Flag formation AND Pennant formation-Trend Continuation Patterns

TAGS:Flag formation,continuation patterns,Pennant Formation,a bearish pennant,bullish pennant,a bear flag formation,Rectangles,Wedges,Triangles,Pennants,Flags,Triangle Formation,Wedge Formation and Rectangle Formation

 Trend Continuation Patterns

Technical analysis provides charts that reinforce the current trends. 

These chart formations are known as continuation patterns. They consist of fairly short consolidation periods. The breakouts occur in the same direction as the original trend.

The most important continuation patterns are:

1. Flags
2. Pennants
3. Triangles
4. Wedges
5. Rectangles

Flag formation

The flag formation provides signals for direction and price objective. This formation represents a brief consolidation period within a solid and steep upward or downward trend. The consolidation itself is bordered by a support line and a resistance line, which are parallel to each other or very mildlyconverging, making it look like a flag (parallelogram) and tends to be sloped in the opposite direction from the slope of the original trend, or is simply flat. The previous sharp trend is resembles a flagpole.

If the original trend is going down, the formation is called a bearish flag. (See Figure 5.22.) As Figure 5.22. shows, the original trend is sharply down. The flagpole is measured between points A and B. The consolidation period occurs between the support line B to E and the resistance line C to D. When the price penetrates the support line at point E, the trend resumes its fall, with the price objective F, measured from E. The price target is of about equal amplitude with the flagpole's length (A to B), measured from the breakout point through the support line (B to E.)

In the numerical example, the height of the flagpole is measured as thedifference between 140.00 and 120.00 equals 2000 pips. Once the support line is broken at 125.00, the price target is 105.00, as 2000 pips from 125.00.

Pennant Formation

The pennants are closely related to the flags. The same principles apply. The sole difference is that the consolidation area better resembles a pennant, as the support and resistance lines converge. If the original trend is bullish, then the chart pattern is a bullish pennant. In Figure 5.23., the pennant pole is A to B The pennant-shaped consolidation is framed by C, B, and D. When the market breaks through the resistance line B to D, the price objective is E. The amplitude of the target price is D to E, and it is equal to the pennant pole A to B. The price target measurement starts from the breakout point.

Figure 5.22. SHAPE 2 Diagram of a bear flag formation

Figure 5.22.SHAPE1 Diagram of a bear flag formation

In the numerical example, the height of the pennant pole is measured as the difference between 1.5500 and 1.4500, or 1000 pips. Once the resistance line is broken at 1.5200, the price target is 1.6200, as 1000 pips from 1.5200.

Figure 5.23.  SHAPE 2Diagram of a bullish pennant.

Figure 5.23. SHAPE 1 Diagram of a bullish pennant.

If the original trend is going down, then the formation is a bearish pennant. In Figure 5.24., the pennant pole is A to B. The pennant-shaped consolidation is framed by C, B and D. When the market breaks through the support line B to D, the objective price is E. The amplitude of the target price is D to E, and it is equal to the pennant pole A to B. The price target measurement starts from the breakout point.

In the numerical example, the height of the flagpole is measured as the difference between 139.00 and 119.00, or 2000 pips. Once the support line is broken at 120.00, the price target is 100.00, as 2000 pips from 120.00.

Figure 5.24.SHAPE 2 Diagram of a bearish pennant

Figure 5.24. SHAPE 1 Diagram of a bearish pennant

Do you like to read about others Trend Continuation Patterns like Triangle Formation click here or Wedge Formation and Rectangle Formation click here

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trend reversal patterns let's see Triple Top And Triple Bottom

 tags:- Trend Reversal Patterns,Triple Top And Triple Bottom,the triple bottom,Rounded Top , Bottom Formations,Diamond Formation

 Do you like to read about Double Top  and Double Bottom patterns click here  and for Head-And-Shoulders pattern click here

Triple Top And Triple Bottom

The triple top is a hybrid of the head-and-shoulders and double-top trend reversal formations. (See Figure 5.19.) Conversely, the triple bottom is a hybrid of the inverse head-and-shoulders and double-bottom formations. (See Figure 5.20.) Consequently, they have the same characteristics, potential problems, signals, and trader's point of view as the double top or double bottom, respectively.

As shown in Figure 5.19., in a typical triple-top formation, the tops have about the same height. A parallel line (the neckline) is drawn against the line connecting the three tops (B, D, and F.) As a resistance line, the neckline is broken at point A. It turns into a strong support for price levels at С and E, but eventually fails at point G. The support line turns into a strong resistance line, which holds the market backlash at point H. The price objective is at level I, which is the average height of the three tops formation, as measured from point D (see the dotted lines).

Figure 5.19. Diagram of a triple-top formation

As a double top, the formation fails at point E. The price moves up steeply toward point F. The resistance line is holding once more and the price drops sharply again toward point G. At this level, the market pressure is able to penetrate the support line. After a possible retest of the neckline, the prices drop further, to eventually reach the price objective.

The opposite is true for the triple bottom

As shown in Figure 5.19., in a triple-bottom formation, the bottoms have about the same amplitude. A parallel line (the neckline) is drawn against the line connecting the three bottoms (B, D, and F.) As a support line, the neckline is broken at point A. It turns into a strong resistance for price levels at С and E, but eventually fails at point G. The resistance line turns into a strong support line, which holds the market backlash at point H. The price objective is at level I, which is the average length of the triple-bottom formation, as measured from point D (see the dotted lines).

Figure 5.20. Diagram of a typical triple-bottom formation.

Rounded Top and Bottom Formations

The rounded top and bottom, also known as saucers consist of a very slow and gradual change in the direction of the market. These patterns reflect the indecision of the market at the end of a trend. The trading activity is slow. It is impossible to know when the formation is indeed completed, and not for a lack of trying. Like any other consolidation pattern, the longer it takes to complete, the higher the likelihood of a sharp price move in the new direction.

Diamond Formation

The diamond formation tends to occur at the top of the trend. The price activity may be outlined by a shape resembling a diamond (see Figure 5.21.). The increase and decrease in trading volume closely mimic the combination of divergent and convergent support and resistance lines. Upon breakout, volume picks up substantially. The price target is the height of the diamond, measured from the breakout point.

The head-and-shoulders, the double top and bottom and the triple top and bottom, due to their significance in trend reversals, are generally known as major reversal patterns.

Figure 5.21. A scheme of a diamond reversal formation

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trend reversal patterns let's see Double Top and Double Bottom patterns

tags:-Trend Reversal Patterns, Double Top,Double Top Formation,Double Bottom

 Do you like to read about Head-And-Shoulders pattern click here and for Triple Top And Triple Bottom patterns click here

Double Top

Another very reliable and common trend reversal chart formation is the double top. As the name clearly and succinctly describes, this pattern consists of two tops (peaks) of approximately equal heights. (See Figure 5.17.). A parallel line is drawn against a resistance line that connects the two tops. We should think of this line as identical to the head-and-shoulders' neckline. As a resistance line, it is broken at point A. It turns into a strong support for price level at C, but eventually fails at point E. The support line turns into a strong resistance line, which holds the market backlash at point F. The price objective is at level G, which is the average height of the double top formation, measured from point E.

Figure 5.17. Diagram of a typical double-top formation

Signals Provided by the Double Top Formation

The double top formation provides information on:

1. The support line, set between points A and E.
2. The resistance line, set between points В and D.
3. The price direction. If the neckline holds the buying pressure at point F, then the formation provides information regarding the price direction: diametrically opposed to the direction of the peaks (bearish).
4. The price target, provided by the confirmation of the formation (by breaking through the neckline under heavy trading volume).

Exactly as in the case of the head-and-shoulders pattern, a vital requirement for the successful completion of the double-top formation is that the breakout through the neckline occurs under heavy market volume. Again, please remember that gauging volume in traditional ways is only possible in the currency futures market. Therefore, the trader must estimate the size of
the cash market volume by extrapolating from

The currency futures' volume and the trading "noise." A breakout on light volume is a strong case for a false breakout, which would trigger a sharp backlash in the currency price. The time frame for this chart formation's evolution is anywhere from several weeks to several months. The intraday chart formations are less reliable. There is a strong correlation between the
length of time to develop the pattern and the significance of the formation.

The target is unlikely to be reached in a very short time frame. There is no direct suggestion regarding the length of target reaching time; but foreign exchange common sense links it to the duration of development.

It is important to measure the target from the point where the neckline was broken. Avoid the trap of measuring the target price from the middle of the formation under the neckline. This may happen as you measure the average height of the formation.

Double Bottom

The double bottom formation is a mirror image of the previous pattern. (See Figure 5.18.). Therefore, one may apply the same characteristics, potential problems, signals, and trader's point of view from the preceding presentation.

Figure 5.18. Diagram of a typical double-bottom formation

The bottoms have about the same amplitude. A parallel line (the neckline) is drawn against the line connecting the two bottoms (B and D.) As a support line, it is broken at point A. It turns into a strong resistance for price level at C, but eventually fails at point E. The resistance line turns into a strong support line, which holds the market backlash at point F. The price objective is at level G, which is the average height of the bottoms, measured from point E. (See the dotted lines).

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Trend Reversal Patterns let's see Head-And-Shoulders pattern

 tags:-Trend Reversal Patterns,Head-And-Shoulders,Inverse Head-And-Shoulders

Chart formations are generally sorted on the basis of their significance to the current trend of the underlying currency. Formations signaling the end of the trend are known as reversal patterns. Conversely, chart formations that confirm that the underlying currency trend is intact are called continuation patterns.

The most significant trend reversal patterns are:

1. Head-and-shoulders and inverse head-and-shoulders.
2. Double tops and double bottoms.
3. Triple tops and triple bottoms.

Head-And-Shoulders

The head-and-shoulders pattern is one of the most reliable and wellknown chart formations. It consists of three consecutive rallies. The first and third rallies—the shoulders—have about the same height, and the middle one—the head—is the highest. All three rallies are based on the same support line (or on the resistance line in the case of the reversed head-and-shoulders formation), known as the neckline.

Prior to point A, the neckline was a resistance line (see Figure 5.15.). Once the resistance line was broken, it turned into a significant support line. The price bounced off it twice, at points B and C. The neckline was eventually broken in point D, under heavy volume, and the trend reversal was confirmed. As the significant support line was broken, a retracement could be expected to retest the neckline (E), now a resistance line again. If the resistance line held, the price was expected to eventually decline to around level F, which was the price target of the head-and-shoulders formation. The target was approximately equal in amplitude to the distance between the top of the head and the neckline. The price target was measured from point D, where the neckline was broken. (See the dotted lines).

Signals Generated by the Head-and-shoulders Pattern

The head-and-shoulders formation provides excellent information:

1. The support line. This is based on points B and C.
2. The resistance line. After giving in at point D, the market may retest the neckline at point E.
3. The price direction. If the neckline holds the buying pressure at point E, then the formation provides information regarding the price direction: diametrically opposed to the direction of the head-and-shoulders (bearish).
4. The price target. This is provided by the confirmation of the formation (by breaking through the neckline under heavy trading volume).

Figure 5.15. Diagram of a typical head-and-shoulders pattern

One of the main requirements of the successful development of this formation is that the breakout through the neckline occurs under heavy market volume. A breakout on light volume is a strong warning that it is a false breakout and will trigger a sharp backlash in the currency price. The time frame for this chart formation's evolution is anywhere from several weeks to several months. The intraday chart formations are not reliable. The longer the formation time is, the more significance should be attached to this pattern. The target is unlikely to be reached in a very short time frame. Whereas there is no immediate suggestion regarding the length of target reaching time, common sense would link it to the duration of development of the chart pattern.

It is reasonable to emphasize the importance of measuring the target from the point where the neckline was broken. There is a tendency among new technicians to measure the target price not only from under the neckline but also from the middle of the formation. This may happen as they measure the height of the head. Most head-and-shoulders formations, of course, look different from that in Figure 5.16. Prices fluctuate enough to forego any possibility of a clean-looking chart line. Also, the neckline is seldom a perfectly horizontal line.

Figure 5.16. Diagram of a typical inverse head-and-shoulders pattern

Inverse Head-And-Shoulders

The inverse head-and-shoulders formation is a mirror image of the previous pattern. Therefore, you can apply the same characteristics, potential problems, signals, and trader's point of view from the preceding presentation. The underlying currency broke out of the downtrend ranged by the xx'-yy' channel. The currency retested the previous resistance line (the rally number 3), now turned into a support line. Among the three consecutive rallies, the shoulders (1 and 3) have approximately the same height, and the head is the lowest. Prior to point A, the neckline was a support line. Once this line was broken, it turned into a significant resistance line. The price bounced off the neckline twice, at points В and C. The neckline was eventually broken at point D, under heavy volume. As the significant resistance line was broken, a retracement could be expected to retest the neckline (E), now a support line again. If it held, the price was expected to eventually rise to around level F, which is the price target of the head-and-shoulders formation.

The price objective is approximately equal in amplitude to the distance between the top of the head and the neckline, and is measured from the breakout point D.

 Do you like to read about Double Top  and Double Bottom patterns click here  and for Triple Top And Triple Bottom click here

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Trends, Support and Resistance in forex

tags: Lines of Support and Resistance,The Trendline,Percentage Retracement,Kinds Of Trends

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Kinds Of Trends

The trend shows a pending direction of the market movement. A trend may be:

1. Upward (See Figure 5.7.)
2. Downward (See Figure 5.8.)
3. Sideways, also known as a "flat market" or "trendless" (See Figure
5.9.)

Because the markets do not move in a straight line in any direction, but rather in zigzags, it is the direction of these peaks and troughs that creates the market trend. In addition to direction, trends are also classified by time frame: major or long-term trends, secondary or medium-term trends, and near-term or short-term trends. Any number of secondary and near-term trends may occur within a major trend. The time frames for each class vary widely. The Dow Theory suggests a one-year length for a major trend. Currently, for a major trend, the market expects a time span of over one year. Secondary trends should last for a matter of months, and short-term trends for a matter of weeks.

Figure 5.7. An example of the up trend

Figure 5.8. An example of the down trend

Figure 5.9. An example of the sideways trend

Percentage Retracement

Foreign currencies, like all the other financial instruments, do not move straight up or down, even in the healthiest of trends. Traders watch several percentage retracements, in search of price objectives.

There are three typical percentage retracements:

1. Charles Dow developed the traditional percentage retracements which are 1/3, 1/2, and 2/3; or 33 percent, 50 percent, and 66 percent. A retracement past 66 percent is considered to be a trend failure.
2. The Fibonacci ratios. These ratios are 0.382, 0.50, and 0.618, or approximately 38 percent, 50 percent, and 62 percent.
3. The Gann percentages attach importance to the one-eighth breakdowns.

 The Trendline

A trendline is the natural development in tracking a trend. It simply consists of a straight line connecting the significant highs (peaks) or the significant lows (troughs.) Following in the tracks of the trend directions, the trendlines may be classified as:

1. Rising trendlines. (See Figure 5.10.)
2. Declining trendlines. (See Figure 5.11.)
3. Sideways trendlines. (See Figure 5.12.)

To draw a trendline only two points are necessary and the third one is the contact point confirmation. The currency maintains its general direction and velocity. A trendline exists until it is broken as a result of a significal move of the price up or down. Hence, even after confirmation, the breakout is still likely to be followed by a period of consolidation It is relatively rare for a
trendline to suddenly reverse its direction. If a consolidation period does indeed occur, the longer it lasts, the steeper the following rally will be. Breakouts from up trendlines tend to test the strength of the former support line, now turned into a resistance line.

A price filter of 3 percents serves usually to test the validity of the breakout.

Figure 5.10. Example of a rising trendline.

Figure 5.12. An example of the sideways trendline

 The trendline and a line drawn along the opposite edge of the trend pattern about to be parallel to the trendline form the trade channel (See Figure 5.13.). Then the both lines are known as the channel lines.

Lines of Support and Resistance

The upper and bottom borders of a trade channel (See Figure 5.14.) forme lines of support and resistance. The peaks represent the price levels at which the selling pressure exceeds the buying pressure are known as resistance levels. The troughs, on the other hand, represent the levels at which the selling pressure succumbs to the buying pressure. They are called support levels. The longer the prices bounce off the support and resistance levels, the more significant the trend becomes. Trading volume is also very important, especially at the critical support and resistance levels. When the currency bounces off these levels under heavy volume, the significance of the trend increases. The importance of support and resistance levels goes beyond their original functions. If these levels are convincingly penetrated, they tend to turn into just the opposite. A firm support level, once it is penetrated on heavy volume, will likely turn into a strong resistance level. Conversely, a strong resistance turns into a firm support after being penetrated.

Figure 5.13. An example of the trade channel

Figure 5.14. Example of the support turned into resistance

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