Do You Know Which Trading Style Is Right For You?

Trading can be much more enjoyable when you're trading within your trading style. This blog will explain trading styles and why they are important. Trading styles take into consideration your personality, your job, your family situation, your schedule, and the environment in which you trade.

We all know about the example of trying to fit a square peg into a round hole. It just doesn't fit. Ever try to fit into a shirt size medium when you need an XL? The same is true of investing. There are five primary trading styles associated with trading stocks. There are similar considerations for other types of trading (e.g. Forex), but this blog will focus on stock trading styles.

The five trading styles are:

1. Long term investor
2. Intermediate term investor
3. Position trader
4. Swing trader
5. Day trader

The Long Term Investor:

• They make their investment decisions based on the fundamentals of the company management and the company financial statements.
• They also pay a lot of attention to the economy and trends in the market.
• They may look at stock price and stock charts, but more likely once-a-week if then.
• They generally hold their stocks for a long period of time on the order of one year or more.
• This style works very well for the person with a very busy schedule with very little time to be studying the market.

The Intermediate Term Investor

• They also make their investment decisions based on the fundamentals of the company management and the company financial statements.
• They pay a lot of attention to the economy and trends in the market.
• They may look at stock price and stock charts, but more likely once-a-week if then.
• They generally hold their stocks for around six months.
• This style works very well for the person with a very busy schedule with very little time to be studying the market.

Notice that we used the term "investor" when talking about the long term investor and the intermediate term investor.

The Position Trader

• They consider both the fundamentals and technical aspects of a stock.
• They look for market conditions and stock price action in a very narrow range that we call consolidation.
• They look for entry signals indicating that the stock price is about to break out of the consolidation pattern.
• They generally hold their stocks for around 3 to 12 weeks dependent on the duration of the consolidation pattern.
• This is considered to be an excellent trading style for beginners because the consolidation pattern and breakout are easy to find and trading decisions can be made determined before the breakout happens.
• This style also works very well for the person with a busy schedule with little time to be studying the market.

The Swing Trader

• Swing Traders pay close attention to the technical price action of a stock. They look for stocks that are trending upward or downward.
• They often use stock scanning or screening software to find stocks that meet their trading criteria.
• They spend time daily looking at their stock price performance and opportunities for new trades.
• They generally hold their stock for 3 to 10 trading days.
• They generally check the news early in the morning and then enter their trade orders before the market opens.

The Day Trader

• They hold their stock for less than one day with all stocks purchased during the day, sold by the end of that trading day.
• They have the tools to monitor trading activity in real time.
• They generally stay at the computer throughout the day until all their open positions have been closed.
• Day trading is risky and is not recommended for beginners.

Notice that we used the term "trader" when talking about shorter term position trader, swing trader and day trader styles.

Summary

Find the trading style that works best for you and you'll be experience less stress and better results in your trading.

For a more detailed report on trading styles, click on winning stock trading fundamentals or  stock trading styles.

Trend Trading Report Part Ten - Developing Your Own Trend Trading System

My objective in this last part of the Trend Trading Report is to provide some ideas on how to form your own trend trading system. 100 trading experts could write this section and they'd all provide different recommendations on how to develop your own system. So, the material here is an example from which you can start to think how you would like your system to look.

However, a trend trading system also requires some amount of trade management thinking to maximize your chances of becoming profitable. So, I'll add some comments in on trade money management as well. And I'll start with that.

As a Trader, you need to think about the amount of money you're going to put into your trading account, your investment portfolio. Make sure that you're being realistic in the amount of money you're going to put into your portfolio. Don't assume that you're going to double your money. If you're not yet an expert trader, keep in mind that you could lose that money. Don't invest more than you can afford to lose.

If you're a stock trader, once you're determined the amount of money you're going to invest in your online trading account (your portfolio) follow these guidelines:

1. Limit the percentage of the portfolio you're willing to  invest in each stock.
2. Limit the amount of risk you will accept as a percentage of your portfolio.
3. Only buy stocks that have considerably more reward than risk.
4. Protect your gains as the stock price moves higher.
5. Never increase your risk in any one trade if the stock price begins to fall.

To help you in evaluating each trade, before the trade is entered, use the onlineInvestment calculator. Just enter your guidelines in the chart and it will tell you whether you need to reduce the number of shares to achieve your guidelines. 

   

If you're a Forex trader, follow these guidelines:

1. Determine the amount of money you're going to transfer into your online trading account.
2. Determine the percentage of your portfolio that you're willing to risk in each trade. If you're a beginner you might want to start with a "micro account" and limit your risk to 1% of the total account. For example, if you have $10,000 in your account, a 1% risk indicates you're willing to risk $100 with each trade.
3. Before entering your trade, determine the number of pips between the entry price and your stop loss.
4. Calculate the lot size for this trade using the following formula

Lot size = ((Maximum risk $)/(stop loss pips))/10

Spreadsheet formula: lot size = ((INT(maxrisk$*10/#pips))/100

System

We've been studying trends. How can we determine the trend?

You will recall: If we mark the highs and lows in the price action:

• An upward trend will have successively higher highs and higher lows,
• A downward trend will have successively lower highs and lower lows

A more convenient option might be to add the following moving averages to your chart using different colors so they are clearly identified.:

• 5 period simple moving average
• 15 period simple moving average
• 50 period simple moving average

The 50 period moving average will be a representation of the longer term trend. We want to trade with the trend.

Consider the following four options you might consider in your trend trading system:

Option 1

• Assume the 50 period moving average is sloping upward indicating an upward trend
• When the 5 period moving average moves above the 15 period moving average and closes above the 15 period moving average, place a buy order. Make sure the 5 period moving average remains above the 15 period moving average, as indicated by the closing of that candle, before you place your buy order. Some Traders prefer to wait until two candles close before placing the buy order.
• For information on buying your shares, follow the guidelines found at http://www.winning-stock-trading-fundamentals.com/buying-stocks.html. The simplest way to place a buy order is to enter a Buy Market Order. In the Forex market it is called a Market Execution Buy by Market order.
• For information on selling your shares, follow the guidelines found at http://www.winning-stock-trading-fundamentals.com/sell-order.html. The simplest way to place a sell order is to enter a Sell Market Order. In the Forex market it is called a Market Execution Sell by Market order.
• Listed under the above information on selling your shares, you'll find information on stop loss. I recommend setting your stop loss 3% below the nearest support level.

Option 2

• Assume the 50 period moving average is sloping upward indicating an upward trend
• When the price action moves from below the 50 period moving average and closes above the 50 period moving average, place a buy order. This is an indication of an upward trend in the price action. Make sure you wait until the candle closes above the 50 period moving average before placing your buy order. Some Traders prefer to wait until two candles close before placing the buy order.
• For information on buying your shares of stock, follow the guidelines found at http://www.winning-stock-trading-fundamentals.com/buying-stocks.html. The simplest way to place a buy order is to enter a Buy Market Order. In the Forex market it is called a Market Execution Buy by Market order.
• For information on selling your shares of stock, follow the guidelines found at http://www.winning-stock-trading-fundamentals.com/sell-order.html. The simplest way to place a sell order is to enter a Sell Market Order. In the Forex market it is called a Market Execution Sell by Market order.
• Listed under the above information on selling your shares, you'll find information on stop loss. I recommend setting your stop loss 3% below the nearest support level. For Forex Traders, I recommend setting your stop loss 2 pips below the nearest support level, or the nearest low price (also known as a "swing low").

Option 3

Both of the above options represent "trading with the trend". Following is an option that confirms the existence of a trend, with temporary dips in price (but still trending) before continuation of the trend.

Consider the following chart image:

• Note the position of the moving average lines during the trending periods on the above chart. The 5MA is above the 10MA which is above the 20MA which is also above the 50MA. That is an example of an upward trend.
• An upward trend will have times when the upward trend stops. This is the case during the two trending periods when the moving averages are no longer aligned.
• The upward trend will also exhibit dips where the price drops as seen by the red candles exhibiting DIPS in the price. These are excellent opportunities to place a buy order before the trend continues.

Option 4

The challenge in option 3 is to know when to place a buy order when the price retraces when trending. A retracement is the dip shown in 3 places in the chart image above. The depth of the retracement can be deep enough to cause a misalignment of the moving averages indicating the trend has come to an end. But then, in many cases, the price corrects and the trend continues. One of the ways to overcome this challenge is provided in this Option 4.

1. Use a higher timeframe. For example:

• If you're trading stocks and prefer to make buying decisions on a 15 minute chart, start with a 1 hour chart
• If you're a Forex trader and prefer to make buying decisions on a 5 minute chart, start with a 15 minute chart.
• The key issue is that the higher timeframe should be at least 3 to 4 times longer.

2, Look for a trending condition such as seen in the chart image above.

3. When the price action dips (retraces) switch to the shorter timeframe chart. Look for the moving averages on the shorter timeframe chart to align indicating that trending has been reinstated on the shorter timeframe. 

4. The key point here is that the trending condition will show up on the shorter timeframe chart before it shows up on the longer timeframe chart. 

5. When the trending condition is present on the shorter timeframe chart, place the buy order.

The buy orders, sell orders, and stop loss are the same for options 3 and 4 as they were discussed for options 1 and 2.

Summary

All of the examples above are options you could consider in developing your trend trading system. As you learn more about trading, you may want to add more indicators to use in your system. However, sometimes the simple systems as shown above are easy to use and very effective.

I wish you all the best in your future trades.

End of Part Ten

This is the final report in this 10 Part Trend Trading Report. I hope you've enjoyed it. Your comments are welcome.

Trend Trading Report Part Nine - Trend Reversal Patterns

In this Part of the Trend Trading Report we'll cover two common trend reversal patterns. They are:

1. Wedge
2. Head and Shoulders

I introduced you to these patterns in Part Six of this Report. I'll go into more detail here.

There are three phases to note when it comes to trend following patterns. They are:

1.    The candle sticks that form the trend leading to the pattern. They may be trending upward or downward.

2.    The pattern formed by the candle sticks

3.    The candle sticks that form the trend upon exiting the pattern.

Wedge

Below is am image with a rising wedge and a falling wedge.

In the case of a rising wedge, the pattern begins with an upward trend. The pattern is wide at the left and narrows as the price moves higher with the trading range narrowing. In contrast, the falling wedge begins with a downward trend. This pattern is also wide at the left and narrows as the price action moves lower with  the trading range narrowing. The remainder of this discussion will focus on the rising wedge. It should be relatively easy for the reader to understand what is happening with the falling wedge. 

The wedge can be one of the most difficult chart patterns to accurately recognize and trade. The reason is that the price point continues to move in the original trend direction. In the case of a rising wedge the trend continues to move upward with higher highs and higher lows. In the case of a falling wedge, the trend continues downward with a series of lower highs and lower lows.

How do you trade a wedge? Looking at the rising wedge image above you'll see an entry point, a stop loss point, and a target profit level below the rising wedge. In the case of the falling wedge, the target profit level is above the wedge. In both cases the tendency is for a reversal of the original trend.

Conditions required for a wedge pattern include the following:

1.    There must be a trend in existence leading up to the wedge.

2.    The upper resistance line must touch the price action at least twice, preferably three times

3.    The lower support line must touch the price action at least twice, preferably three times.

4.    Volume should be expected to decline as prices rise and the wedge takes shape. Once the price action breaks from within the wedge pattern, the volume should be expected to increase.

Head and Shoulders

The head and shoulders pattern is one of the easier patterns to recognize once the Trader is aware of it and is looking for it. Below is an image of the head and shoulders pattern and the inverse head and shoulders pattern.

The head and shoulders pattern appears at a top in the price action. Looking at the image above, you'll see the left shoulder where the upward trend formed a peak followed by a decline in the price. When the price rises again, it forms a higher peak referred to as the head. After a price decline from the head, the price once again moves upward forming a new peak that is lower than the peak formed by the head. The formation of the head and shoulders pattern is never as perfect as the image shown above. With a little practice the Trader will be able to filter out the noise in the price action around the head and shoulders pattern.

The inverse head and shoulders pattern (see image above on the right) is formed at the bottom in the price action. The left shoulder appears in a V shape when the price moves downward and then moving higher. The upside down head is formed when the price declines to a lower level. After the price rises from the head, the price once again moves downward forming a new peak that is higher than the peak formed by the head. Once again the inverse head and shoulders pattern is never as perfect as the image shown above.

Looking at the images above, you'll see a line designated as the neckline. In the case of the head and shoulders pattern (see image above on the left), the neckline is drawn with a straight line that connects the low after the left shoulder with the low created after the head. In the case of the inverse head and shoulders pattern, the neckline is a straight line that connects the high after the left shoulder with the high created after the head.

The pattern is never confirmed until the pattern is complete.

The correct way to trade this pattern is to wait for a breakout to occur. With the standard head and shoulders pattern, the breakout will be to the downside.

Stop loss settings for the standard head and shoulder pattern should be placed just above the right shoulder or just above the head.

The profit target is calculated by subtracting the low point of either shoulder from the peak price at the head. Subtract this number from the breakout entry price to get the profit target.

Summary

Both of the chart patterns shown above are trend reversal patterns. That means that the majority of the time, the trend approaching the pattern is in the opposite direction from the trend exiting the pattern.

End of Part Nine

Part Ten of this report will be released in about one week. The topic is “Developing Your Own Trend Trading System". This will be the last report of this ten-part series. I hope you've found it to be beneficial.

Trend Trading Report Part VIII - Trend Following Patterns

In this Part of the Trend Trading Report we'll cover five trend following patterns. A trend following patterns is continuation patterns that represents a form of consolidation that results in a continuation of the trend leading up to the continuation pattern approximately 70% of the time. The five trend following patterns covered in this report are:

1. Symmetrical Triangle
2. Ascending/Descending Triangle
3. Pennant
4. Flag Pattern
5.  Rectangle

I introduced you to these patterns in Part Six of this Report. I'll go into more detail here.

There are three phases to note when it comes to trend following patterns. They are:

1. The candle sticks that form the trend leading to the pattern. They may be trending upward or downward.
2. The pattern formed by the candle sticks
3. The candle sticks that form the trend upon exiting the pattern. 

Symmetrical Triangle

The symmetrical triangle is formed by a descending resistance  trendline and an ascending support trendline. The angle of the resistance line above the horizontal line drawn through the middle of the pattern, is approximately equal to the angle of the support line below the horizontal line. These two lines come together at the point of the triangle. The price action will move up to the resistance line and bounce off the resistance line. The price action will then proceed to move down toward the support line and bounce off the support line. Eventually the price action will breakout to the upside or the downside.

If preceded by a descending trend, the Trader should expect that the price action will break through the support line. If preceded by an ascending trend, the Trader should expect the price action to break upward through the resistance line.

Investing is a game of statistics. Traders should never expect things to go in the predicted direction. Price action can go against the odds forming a new trend direction from the previous trend direction.

Following is an image of a bear symmetrical triangle meaning that the price action was trending down leading up to this pattern and the breakout took place in the same descending direction.

Ascending Triangle

Following is an image of an ascending triangle. You will notice that the lower line, the support line, exhibits higher lows as you would expect with a bullish trend. The upper line is essentially a horizontal line that represents resistance. Within the pattern, the price action will bounce between the lower support line and upper resistance line.

The price action leading to the ascending triangle will generally be an upward trend. The price action exiting (breakout out) from the pattern will generally be an upward trend unless the pattern fails.

The price of the security moves between these trendlines until it eventually breaks out to the upside. This pattern will typically be preceded by an upward trend, which makes it a continuation pattern; however, it can be found during a downtrend.

The price action in the midst of the ascending triangle represents the battle between buyers and sellers with the buyers gaining strength, which is why we see higher lows. Because of the strength of the buyers, the price action eventually breaks to the upside.

The height of the triangle at the entry to the pattern (see the red vertical line on the left) is an estimate of the price move to the upside when price breaks out of the ascending triangle (see the red vertical line on the right).

Descending Triangle

Following is an image of an descending triangle. You will notice that the lower line, the support line, is flat. The upper line, the resistance trendline is sloped downward. This pattern is just the opposite from the ascending triangle. With the descending triangle, the price trend is generally downward where this pattern is formed and the breakout will in most cases be to the downside.. Within the pattern, the price action will bounce between the lower support line and upper resistance line.

The height of the triangle at the entry to the pattern (see the red vertical line on the left) is an estimate of the price move to the downside when price breaks out of the descending triangle (see the red vertical line on the right).

Pennant and Flag Patterns

The next two patterns, the flag and pennant patterns, are also continuation patterns. They're very similar to each other, particularly in their shape. The flag pattern is rectangular and the pennant is in the shape of a triangle.

Both of these patterns generally appear after a spike in the price action, meaning a sizeable movement to the upside or downside. After this spike in price action, there is a sideways price action that forms the pennant or the flag. The pole of the flag or the pennant in the spike in price action leading up to the flag or pennant.

As with the triangular patterns, the price will breakout in the same direction as the spike in price action leading to the flag or pennant pattern.

Generally the size of the spike in price action leading up to the flag or pennant is approximately equal to the size of the price action upon exiting the pattern.

Pennant

Following is an image of a bull pennant that exhibits a strong move upward and it breaks out to the upside.

The pennant looks like a symmetrical triangle formed by an ascending support trendline and a descending resistance trendline. The pennant is generally symmetrical around the horizontal line drawn from the point of the triangle.

Flag

Following is an image of a bull flag that exhibits a strong move upward and it breaks out to the upside. You'll notice how the flag is in the shape of a rectangle formed by two parallel trendline acting like support and resistance until the breakout occurs. Usually the flag will have a slope to it in the opposite direction from the initial spike movement leading to the pattern, as shown in the image below.

Also notice that the size of the movement leading to the flag pattern (see the red dash line on the left) is approximately equal to the size of the breakout move (see the red dash line on the right).

Following is an image of a bear flag.

In both the case of the pennant and the flag, the price movement leading to the flag or pennant should be a strong sizeable move.

Rectangle

A rectangle is formed when the market consolidates in a narrow trading range moving sideways. The rectangle often is formed at the end of a trend as the market takes a breather before moving into another trend. Following is an image of a rectangle pattern.

In some cases, when the breakout takes place, you'll find the price moving back below resistance. Many traders look for price to close above or below the rectangle on two consecutive days before they consider it a breakout.

Summary

All of the chart patterns shown above are trend following patterns. That means that the majority of the time, the trend approaching the pattern is in the same direction as the trend exiting the pattern. Traders that recognize trend-following patterns generally can take advantage of the trend following behavior of the pattern.

End of Part Eight

Part Nine of this report will be released in about one week. The topic is "Trend Reversal Patterns".

Trend Trading Report Part VII - Support, Resistance, & Trend Lines

In this Part of the Trend Trading Report we'll cover support, resistance, and trend lines. Even if you have some experience trading stocks or forex, you're likely to find some valuable information in this part of the Report. Support, resistance, and trend lines are an integral part of becoming a successful Trend Trader. Don't take these subject lightly.

Support
A support line is defined as a price level that acts like a barrier preventing the price of a stock from moving lower. Support is evident in stock charts where the price is trending upward, downward, and sideways. This is important as it points out the fact that the support line can be sloping up, sloping down, or horizontal. In all cases, falling prices have a tendency to bounce off of support and move higher.

Following is a chart where price is moving higher. Note how the straight support line touches the downward dips in price movement at least five places. In each case the price bounced off of support and moved higher. Finding good entry points in your trading will improve when you can properly identify support lines.

Resistance
A resistance line is defined as a price level that acts like a ceiling preventing the price of a stock from moving higher. Resistance is evident in stock charts where the price is trending upward, downward, or sideways. This is important as it points out the fact that the resistance line can be sloping up, sloping down, or horizontal. In all cases, rising prices have a tendency to bounce off of resistance and move lower.

Following is a chart where price is moving lower. Note how the straight support line touches the upward price movements at least five places. In each case the price bounced off of resistance and moved lower. Finding good entry points in your trading will improve when you can properly identify resistance lines. Don't get too hung up by the fact that price penetrated above the resistance line as long as the price quickly retreated below resistance.

Trend Lines

Upward Sloping Trendline

• Upward sloping trendlines are a signal that the demand for the stock is greater than the supply causing a rise in the price of the stock.
• These lines are drawn below the price and connect a series of closing prices (lows).
• On the graph below, note the successively higher bottoms in an upward sloping trendline. If this is truly a trend, the trader will be able to draw a line through a minimum of 3 lows

Downward Sloping Trendlines

• Downward sloping trendlines are a signal that investors are more inclined to sell the stock than to buy it and there is likely more supply of stock to sell than investors wanting to buy it at the current price.
• These lines are drawn above the price and connect a series of closing prices (highs).
• On the graph below, note the successively lower tops in a downward sloping trendline. How many points can you see that touch this trendline? (I count more than 6).

Benefits of a Trendline

• This line makes it easier to see a trend.
• This line helps in the prediction of future price behavior for a stock.
• It helps the trader to see a level beyond which the stock price is not likely to move, a line from which the stock price is likely to bounce.

Summary

For more details, click on support, resistance, or trendlines.

As an optional homework assignment, look at several stock or forex price charts and see if you can identify some upward sloping trendline where you draw the support line under the prices, but where prices touch the trendline at least 3 times. Also look for downward sloping trendlines where you draw the resistance line above the prices, but where prices touch the trendline at least 3 times.

End of Part Seven

Part VIII of this report will be released in about one week. The topic is "Trend Following Patterns".

Trend Trading Report Part VI - Introduction To Chart Patterns

In this Part of the Trend Trading Report we'll cover chart patterns, what do they look like, what are they meant to communicate, and recommendations for their use.

Review: Wikipedia defines a chart pattern as " a pattern that is formed within a chart when prices are graphed. In currency pair trading. C hart pattern studies play a large role during technical analysis. When data is plotted there is usually a pattern which naturally occurs and repeats over a period."

The following chart patterns include multiple candles in different colors and shapes. Note: a black candle/black body is bearish and bearish candlesticks on some currency pair charts may use other colors (e.g. red). A white candle/white body is bullish and bullish candlesticks on some currency pair charts may use other colors (e.g. green).

The descriptions with each pattern are provided by Wikipedia with some additional comments by the author.

Head and Shoulders Pattern

Click on the heading sub-title immediately above for an image of the head and shoulders pattern.

The left shoulder is formed at the end of an extensive move during which volume is noticeably high. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down to a certain extent which generally occurs on low volume. The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume. The right shoulder is formed when prices move up again but remain below the central peak called the Head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder.

Inverted Head and Shoulders Pattern

Click on the heading sub-title immediately above for an image of the inverted head and shoulders pattern.

This pattern is the inverse of a Head and Shoulders. The formation is upside down in which volume pattern is different from a Head and Shoulder Top. Prices move up from first low with increase volume up to a level to complete the left shoulder formation and then falls down to a new low. It follows by a recovery move that is marked by somewhat more volume than seen before to complete the head formation. A corrective reaction on low volume occurs to start formation of the right shoulder and then a sharp move up that must be on quite heavy volume breaks though the neckline.

Triangle Pattern

Click on the heading sub-title immediately above for triangle pattern images.

Triangle Patterns can be broken down into three categories: the ascending triangle, the descending triangle, and the symmetrical triangle. While the shape of the triangle is significant, of more importance is the direction that the market moves when it breaks out of the triangle. In the case of a Symmetrical Triangle, the top line (resistance) is sloped down and the bottom line (support) slopes up.

Flag and Pennant Pattern

Click on the heading sub-title immediately above for flag and pennant pattern images.

The flag pattern is encompassed by two parallel lines. These lines can be either flat or pointed in the opposite direction of the primary market trend. The pole is then formed by a line which represents the primary trend in the market. The pattern is seen as the market potentially just taking a “breather” after a big move before continuing its primary trend.

The bull flag pattern is found within an uptrend in a currency pair. This pattern is named for the resemblance of a flag on a pole.

The pennant pattern is identical to the flag pattern in its setup and implications; the only difference is that the top (resistance) line and bottom (support line) are not parallel, but rather characterized by converging trend lines rather than parallel trend lines.

Wedge Pattern

Click on the heading sub-title immediately above for wedge pattern images.

The wedge is characterized by a contracting range in prices coupled with an upward trend in prices (known as a rising wedge) or a downward trend in prices (known as a falling wedge).

A wedge pattern is considered to be a pattern which is forming at the top or bottom of the trend. It is a type of formation in which trading activities are confined within converging straight lines which form a pattern. It should take about 3 to 4 weeks to complete the wedge. This pattern has a rising or falling slant pointing in the same direction. It differs from the triangle in the sense that both boundary lines either slope up or down. Price breaking out point creates another difference from the triangle. Falling and rising wedges are a small part of intermediate or major trend. As they are reserved for minor trends, they are not considered to be major patterns.

Double Top and Double Bottom Patterns

Click on the heading sub-title immediately above for double top and double bottom pattern images.

The double top is a frequent price formation at the end of a bull market. It appears as two consecutive peaks of approximately the same price on a price-versus-time chart of a market. The two peaks are separated by a minimum in price, a valley. The price level of this minimum is called the neck line of the formation. The formation is completed and confirmed when the price falls below the neck line, indicating that further price decline is imminent or highly likely.

A double bottom is the end formation in a declining market. It is identical to the double top, except for the inverse relationship in price. The pattern is formed by two price lows separated by local peak defining the neck line. The formation is completed and confirmed when the price rises above the neck line, indicating that further price rise is imminent or highly likely.

Triple Top and Triple Bottom Patterns

Click on the heading sub-title immediately above for triple top and triple bottom pattern images.

The formation of triple tops is rarer than that of double tops in the rising market trend. The volume is usually low during the second rally up and lesser during the formation of the third top. The peaks may not necessarily be spaced evenly like those which constitute a Double top. The intervening valleys may not bottom out at exactly the same level, i.e. either the first or second may be lower. The triple top is confirmed when the price decline from the third top falls below the bottom of the lowest valley between the three peaks.

Most of the rules that are applied in the formation of the triple top can be reversed in the formation of triple bottom. As far as volume is concerned, the third low bottom should be on low volume and the rally up from that bottom should show a marked increase in activity

Price Channel

Click on the heading sub-title immediately above for price channel images.

A price channel is a pair of parallel trend lines that form a chart pattern for a currency pair. Channels may be horizontal, ascending or descending. When prices pass through and stay through a trend line representing support or resistance, the trend is said to be broken and there is a "breakout".

Summary

Chart patterns are fairly easy to recognize. With a little practice you'll be able to recognize them as well. It's important to keep in mind that channel patterns fall into two categories: Continuation Patterns and Reversal Patterns. We'll cover those in parts VIII and IX of this report.

End of Part VI

Part VII of this report will be released in about one week. The topic is "Support, Resistance, and Trend Lines"

Trend Trading Report Part V - Complex Candlestick Patterns

In this Part of the Trend Trading Report we'll cover complex candlestick patterns, what do they look like, what are they meant to communicate, and recommendations for their use.

Review: Wikipedia defines a candlestick pattern as "a movement in prices shown graphically on a candlestick chart that some believe can predict a particular market movement. The recognition of the pattern is subjective and programs that are used for charting have to rely on predefined rules to match the patterns. there are 42 recognized patterns that can be split into simple and complex patterns."

The following patterns are referred to as complex patterns. In all cases below, these complex patterns are multiple candles in different colors and shapes. Note: a black candle/black body is bearish and candlesticks on some currency pair charts may use other colors (e.g. red). A white candle/white body is bullish and candlesticks on some currency pair charts may use other colors (e.g. green).

Complex Candlestick Patterns

Recommended Use Of Candlestick Patterns

Use of the above candlestick patterns is complicated by the fact that there are so many different patterns. If I were buying and selling currency pairs every day I might have memorized these various candlestick patters, but I don't trade currency pairs every day. Therefore, I recommend focusing on up to 5 of your favorite candlestick patterns. Get to know them well, and use them when they appear.

When trading currency pairs live, it's somewhat cumbersome to have to study all the candlestick patterns to remember what they are and interpret what they mean. My personal preference is the following:

1. Pick a small set of candlestick patterns that are very effective, and stick to them. 2. Focus more on chart patterns for predicting what price-action will do next. Chart patterns will be covered in depth in the next three posts.

End of Part V

Part VI of this report will be released in about one week. The topic is "Introduction To Chart Patterns"

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