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A chart pattern is a pattern within a chart when prices are graphed. Chart pattern studies play a large role during technical analysis.

Advanced Class

CHART PATTERNS

 A chart pattern is a pattern within a chart when prices are graphed. Chart pattern studies play a large role during technical analysis.

Chart patterns are used as either reversal or continuation signals.

Chart patterns look at the big picture and help to identify trading signals or signs of upcoming movements.

Reversal Patterns

  1. Prerequisite for any reversal pattern is that there should have been a significant trend prior.
  2. The signal of an impending trend reversal is often the breaking of an important trendline.
  3. The larger the pattern the greater the subsequent move.
  4. Topping patterns are usually shorter in duration and more volatile than bottoms.
  5. Bottoms usually have smaller price ranges and take longer to build.

Volume is usually important on the upside

Double top

A double top is a chart pattern, characterized by two consecutive peaks in price that signals a potential bearish reversal of an uptrend.

Double top 

  • Furthermore, double top is a reversal pattern that is formed after there is an extended move up. The “tops” are peaks which are formed when the price hits a certain level that can't be broken. After hitting this level, the price will bounce off it slightly, but then return back to test the level again.

Double bottom

Before we get into how to trade the double bottom, we first need to become familiar with the characteristics of one. This will allow you to quickly and easily identify the pattern on a chart and will also help you to understand the dynamics of this pattern.

 

  • As you can see from the illustration above, the double bottom pattern has formed after an extended move down. The market found buyers at a key support level (first bottom). Shortly after forming the first bottom, the market retested new resistance at the neckline and subsequently found support again at the same key support level (second bottom).

Double bottom in action

Head and shoulder

A head and shoulders pattern is a chart formation that resembles a baseline with three peaks where as the head and shoulders pattern forms when a stock's price rises to a peak and subsequently. Most Commonly Used Forex Chart Patterns.

The head and shoulder chart pattern is based on a reversal pattern that is mostly seen in uptrends and in here, you will learn how to trade this pattern by learning to recognize this pattern when it starts to form and then trading it.

The head and shoulders  trading strategy is the opposite of inverse head and shoulders  trading strategy. Which is yet to come below.

Drafted analysis

 

  • With reference to this drafted and the action of the head and shoulders bellows, there are certain procedure to consider.
  • When placing an order (buy or sell) you have to make sure that you place your order after a retest or when you are certain that it has formed a head and now has to bounce back for a retest in formation of another shoulder. (drafted diagram : points 2 and 3) 

Inverse Head and shoulder

  • An Inverted Head and Shoulders is a reversal pattern consisting of three lows with the Head represented as central low being the lowest peak of the pattern and the flanking peaks as the shoulders.

The inverted head and shoulders represents a decline to a new low and a rally to immediate resistance followed by a second decline to a lower level than a third, more modest decline and rally through resistance. In addition, an inverse head and shoulders is reversal or to say, turned upside down. It is more or less like a head and shoulders that is not inverted, and the same rules apply because they possess same features, apart from inversion.

 When placing a buy or sell:

 

  • Wait for a candlestick to break the neckline to the downside.
  • Then place a sell stop order just a few pips (3-5 pips at least) under the low of the candlestick.
  • Place you stop loss 3-5 pips above the high of the right shoulder.

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Falling wedge

 

  • Just like the rising wedge, the falling wedge can either be a reversal or continuation signal.
  • As a reversal signal, it is formed at a bottom of a downtrend, indicating that an uptrend would come next.
  • As a continuation signal, it is formed during an uptrend, implying that the upward price action would resume. Unlike the rising wedge, the falling wedge is a bullish chart pattern. 

Raising channel

  • A raising channel is the price action contained between upward sloping parallel lines. Higher highs and higher lows characterize this price pattern. Technical analysts construct an ascending channel by drawing a lower trendline that connects the swing lows, and an upper channel line that joins the swing highs. The pattern’s opposite counterpart is the descending channel.
  • During a raising channel, a possible breakdown breaks below the lower channel line of an ascending channel, which breaks to form another channel after a retest, which can also be a sell entry. 

Falling channel

  • A falling channel is used in technical analysis to show a downward trend in a security’s price series. It is formed from two negative sloping trend lines drawn above and below a price series.
  • An ascending channel (falling channel) is the opposite of a descending (raising) channel. Both ascending and descending channels are primary channels followed by technical analysts. In an ascending channel, the trend lines would be positive sloping at the resistant and support levels. 

Executing Your First Trade Using the Break Out Strategy

  • Now that we have added just a little bit of knowledge to your arsenal lets get more details on the strategy . I know it’s as easy as ABC so we going to sing the ABC`s together

The steps in the run up are very simple. We use and follow 6 steps

  1. Overall chart analysis from the monthly to the minute chart
  2. Check and pick areas of support and resistance
  3. Pick the overall trend (You can use trend lines or moving averages)
  4. Trend line analysis to locate breakouts and
  5. Checking the news and any economic events
  6. Executing the trade

Steps 1-3 and Step 5 will be covered practically in our exciting JOANT modules which I know you will love. Here we shall just take further steps 4 and 6

Trendline Analysis To Locate Breakouts

The trade strategy

  • #1: Start with the Monthly chart to see If one can find obvious peaks and troughs to draw trendlines there...if trendlines can be drawn, draw them and if there is no peaks or troughs to draw trendlines, switch to the next smaller timeframe,the weekly chart.
  • #2: And so the process is repeated from the weekly chart down to the hourly chart and the 30 minute chart.
  • In drawing trendlines from the monthly down to the 1hr timeframes pay attention to WHERE and HOW FAR or HOW NEAR the price is in regards to those trendlines drawn...why?

Because, the closer one spots price nearing a trendline, KNOW there is possible trade setup happening.

  • Also, if in a profitable trade, know where the opposing trendlines are so as to can manage a trade more effectively by moving my stop loss tighter to lock profits or take some partial profits off instead of being caught by surprise.
  • If in a trade or thinking of jumping in, it also pays to know where significant horizontal support andresistance levels are on the charts.
  • These levels also provide turning points for market reversals so don’t ignore them but work with them.
  • Remember also that larger timeframes cover up many good trading opportunities that happen in the lower timeframes so having a good understanding of what is what is happening in the larger timeframe and then getting into the smaller timeframes for trade entries and trade management is part of the strategy to winning consistently.

THE RULES

TRADE ENTRY TIMEFRAMES

  • Use the 1hr and 4hr timeframes for entries. Switch back and forth between these two timeframes looking for high probability reversal candlestick patterns as confirmation to enter a trade (more on that later).
  • Also go to the smallest timeframe possible like the 5min up to the 30min to enter a trade based on trendlines drawn from 1hr up to the monthly.
  • Why smaller timeframe entries? Three reasons
  • Reason#1: This allows one to get an early head start and if market moves in your favour,you will be in more profit than If you took a trade based on the 1hr or 4hr timeframes.
  • Reason#2: Minimize risk. Getting in on trades in smaller timeframes also allows me to have smaller stop loss sizes.
  • Reson#3: If my stop loss is small, then I can increase my lot sizes while still maintaining the same level of % risk per trade on my account. This is all about position sizing and risk management.

THE 4 TRENDLINE BREAKOUT TRADING SETUPS

 Two opposing trendlines converging to an apex.

  TL breakout setups #1 & #3 are IMMEDIATE breakouts of the trendline

TL breakout setups #2 & #4 are entry setups based on temporary retracements or pullbacks trade setups AFTER the trendline has been broken or intersected

  • It is important for you to know that not all breakouts will turn out as the ones stated above because there will be false trendline breakouts well…breakouts that would seem tobe real breakouts only to reverse later and continue to follow the previous trend/trendline.

TRENDLINE BREAKOUT TRADING RULES
Short/Sell Entry Rules

  • #1: Wait for the candlestick that intersects the upward trendline to close below the trendline.
  • #2: Place a sell stop order a few pips under the LOW of the candlestick. (Look for reversal candlesticks like bearish railway track, bearish engulfing pattern, spinning top, and dark cloud to give you added confirmation on continuation of the downward trend.) If not, just the close below the trendline should be sufficient.
  • #3: Set your take profit target WITHIN the previous significant “trough”
  • #4: For short setup TL Breakout#2 (the pullback setup) wait for the CLOSE of candlestick that is:
  • (a) very close to or
  • (b) almost touches or
  • (c) touches or
  • (d) intersects the broken trendline and may close above it during its temporary upward retracement then place your sell stop order a few pips under the low of that candlestick. Look for bearish reversal candlesticks for added confirmation and place your sell stop order.
  • #5: Place your stop loss a few pips above the high of the candlestick which you have placed your pending stop order

# diagram

Long/Buy Entry Rules

  • #1: Wait for the candlestick that intersects the downward trendline to close above the trendline.
  • #2: Place a sell stop order a few pips above the HIGH of the candlestick
  • #3: Set your take profit target WITHIN the previous significant “peak”
  • #4: For long setup TL Breakout#4 (the pullback setup) wait for the CLOSE of candlestick that is
  • (a) very close to or
  • (b) almost touches or
  • (c) touches or
  • (d) intersects the broken trendline and may close below it
  • then place your buy stop order a few pips above the high of that candlestick.
  • #5: Place your stop loss a few pips below the low of the candlestick which you have placed your pending buy stop order.

 BREAKOUT TRADES SETUPS THAT ARE NOT “OK” FOR ENTRY

  • Not all breakout setups or pullbacks after breakout setups are perfect to enter every time they happen.
  • You must be able to know which ones are “ok” to enter and which ones are not.
  • One common problem is the formation of very long breakout candlesticks. If you are getting into a trade with this kind of setup, your stop loss would be huge.

Long breakout candlestick=large stop loss distance
Do not chase trades

Qn:HOW CAN YOU TELL IF A BREAKOUT IS GOING TO BE A FALSE BREAKOUT?

  • #1: move stop loss to break-even if you see an indication that a false breakout might be happening
  • #2: take partial profits off if you can and move stop loss to break-even for the rest of the remaining lots or
  • #3: move stop loss tighter to lock in profit or

#4: you do absolutely nothing! Just leave your stop loss where it was placed initially, without taking any partial profit etc…and just see what happens. Sometimes the market has a habit of shaking off the weak feet and then continue moving in the direction of the trade again and you can be rewarded nicely for holding on

The answer: Impossible.

  • When we are in a breakout trade and it turns out to be a false breakout, 3 things usually happen:

(1) the trade gets stopped out with a loss

(2) the trade gets stopped out at break-even

(3)you might walk away with a small profit

  • The important thing about false breakout is not so much as trying to predict if a breakout is going to be a false breakout but how to manage your trade if you see signals that a breakout is losing steam and might turn out to be a false breakout.

Managing a False Break Out

#1: move stop loss to break-even if you see an indication that a false breakout might be happening

#2: take partial profits off if you can and move stop loss to break-even for the rest of the remaining lots or

#3: move stop loss tighter to lock in profit or

#4: you do absolutely nothing! Just leave your stop loss where it was placed initially, without taking any partial profit etc…and just see what happens. Sometimes the market has a habit of shaking off the weak feet and then continue moving in the direction of the trade again and you can be rewarded nicely for holding on…

TRADE MANAGEMENT

  • When trade moves by the amount that is risked, move your stop loss to break-even. This is the best practice to preserve your account. Don’t worry about getting stopped out.
  • Better that you get stopped out with break-even trade than with a loss.There will be opportunities tomorrow.
  • Have that kind of mindset
  • Trailing stop.
  • This is the real money maker if you apply this technique correctly.
  • Move stop loss and place behind each subsequent peak or trough that is formed as trade moves in your favor.
  • Placing stop loss behind peaks or troughs as trade moves in your favor allows you to ride the trend as long as you possible can as it heads towards your profit target or if you don’t have a profit target, you can ride it as long as it goes until you get stopped out

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Page Five

Forex trading psychology

A                -        YMFL Psychology

B                -         (we will send soonest)

D                -         Forex trading psychology is a big thing. Often, it is the psychology, not a lack of academic knowledge or skill in application, that is considered to be the primary originator of trading mistakes.

Forex trading psychology is a big thing. Often, it is the psychology, not a lack of academic knowledge or skill in application, that is considered to be the primary originator of trading mistakes.

Mistakes are constantly repeated by financial traders of various national, cultural and social backgrounds, which suggests that it is the common traits shared among us as humans that lie in the base of those mistakes.

That common trait is fear, which creates the fight or flight response in humans. Unfortunately, it is this fight or flight response which can cause the downfall of many traders.

We cannot change what we have evolved to feel over millions of years, but we can change how we approach these feelings by studying the psychology of successful Forex traders and applying the findings. Today, we will look at how we should behave and respond to trading situations from the correct Forex trading psychology point of view.

Fear can have a significantly limiting effect on trading behavior. Naturally, your mind will want to find the safest option to ensure survival. In terms of trading, this means that if a trade looks like it is going to lose profit, your natural instinct would be to pull out of the trade so you don't incur further losses.

However, this can take you away from a carefully planned trading strategy. Even worse, it could cause you to make rash decisions with the hope of turning that losing trade around, causing you to lose much more money than you would of if you had just left it to play out.

Instead of focusing on the long term plan, your mind wants to focus on making the best out of this short term losing position.

Understanding the role of psychology in Forex trading will help alleviate fear from your decision making process. Becoming aware of fear on the spot will empower you, both as a trader and as an individual. It will also allow you to re-establish the control of logic and reason, which is your ultimate goal.

Enemy within

It's easy for traders to feel confident in their ability to stay calm and collected during their trading sessions before the market opens. However, once the clock starts it's a different story. When faced with real, financial decisions it's very easy for emotions to come into play. We can't avoid our emotions, but we can work around them. Traders cannot afford to give in to feelings of excitement, fear or greed when trading, as it can cause costly and irreversible mistakes.

Evaluate yourself psychologically by identifying if you are exposed to one of the following psychological biases of Forex trading:

Overconfidence bias - 'The market will go here'

Anchoring bias - 'This probably means that'

Confirmation bias - 'This also proves that I am right'

Loss bias - 'I hope the price will come back'

Notice how they overlap, because no matter how you look at it each of these biases boil down to fear. Nonetheless, we shall discuss them in detail because the first step is to become aware of our emotions.

Demo Account

Overconfidence bias

Lesson number one in Forex trading psychology is to watch out for trading euphoria. Humans are naturally self-focused. Our egos want to be validated through proving that we know what we are doing and that we are better than the average person. Any hint that confirms these thoughts only reinforces our self-image by a distinct feeling of self-love.

The problem is that this is where traders are most likely to succumb to the overconfidence bias. It's not uncommon for traders to complete a winning streak and then believe that they can't get anything wrong in the future. To believe this is of course unwise and is only going to end in failure. Make sure you always analyse your trading sessions and look at your wins and losses.

This is the only way you can really stay on top of your trading. Allow yourself to make mistakes - and don't make the mistake of being scared to prove yourself wrong - you'll be in a much better position for it in the long run.

You have to be comfortable with accepting that mistakes are inevitable, especially in the early stages, but it's all part of the learning curve.

Anchoring bias

This one is about mental comfort zones created by traders when performing market analysis, ultimately thinking that the future will be the same as the present, purely based on the reason that the present appears to be like the past. Just as other biases in Forex trading psychology, this one is directly borrowed from social studies.

Anchoring is a tendency to rely on what is already known to a trader for decision making in the future, instead of considering new situations and the changes they can bring. At times, anchoring tends to cause traders to rely on obsolete and irrelevant information, which of course won't help them trade successfully. In practical terms this manifests in traders holding losing positions open for too long, simply because they fail to consider the options that are outside their comfort zone.

You mustn't be afraid of trying new things when trading Forex - be willing to try new strategies and go against what you know. By anchoring yourself to outdated strategies and knowledge, you're only increasing the probability of bigger losses.

Confirmation bias

Confirmation bias is the one that is most common amongst traders. Looking for information that will support a decision you have made, even if it wasn't the best decision, is a way to justify your actions and strategy. The problem is that by doing this, you're not actually improving your methods and you're just going to keep making the same mistakes. Unfortunately, this can create an infinite loop in Forex trading psychology that can be difficult to break.

The best case scenario in confirmation bias is that a trader will simply waste precious time researching what they already knew to be true. However, the worst case scenario is that not only will he lose time, but also money and the motivation to trade. A trader must learn to trust himself, and be happy to use his intelligence to develop profitable strategies and be able to follow them without fear or doubt.

Loss bias

Loss aversion bias derives from the prospect theory. Humans have a funny way of evaluating their gains and losses, along with comparing their perceived meanings against each other. For example, when considering our options before making a choice, we are more willing to give preference to a lower possible loss over a higher possible reward. Fear is a much more powerful motivator than greed. In practice, a trader with a loss bias is more akin to cutting profits when they are still low, while allowing bigger drawdowns.

Conclusion

There is only one piece of advice to solve the problems of traders that can be drawn from studying Forex trading psychology - develop a trading plan and stick to it.

As a trader in doubt, you should absolutely feel free to research every other possible remedy available, but the chances are that you will still come back to a simple trading plan. It's understandable for traders to feel fear when trading.

However, being able to push this fear aside and work through it is absolutely vital for any trader who wants to be successful. Practice trading, make notes, research new strategies and make mistakes.

Trial and error is a massive part of the Forex learning curve, and generations of traders have proved that this is the most effective way to eliminate trading fears.

You might consider this example as a point of reference if you start to doubt yourself. Dr. Alexander Elder in one of his lectures told a story about an old friend of his, a private trader who was inconsistent and experienced periods of wins and losses alike. In a couple of years this trader's name ended up on the US list of top money managers.

When Elder asked 'How, what changed?', the trader said, 'I am using the same trading strategy that I always have. What changed is that I stopped trading against myself and my strategy.' That money manager pulled a mental trick on himself.

When he was still a private trader and was inconsistently profitable, he pretended he was employed by an investment firm and had a real boss, who gave him a trading strategy and left for a year, leaving the man in charge with one condition. Upon the boss's return, the performance of the trader will be not judged by how much money he made, but by how meticulously he followed the strategy.

In other words, he split his trading into two separate roles - the planner, who had no exposure to the market, and the executor, who had no say in planning.

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