance line. During the consolidation, rising lows are formed in an ascending triangle. The high prices, however, remain at the level of the resistance line. For the investor there is a buy signal when the resistance line is crossed upwards.
The descending triangle forms in a predominant downtrend with price encountering a support line repeatedly. In a descending triangle, falling high prices are formed during consolidation. The lows, on the other hand, remain at the level of the support line. A sell-signal is given to investors when the area of support to the downside is broken.
The wedge formation
A wedge, like a symmetrical triangle, is formed by two converging trend lines. These trend lines meet at the top. A wedge can have a negative or positive slope. A wedge always points with its point against the prevailing trend. A rising wedge indicates a downtrend and a falling wedge indicates an uptrend. If the trend line of a rising wedge is broken, the investor receives a sell-signal, as the downward trend will continue. A buy signal, on the other hand, arises when the trend line of a falling wedge is broken, as the upward trend continues.
In chart analysis it is mostly only about general tendencies and not about fixed rules. So there can always be exceptions. In addition, sales and open interest should also be included in a comprehensive chart analysis.
Pierre Bonnet / editors Forex-news.com.net
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