4. Moving average
and here is the "flag pole" (a strong price move that is almost vertical) and a "flag" (a small price channel), and finally, "Pennant"
p>However, this figure, like the head and shoulders, usually appears in the upper levels of quotes, in the "highs" because it’s actually a top.
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How to trading forex Fortfs page 4
PART 4. GRAPHICAL ANALYSIS
What is graphical analysis?
We introduced you to graphical analysis earlier when had analyzed levels and lines of support and resistance. Graphical analysis is partly technical, but nonetheless a quite independent method for predicting the future movement of prices. When people talk about this type of analysis, they most often mean the forming (or drawing) of different shapes on a chart over the course of their trading activity. And each of these figures, though not always easily distinguishable, can give a reasonably clear indication of what will happen to the price in the future. There are traders who say that graphical analysis does not work. However, they just don't know how to quickly interpret the shape on the chart and don’t always remember what it means, therefore they think it doesn’t work. Three different people can look at the same chart and recognize three completely different shapes and make three different predictions - all because this type of analysis is quite subjective, and therefore, may not be very reliable. It doesn’t make sense to clog your head with things that are not likely to be useful.
It should be noted that it’s very important that you don’t just look for these figures and blindly follow their signals. You also need to pay attention to the precise location the figure appears on the chart. Another point: it is best to examine multiple time-frames in order to determine, for example, if the signal to sell that you saw on the 5-minute time frame isn’t just a small correction (maybe a couple of points), while the main trend (very strong) can be seen quite differently using the hourly view, which may show a completely different figure. Therefore, it’s best to start with a search for a "global" figure on the one-day or 4-hour time frame view, then go shorter and shorter. You will then have a clear understanding of reliability of the signal was that you saw on the M15 chart.
What are the advantages of graphical analysis?
There are actually many advantages and even beginners can see them. For example, some people perceive images better than reading text. When you open up your Terminal and spend a couple of hours of fun searching for these figures, you'll see that they appear quite often. The market is actually built on them and they will help you better understand its structure and the principles that control its movement. Another plus is that by using these shapes, you will soon be able to quickly determine when a new trend is forming, in which direction it will go, and when it will end. This will give you an advantage over those traders that neglect graphical analysis. Let's mention one more advantage: this method can be the foundation of a very profitable trading strategy. It can be combined with, say, the results of a fundamental analysis. Then you can see what kinds of figures are formed on the market and make a decision with 100% confidence.
Important note: in order to create figures which are used in graphical analysis, you'll need to use the trend line on the top panel of the Terminal. You simply install it anywhere on your chart. Now double click on it and three points will appear that you can move any way you want in order to create the shape. One more thing: it’s better to add figures on a line chart, not on a candlestick or bar chart. Then, during your analysis, you can switch back to the format you find most convenient.
What figures are used in graphical analysis?
There are a lot of them and new ones appear all the time, as a result of the “fantasy games” of experienced traders. Be that as it may, all the figures are designed to either confirm an existing trend and secure it (called continuation figures), or reject it and report that movement in the current direction is coming to an end and market is on the verge of a turnaround (these are called pivot figures). The appearance of each of these figures leads to one obvious signal: buy or sell. But there is also another kind of figure that can easily confirm a trend, as well as a reversal. As soon as you see that this figure appeared on a chart, you watch the price to determine whether it goes up or down, with the trend or against. If it goes along the trend, it will continue to move in that direction, and if it changes its direction, then the market’s mood will change. To be honest, trend figures can be aptly called "flags" and "pennants."
Reversal Figures (most of them) include: "Head and shoulders" (direct and inverted), "Twin tops", "Double bottom", "Triple top", "Bottom", "Triple Diamond (Rhombus)", "Ascending and descending Wedge" and the "Divergent triangle."
Figures of "Waiting" include: the "Symmetrical triangle", "Rising" and "Down". In our examples we will use different time frames and you will learn to see these figures in small time-frames, as well as in global views.
"Wedge” Figures. Let's start with the most simple and easy to recognize figures that can be seen in the charts quite often. It’s called the "Wedge".
The "wedge" shape is reminiscent of a canal that aspires to be a triangle. And it actually does sometimes It is important to remember that these figures are more suitable for longer time intervals than for smaller time-frames, but can appear anywhere. The reason for its appearance can be a slowdown in growth or falling prices. In this scenario, movement seems to be continuous, but the force and volume is not enough to prevail in the market and new players enter the game: sellers or bears (rising "Wedge"), or the buyers – the bulls (descending "Wedge").
How do you trade on a "Rising Wedge?"
When the price breaks downwards, against the trend – we sell - and the trend is now finished. Here is how such scenario might look like:
Let's open the EURUSD chart in our Terminal using the H1 view and look for a "rising wedge." If you can’t find one, scroll backwards in time. One such figure starts forming on January 17, 2013 at 12:00. To find this point you can use the handy crosshair tool. You'll find it on the top panel above the chart window. So, this figure finished forming on January 18th at 9:00 - exactly one day later. Outline this "Wedge" with two trend lines - then you will see how the price sharply broke through the lower bound of our figure and plummeted downwards.
First, you need to find a "Rising Wedge." Look for a candlestick whose upper shadow rises only slightly above above or is at practically the same level as the body of the candlestick, while the lower shadow is rising higher and higher – outline this movement with two trend lines and see whether or not they seem to form a "wedge." Now the situation can go one of two ways: either the "wedge" might grow into an "ascending triangle" (see) and the price will break through the upper bound
or it may stay a "Rising Wedge" and the price will break downwards, as in our case. Accordingly, in the first scenario you could place a buy order, and in the second, a sell order. Additionally, while one of the sides of a triangle is always horizontal, this is not always the case for wedges. Even a wedge like this is possible:
How do you trade on a "Falling Wedge?"
When the price breaks upwards, against the trend - we buy - and the trend is finished. Let's find a descending wedge in the Terminal. If you still aren’t able to spot one on your own, look at the EURUSD chart again in H1 view. Point your crosshair at 26.10.2012, 12:00. That was the beginning of a descending wedge that lasted until 30.10.2012, 07:00, when the price broke through the upper bound.
Now you need to assess the situation. If you see that the price has been increasing and the lower shadow of the candlestick falls only slightly or stays steady for some time, while the upper shadow continues to go lower and lower, either this figure will become a "upside-down triangle" (see) and the price will break through the lower bound or your original assessment was correct and the chart is about to break upwards. The first scenario would be a signal to you to sell and the second would be a signal to buy.
The "Triangle" figure. We already mentioned the "triangle." You are already familiar with using two trend lines to outline a possible "wedge" and a triangle differs in that when you draw the two lines, they clearly intersect, forming a triangle. This figure can be reversing or trending, depending on which way the price is about to break.
How to trade on a descending triangle?
When the price breaks upwards, against the trend - we buy - and the trend is finished. When the price breaks downwards, with the trend - we sell - and the trend continues. Look at the shape of the descending triangle:
The lower bound (always horizontal) of the triangle can be traced using at least two points. We suggest you to look up another triangle in the Terminal on H1. Click your crosshair at 9.10.2012, 14:00. This is when the downward movement begins, which eventually hits the horizontal support below, can’t cope with it and, after a moment of thought, breaks through the top of the triangle.
At this point, you would open an order to buy. Actually, triangles can also be seen by the naked eye. Take a look at the global time-frame, W1. You will be able to see a big triangle that starts at 11.10.1998 and ends on 05.08.2001 with an upwards break.
In this example, the price in the triangle may just go down, as if rolling down a hill to the bottom bound, bounce off and make an upwards break. By the way, take a look at the global triangle: it can also be outlined a little differently so that it ends on 03.12.2000.
Take a look: inside and nearby you can see three additional, smaller triangles in a row. From 18.06.2000 to 26.11.2000, from 31.12.2000 to 01.07.2001 and from 16.09.2001 to 03.03.2002.
We hope it’s clear that, if drawn correctly, this type of triangle begins with upward movement and ends with downward movement.
Now let’s take a look at another triangle, which ended with an upwards break instead of down, continuing a trend. In the hourly chart for EURUSD, click your crosshair tool on 01.02.2013, 17:00. This triangle, which began as a powerful candlestick moving upwards, slowly began a downward fall, breaking through the bottom bound and continuing downwards with the same initial determination.
How do you trade on an "ascending triangle?"
When the price breaks upwards, with the trend – we buy – and the trend continues. When the price breaks downwards, against the trend – we sell – and the trend is over. In this case, it's the opposite: the bottom line, supporting the price, moves toward the top line, horizontally, so that, in the end, they will connect and form the ascending triangle. And it looks like this:
If you switch to time-frame D1 you'll see that another triangle started at 26.07.2011 at 00:00 and concluded with a downwards break out at 31.08.2011 at 00: 00.
In cases like this, the price has to break through the bounds of the triangle to signal you to sell. Here’s another possibility: you get a buy signal and the continuation of the trend if you discover a triangle like the one in the M30 time-frame between 29.01.2013, 16:30 and 30.01.2013 at 09:00.
As soon as you see that an "ascending triangle" is forming, try to determine where it will break out – through the upper or lower bound. In the case of the former, you buy, and in latter, you sell.
How do you trade on a "symmetrical triangle?”
When the price breaks downwards – we sell. When the price breaks upwards – we buy. In contrast to the upwards and downwards triangles, in a symmetrical triangle, both of the lines are angled – the upper and the lower. Here's an example: M30 view, click your crosshair on 01.02.2013, 16: 30. It continues until 04.02.2013, 10: 00, when the lower limit was broken and the trend reversed.
This is a pretty clear signal to sell.
Another example is the M15 view of crosshair 06.02.2013, from 09: 30 to 14:15, when, after the appearance of a "symmetrical triangle" the price continued to decline, breaking through the bottom bound.
How do you trade on an "expanding triangle?"
When the price breaks downwards – we sell. When the price breaks upwards – we buy. In both cases, the trend is over. An “Expanding Triangle" is a mirror image of the upwards and downwards triangles and it always causes the market to reverse itself. Look at the graph in H1 view of crosshair 04.12.2012, 19:00, when the triangle begins that culminates in the downward breakout of trading and a reversal at 06.12.2012 at 15:00.
If such a triangle forms on top that means that the trend will change to descending. If it forms on the bottom, then it will change to ascending.
The "Flag" and "Pennant" figures. Generally speaking, these two figures are very similar, and even produce the same signals. Basically, they represent a small pause in the active movement of prices - a flat, after which the trend continues. It’s as if the traders need to take a moment to rest before rushing into battle again. More often closes, during these times one half of traders close their positions and the other half opens new positions from this price level. Let’s take a look at these two figures: here is the "flag"
It also has a "shaft" and a small symmetrical triangle.
How do you trade using "flags" and "Pennants?"
If you see an upwards panel – that’s a signal to sell, if the panel is downwards – that’s a signal to Buy. In both cases, the trend will continue for at least the width of the figure. As a rule, the best way to find both "flags" and "pennants" is on the intraday charts (up to H4). Usually, after these figures form, the price will move the same distance as it did before the figure formed, or, at a minimum the distance will be equal to its width. Let's open the H1 view and look at crosshair 10.01.2013, 18:00. This is when the panel of our flag begins to form. As you can see, the shaft is quite long, but the flag itself is indicating an absolutely flat, lateral movement, which shows no intention of going up or down – that’s your signal to place a buy order as soon as the price breaks through the upper bound. Then the upward trend continued for two more flag lengths.
A little later at 11.01.2013, 18.00, we can see a pennant that is pointing downwards, that gives us yet another signal to buy.
But be careful: if the price breaks through the bottom bound instead of the upper bound, this can signal a reversal, albeit a small one. Like in this example – 07.01.2013, 23:00.
At the beginning you might have assumed that since a flag has formed all you have to do is wait for the upward movement, but instead, a pennant formed, followed by a breakout through the bottom bound. Overall, you need to remember this: you must learn to see all these figures and outline them correctly. Then all you have to do is wait and see through which bound the price breaks out. Wait a minute to confirm your decision and then place an order in that direction.
Sometimes you might see a "flag" that is moving downwards, then all of a sudden a pennant appears and there is a slight roll-back of prices after which, it continues on its course. For example, look at the multiple "flags" and "pennants" lined up in a row at 02.01.2012, 16:00.
As you can see, all of them are pointing slightly upward.
The “head and shoulders” figure. This is one of the most popular figures among traders, perhaps because it really resembles a human head and shoulders, and also because it is easier to figure everything else out. Actually, when this figure appears, there can be no doubt: the trend is going to reverse. It happens like this: first, the chart shows a small top, the "shoulder" then it falls a little and starts going up again, but much higher this time, forming the "head" and then goes down and follows a path almost equal to the first "shoulder." Accordingly, an inverted head and shoulders indicate downward movement, followed by a small "dimple" which is inverted shoulder. Then, after going slightly up again, it turns downward again (only stronger this time). And then you nearly have it: an upside-down man. We just have to wait for the second shoulder to form.
Remember this main rule: the "head" must be higher than the shoulders. Interestingly, sometimes you may see not one shoulder form on the left side, but two. The same will be true for the right side – it also will have two shoulders. Of course, the reversal rule is only true when the figure has fully formed. You can’t get far with only one shoulder!
How do you trade using the “head and shoulders” figure?
If the price falls below the right shoulder – sell. If it rises above the right shoulder – buy. The trend will reverse itself. Before a "head and shoulders" figure can appear on a chart, the market must first experience an upward trend. Prices, driven by the passionate bulls, go up, then when their momentum begins to drop, the chart begins to crawl downward, after which some traders, no longer believing in future growth, start closing their positions. Coincidentally, there are also those who use this temporary reduction as an opportunity to once again start buying and earn some money. This battle continues until the market is satisfied: it can’t go any further up, so it’s time for a stabilization of prices – time to sell. In the meantime, while the bulls and bears battle it out, the chart has time to draw this beautiful figure.
In this situation we can even benefit from a strong level of support known as the "Line of the Neck,” which can be either horizontal or sloping. As soon as you see the price break that line and continue along its path, would be a good time to place an order to sell. By the way, this figure should be at a high price level. In won’t work at mid-range prices.
Now let's find this figure on our EURUSD chart. If you open the hourly time-frame, beginning with the crosshair of 30.10.2012, 10:00, you will see that a head and two shoulders have formed, though not exactly very smoothly. We will draw our neck line at 1.29258.
As soon as the price breaks through that line, we’ll place an order to sell.
Here’s another possibility: while the trend was moving downward, it drew the head and shoulders and then reversed itself and went upwards. You can see an example of this in H1 view starting at 04.01.2013, 14:00. First an upwards head and shoulders begins to be drawn, then when the price reaches the neck line, at 1.30230, it bounces off and starts to go back up.
You can also see this quite well in H4 view.
How do you trade on an "Inverted head and shoulders?”
When the price rises above the right shoulder - buy. The trend will reverse itself. Although this figure is not very common, let's find one in the H4 time-frame. There is a gap at crosshair 20.07.2012, after which an inverted head is drawn. In this case, the neck line will be set at the bound of the gap at a level of 1.21478. Notice how rapidly the price penetrated it continued upwards.
The "double top" figure. Of course, everyone knows what a top is in a domestic sense. There are, for example, mountain tops, and this shape is very similar to what you will find in your Terminal. The top is the highest point to which the chart climbs before meeting resistance and turning back. But sometimes, the price tries to break through twice (traders call this testing the line of resistance or testing the maximum), but it can’t break through and returns to falling. And that’s the "double top"
which reverses the trend.
How do you trade on the "double top" figure?
If the price breaks downwards through the support – we sell. If the prices breaks. As soon as you see a double top forming, draw a support line along the two minimum points and wait for the price to cross it. You may ask: why must we wait. We already know that after the formation of the second top the price will fall. In fact, it’s not that obvious at all. You should always allow the possibility of mistake. Now the chart is drawing a something that isn’t a graphical analysis figure at all: the second top is being followed by a third, which your deposit may not support. That’s why we don’t recommend taking that kind of risk. It’s better to wait for the break out and calmly place your order to sell.
We suggest you find a "double top" in the Terminal. In the H4 time-frame at crosshair 24.02.2012, 8:00, you will find this figure begin to form and reach a maximum of 1.34289, but it was not able to break through and rolled back down, breaking through the level of support at 1.33651.
The figure inside the trend is also similar to a "double top." It began at 18.05.2012, 20:00, became full formed, but could not go any higher, so it broke through the lower support at 1.27111.
The "double bottom" figure. It is logical to assume that the inverted double top becomes a double bottom - like craters in the ocean. Its principle of operation is the same: it reverses a trend that it is rapidly declining.
How do you trade on a "double bottom?"
When the price breaks through the resistance at the top – we sell and the trend ends. First of all, we need to place the level of support for the "double bottom." Do it at the lowest points of the shape and draw the horizontal resistance through the point where the "double bottom" began and through which it must break. Imagine that you are going to use this line to measure the level of water in your pool with a double bottom. Once again, let’s search for one of this figures by opening time-frame D1, crosshair 06.05.2011, 00:00. Here the figure begins to form and pierces through the resistance at 1.44190 on 02.06.2011, also at 00:00. Accordingly, our support passes through the 1.40426 mark.
The "triple top "figure. Note that the "triple top" and "triple bottom" figures are much stronger and much more clearly indicate that the trend will reverse than their double counterparts. However, these figures are much longer. This suggests that the market has definitely decided to break the existing trend. After all, the price has to approach the line of resistance, bounce off of it, while never breaking through, three times before turning sharply downwards. This figure usually appears after an upwards trend, i.e., at the top, and it is quite unlikely that you will find one in the middle of the chart.
How do you trade on a "triple top" figure?
If the price breaks downwards through the support – sell. The trend has ended. You will find this figure infrequently. You can see it primarily on the daily time-frame and above. For example, you can open the weekly time-frame and on 24.02.2008, at 00:00 you will see a triple top begin to form that will end, breaking through the powerful support level of a candlestick at 1.53111 on 03.08.2008, signaling to traders to open long-term selling deals (by the way, the fall didn’t occur until 16.11.2008). The resistance in this case would be at 1.60332.
Also pay attention to the flag with the rising "panel" that appears on September 7th and confirms that the price will continue its decline.
The "triple bottom" figure. This is a strong, confident figure that, after trying to break through the support line three times, pushes the price higher, thus changing the direction of the trend.
How do you trade on a "triple bottom?"
If the price breaks up through the resistance – sell. The trend has ended. Don’t rush to place orders based on this figure until it has fully emerged. Otherwise, you risk to incorrectly predict which way the market will go. So, let's find a "triple bottom" in our EURUSD chart. You can clearly see one in the same weekly time frame from crosshair 28.09.2008 through 23.08.2009. The "triple bottom" eventually breaks through the resistance at 1.43445.
The "diamond" figure. Here's how it looks:
As you can see, the diamond looks like two triangles that are looking at each other. This figure is considered the rarest and you can only see it in time-frames of H1 and above. The formation of the diamond can occur at the top of a chart, where there will be a reversal of the current trend, or at the base, where it signals an upward trend.
How do you trade on a "diamond" figure?
If the figure appears at the top of a chart and the price has broken downwards – we sell. If you find this figure at the bottom and the price breaks upwards – then we buy. In both cases, the trend will reverse itself. "Diamonds" occur infrequently and they are difficult to identify immediately. This figure is considered the rarest and you can only see it in time-frames of H1 and above.
As you can see, after the formation of this figure, the market trend reversed itself and prices fell downwards. If you decide to invest your money long-term, for example, you can use the D1 view to find a diamond and open a long-term sell order.
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