Complex PatternsPrice Configurations
Price movement often creates typical configurations that are often repeated andto which the market responds many times with a predictable behavior.
Markets usually go from a trend to a consolidation stage. Exiting the price from a consolidation stage creates a strong and decisive movement by creating a new trend. The best techniques tend to recognize a consolidation setup, wait for the price to go out of this phase andenter trades when the trend starts.
There are many patterns,however in this article we will consider the most used ones which over time have been more reliable for us and the world's largest traders.
Flags are considered by most traders the most profitable patterns. They are a continuation pattern as the price that comes out of it continues its main trend.
They are easily identified and are quite common in the market.
This pattern consists of a simple and regular "correction" as opposed to that of the main trend, which is often enclosed in a channel (two parallel trendlines). One of the main conditions in this configuration is that the correction must be followed by a decisive move of the main trend. The trade/investment will be made when the price comes out of the channel and the correction phase, therefore resuming the main trend.
The pennant is very similar to the previously seen flag pattern and it is also a continuation pattern whereby the price coming out resumes its main trend. It is a short-term pattern that is delimited by asymmetrical lines forming a triangle. It is a congestion phase with neutral movement. An essential condition is that it must be preceded by a strong movement of the main trend. The trade/investment will be made when the pattern has been broken with the price moving in the direction of the main trend.
The rectangle pattern is a simple model which means that the price is consolidating before resuming the dominant trend. In order to draw a valid rectangle, at least two maximums and two minimums must be connected.
Even the rectangle, like the two previous ones, is considered a continuation pattern, so in order to exploit the pattern as a valid trading opportunity; one has to wait for the price to break the pattern in the direction of the main trend.
There are mainly three types of triangle patterns:
The symmetrical triangle consists of regular oscillations that tend to shrink. It’s not a pattern of continuation because of its breakout point.The price continues in the breakout direction regardless of the main trend. You can plot it by connecting two converging lines, one that moves on at least two rising/higher minima/lows and another that moves at least two highs declining.
The symmetric triangle is very similar to the pennant but with two differences:
- It requires the highs and lowsto be linked by the trendlines;
- it does not necessarily have to be followed by a strong movement of the main trend.
The ascending triangle is similar to the symmetrical one: Here you have two lines, one being a trend line at an angle of inclination that joins at least two rising minimums/lows and a horizontal that joins two equal (or nearly equal) maximums/highs.
They are also called "bullish triangles" as there is a decisive upward movement indicating that we are in a bullish market. When the pattern is broken, the price begins to rise.
The descending triangles, also referred to as "bearish triangles" are exact opposite of the ascending triangle with the same logic in the opposite direction. To plot a descending triangle we need a descending trendline that connects two maximum/highs and a horizontal line that combines two equal (or nearly equal) minimums/lows.
Cup with a handle
This is not avery well-known pattern typical in markets with high volatility.
We have a rounded wide collection of price in accumulation (the cup), anda very similar but smaller configuration (the handle) with a much lower amplitude and durability.
Trade opening must take place just after the horizontal line breaks.
The strongest and most trusted configurations are those in which the "cup" has a very long "U" shape formed by many candles, and above all rounded, rather than with the pointed "V" bottom without excessive depth. The handle must not be too deep, as it must form in the upper half of the cup.
A common mistake traders make is to assume that a pattern has formed before it is fully established. Patience and mental toughness is a very important quality when trading these patterns. Also ensure you understand the rules for the pattern formations. For a new comer into the trading, you might have to go over or reference this material occasionally.