In the event you plan to succeed in day trading over the prolonged haul, you’ll will need a reliable way of distinguishing between high-probability and low-probability day trade setups. Blindly taking all trading signals produced by most buying systems is simply not a great idea and will likely be a road to ruin in many cases. I began day trading in the late 90s, and as a result, I have come across numerous methods for separating the great trades from the poor ones. A filter that I still use to this day is one that I call the Butterfly Pattern. This pattern uses moving averages on different time frame basis to reveal the true supply and demand forces which can be driving a stock.

I have found that when a Butterfly Pattern exists, it is important to aggressively purchase stocks on pullbacks for long trades and sell stocks on rallies for short trades. This design can be a good way to screen many of your signals for the greatest trading candidates mainly because you can instantly see which side – i.e., the buyers or the sellers – is in control of a stock.

Even though a Butterfly Pattern is a highly effective screening tool, the rules for identifying the structure are remarkably uncomplicated. 1st, you have to choose two unique chart intervals which are greater than the chart interval in which your entry signal occurs. 2nd, a Butterfly Pattern exists when the 20-period simple signal typical is above the 200-period simple moving average in each of the greater chart intervals. That’s truly all there is always to it.

A very good rule of thumb is usually to need the first larger time frame be more substantial than the entry signal time frame by an aspect of five and the second larger time frame be more substantial than the primary higher time frame by a factor of 12. For instance, if the entry signal occurs about the 1-minute chart then pick both the 5-minute and 60-minute charts for your increased time frame analysis. Therefore, in order for a valid bullish Butterfly Pattern to confirm a 1-minute entry signal, the following criteria must each exist (note: reverse the logic for a bearish Butterfly Structure):

The 20-period simple moving average should be over the 200-period simple moving average for the 5-minute chart (i.e., first larger time frame).

The 20-period simple moving average must be above the 200-period simple moving average for the 60-minute chart (i.e., 2nd higher time frame).

Why is this pattern so powerful in picking out excellent trades? From the case of long trades, significant new purchasing activity would have to occur on the higher chart intervals for the shorter term 20-period moving average to cross above the longer-term 200-period moving average. A moving average crossover on two different larger time frames is clear and compelling evidence that a bullish change in sentiment has occurred. Apply the reverse logic for short trades.

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I lately had been questioned by a trader that he could not properly use candlestick reversal patterns to forecast a change in market psychology. He was searching in the stock placed a quick trade after seeing a Bearish Engulfing Pattern that completed itself about the eleventh. The price of the security promptly rallied almost ten percent a couple of days right after the trade, stopping him out with a loss. Immediately after a look in the chart, the difficulty was obvious; he hadn’t learned to filter out invalid reversal signals.

You have to know that invalid reversal signals are typical with candlestick charts as well as the trader who wishes to be profitable merely has to learn how to filter out the invalid signals. Can it be performed? Absolutely, and it’s not that difficult! You see, the stock in question had just made a strong move via technical resistance two days prior to the Bearish Engulfing pattern completed itself. It’s essential to don’t forget that once technical resistance has been broken and successfully retested, it then becomes service. The stock did truly pullback slightly for a few days immediately after forming the Bearish Engulfing Pattern but stayed above the broken resistance line.

This brings us to the question: so what was the correct signal? What the trader failed to at least notice was the Bullish Kicker that presented itself directly at the point with the new found support (former broken resistance). With that signal, the stock has rallied nicely ever since. The Bearish Engulfing pattern was just the initial day of a successful retest of technical support. The stock was simply forming a slight consolidation that proved to be a continuation pattern, not a reversal.

An effortless candlestick trading rule to recall is to trade short or close long positions at a bearish reversal signal that presents itself at technical resistance. Go long or close short positions on a bullish reversal signal that presents itself at technical assistance. Candlestick trading is, in my opinion, the easiest and most profitable method to trade stocks when performed properly. The dilemma is there is a lot of details readily available about the subject that does not tell the complete story and traders become frustrated and stop using candlesticks. Study the art of candlestick trading, keep trying and soon profitable trades will practically jump off the chart at you.

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continuation of downtrend continuation pattern

17. Bear Flag – Downtrend

A bear flag in a downtrend is usually bearish. Bear flag patterns have two important elements – 1. a near-vertical, short-term price decrease with high volume, and 2. a lower volume consolidation of profit-taking as the market takes a breather from the recent dramatic decrease. Be certain that the bear flag is fairly brief; otherwise the consolidation may stifle the on-going downtrend. Most bear flags occur during the middle of a larger move downward.

18. Bear Pennant – Downtrend

Close to the bear flag, bearish pennants involve two important elements – 1. a near vertical, high volume short-term price drop, or flag pole, and 2. a symmetrical, lower-volume triangle-shaped consolidation. This consolidation, with price maneuvering toward a lone equilibrium, has a similar price action and end implications to a symmetrical triangle. Much like the bear flag, these consolidations are temporary and usually occur within the middle of a more substantial downward move. As soon as the breakout occurs, be conscious of a retest of the pennant’s bottom resistance line. If that fails and the cost turns downward, the organization is complete. If the test succeeds and the price comes back up to the consolidation range, the formation is no longer valid.

19. Rectangle – Downtrend

Rectangles may be continuation or reversal patterns, dependent on the strength of the trend. If the trend is strong, a rectangle can signal a profit-taking area, which allows the need to build and the trend to regroup. In a weak trending or flat market, rectangles can likewise represent a reversal pattern, similar to a triple bottom. Rectangles generally keep well-defined horizontal lines and pricing is thought of as balanced among traders. Once the amount breaks out, be alert to a retest of the prior support line (now resistance).

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Downtrend Continuation Patterns

14. Symmetrical Triangle – Downtrend

Symmetrical triangles, a pattern with two lower highs and two higher lows, represent a steadily-increasing equilibrium among traders. Once this equilibrium reaches its tipping point, bulls, in the case above, have to abandon their stance on price as volume grows during the breakout. As the price abruptly breaks faraway from this equilibrium, violent moves are inclined to occur. Be mindful of false breakouts, specially the first one, if the amount reaches the tip of the triangle. Many traders are mindful of these patterns, and they tend to wait for the development, then jump in simultaneously.

15. Descending Triangle – Downtrend

Symmetrical triangles, a pattern with two lower highs and two higher lows, represent a steadily-increasing equilibrium among traders. Once this equilibrium reaches its tipping point, bulls, in the case above, have to abandon their stance on price as volume grows during the breakout. As the price all of a sudden breaks far from this equilibrium, violent moves tend to occur. Be alert to false breakouts, specially the first one, if the amount reaches the tip of the triangle. Many traders are aware of these patterns, and they tend to wait for the organization, then jump in simultaneously.

16. Rising Wedge – Downtrend

When rising wedges occur in a downtrend, they are virtually always continuation patterns. This small retracement/consolidation pattern against the trend is a futile attempt by the bulls to turnaround for the tides, but more bears sit on the sideline awaiting the breakout to the negative effects. Price increases with volume decreases indicate an illegitimate price move. Volume weakens during the consolidation to the wedge point, then increases during a breakout. Be mindful of immediate retests of the support levels after the escape.

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11. Rounding Top

In a rounding top, symmetry is an important distinction. The more dependable rounding top patterns do not wander from the boundaries of a firm semi-circle. Rounding tops can normally be in comparison to a head and shoulders pattern with two left shoulders, one head, and two right shoulders. Any patterns that change from this description can potentially be another pattern all together. If volume declines on each rally upward and the price keeps rising, search for divergent price and indicators, which may start the cost reversal any time.

12. Broadening Top

The broadening top is a unique pattern because it acts opposite of a normal consolidation. As time passes, price ranges and volatility increase, in place of decrease. Volume increases as the share prices rises due, which may be perplexed with bullish behavior. Rallies are short-lived and price drops remove previous support levels. Broadening tops are simply found in topping patterns since they’re the outcome of unrealistic expectations on behalf of bullish traders. Downside breakouts often lead to small declines pursued by a moment test of the breakout level. If the stock closes above this resistance level for any excuse, the pattern becomes invalid.

13. Triple Top

Triple tops may be either a reversal or continuation pattern, dependent on the strength of the trend and the trough levels opposite the tops. Triple tops that do not lead to a rectangle will often seem as if a head and shoulders pattern, a common reversal pattern. For a valid triple top, volume should decline on rallies toward the second and third top and increase into weakness. These volume trends confirm that distribution is coming about into strength. Although the lows made during the trough between the second and third tops will frequently exceed the response low, this specific price action is not needed during the development. No triple top is truly complete until the amount closes below the second trough’s low. Be mindful of small breakouts that immediately test the breakout level.

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Uptrend Reversal Patterns

8. Rising Wedge

Rising wedges are virtually always reversal patterns in an uptrend. Rising wedges represent the start of a more substantial reversal and can form into additional patterns, such as a rounding top. Hence, the targets after a breakout are limited. Volume is a necessary piece of information with the rising wedge is developing. Volume should be high on the continuation of the trend as the first leg of the wedge forms. Volume should then decline as the consolidation nears the wedges apex. As the breakout occurs, volume should spike. Be aware of a downside breakout and retest of the prior support lines. If this test fails, be ready for a trade downward or the development of another, larger pattern.

9. Head and Shoulders

Rising wedges are almost always reversal patterns in an uptrend. Rising wedges represent the beginning of a larger reversal and can take shape into additional patterns, such as a rounding top. Hence, the targets after a breakout are limited. Volume is an important piece of facts with the rising wedge is creating. Volume should be high in continuation of the trend as the first leg of the wedge forms. Volume should then decline as the consolidation nears the wedges apex. As the breakout occurs, volume should spike. Be alert to a downside breakout and retest of the last support lines. If this test fails, be ready for a trade downward or the organization of another, larger pattern.

10. Double Top

Double top formations can be tricky if they’re not well-defined. A number of other formations start with a double top, like a triple top, rectangle, and ascending triangle. The response to the sell side should be significant, which may be an early signal that the uptrend may well be weakening. Volume should decrease as the second leg builds to the previous high. If volume increases and downward selling increases, the probability goes up for a double top formation. To confirm the development, be certain the cost closes below the response low. Be mindful of the retest of the response low, which is now resistance, and prepare for a downward trade. If the downside breakout does not occur or the retest of the response low is productive and breaks through, the formation is no longer valid.

11. Rounding Top

In a rounding top, symmetry is an important distinction. The more dependable rounding top patterns do not wander from the boundaries of a firm semi-circle. Rounding tops can normally be in comparison to a head and shoulders pattern with two left shoulders, one head, and two right shoulders. Any patterns that change from this description can potentially be another pattern all together. If volume declines on each rally upward and the price keeps rising, search for divergent price and indicators, which may start the cost reversal any time.

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In order to establish a candlestick chart, you must have a data set that incorporates open, high, low and close values for on every occasion period you would like to display. The hollow or filled percentage of the candlestick is called “the body” ( likewise known as “real body”). The long thin lines above and below the body represent the high/low range and are called dark areas”; ( also referred to as “wicks” and “tails”). The high is marked by the the surface of the upper shadow and the reduced by the bottom of the low shadow. If the stock closes more than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the the surface of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.

When equated with traditional conventional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. Each candlestick provides an easy-to-decipher picture of price action. Immediately a trader can see compare the bond between the open and close in addition to the high and low. The bond between the open and close is viewed vital details and forms the essence of candlesticks. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than outside, indicate selling pressure.

Long Body Vs Short Body

By and large, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation. Long white candlesticks show strong buying pressure. The longer the white candlestick is, the further the close is above outside. This suggests that prices advanced significantly from open to close and buyers were aggressive. While long white candlesticks are in general bullish, much hinges on their position within the broader technical picture. After extended declines, long white candlesticks can mark a potential turning point or support level. If buying gets too aggressive after a long advance, it can result in abnormal bullishness.

Long black candlesticks show strong selling pressure. The longer the black candlestick is, the further the close is below outdoors. This suggests that prices declined significantly from outside and sellers were aggressive. After a long advance, a long black candlestick can foreshadow a turning point or mark a future resistance level. After a long decline a long black candlestick can indicate panic or capitulation.

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 Continued From Part 1

5. Bull Pennant

Close to the bull flag, bullish pennants involve two important elements – 1. a near vertical, high volume short-term price jump, or flag pole, and 2. a symmetrical, lower-volume triangle-shaped consolidation. This consolidation, with price maneuvering toward a single equilibrium, has a corresponding price action and end implications to a symmetrical triangle. Much like the bull flag, these consolidations are temporary and usually occur within the middle of a bigger upward move. Once the breakout occurs, be aware of a retest of the pennant’s top line. If that fails and the amount turns upward, the formation is complete. If the test fails and the cost comes backpedal to the consolidation range, the organization is no longer valid.

6. Rectangle

Rectangles may be continuation or reversal patterns, depending on the strength of the trend. If the trend is strong, a rectangle can signal a profit-taking area, which allows the need to build and the trend to regroup. In a weak trending or flat market, rectangles can likewise represent a reversal pattern, close to a triple top. Rectangles generally keep well-defined horizontal lines and pricing is considered to be well-balanced among traders.

7. Cup and Handle

The Cup and handle can sometimes be a tricky pattern with a series of more patterns within the larger pattern, like a double top (sides of the cup), inverted head and shoulders (cup), flags and pennants (handle). Cup and handle patterns resemble a double top formation, but the gap comes from increased volume and consolidation after the second top. This consolidation leads to a buying spree that pushes price up through resistance and beyond the last double top formation. The upside breakout from the handle should take place on strong volume, which verifies the selling pressure has been relieved. Be mindful of upside breakouts and quick reversals to try the previous resistance lines, which are now support. If the test fails, search for a trade to the upside.

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Chart patterns contribute an essential role in effective technical analysis. Chart patterns are routine sequences of price action that occur in all time frames and in all markets. Because these patterns are a consequence of human nature and psychology reacting to the markets, we can anticipate these patterns will carry on occur. Knowing these patterns and knowing when they are forming in real time can present you with a competitive advantage in the markets. Just as time, volume, support and resistance, and Fibonacci retracements can help you to work out price movements, so too can recognition of chart patterns help you anticipate trend reversals and continuations.

How to use this guide:

1.Draw the patterns listed and have them visible or on-hand during your trading.

2.Read about and grow knowledgeable about each chart pattern under.

3.When trading (simulation or live), decide if your specific market is in an uptrend, downtrend, or consolidation. Depending in the marketplace you are trading and the time frame of your charts, you may have conflicting trends on two different time frames. Use the longest schedule chart that use on a consistent basis. For day traders and scalpers who use a 1-minute and a 5-minute chart, use the longer schedule chart to determine trend.

4.Navigate to the attached trend section below and consider your charts to see if any of the below patterns match up to your current market, either now or potentially one day.

5.If you are familiar enough with your charting program, draw trend lines for market direction and chart pattern lines to help determine potential patterns.

6.Practice your pattern recognition skills in simulation first, then move to live trading once you achieve consistent profitability in simulation.

7.Execute what you’ve learned by trading the turns away from key support and resistance lines and on key breakouts from recognizable patterns.

Uptrend Continuation Patterns

1. Symmetrical Triangle

Symmetrical triangles, a pattern with two lower highs and two higher lows, represent a steadily-increasing equilibrium among traders. Once this equilibrium reaches its tipping point, bears, in the situation above, have to abandon their stance on price as volatility grows in the background. As the price all of a sudden breaks far from this equilibrium, violent moves tend to occur. Be alert to false breakouts, specially the first one, if the amount reaches the aim of the triangle. Many traders are conscious of these patterns, and they are inclined to wait for the formation, then jump in simultaneously.

2. Ascending Triangle

Ascending triangles are typically a bullish pattern in an uptrend. Owing to the easily-defined and visible buildup of call for to the upside, this pattern is believed one of the most dependable patterns. Ascending triangles are acknowledged by their level highs and rising lows, which often leads to a low volume equilibrium. The organization is only complete if the price action stays within the predetermined borders of the triangle. If whenever the amount breaks through these borders, consider the triangle broken and look for the following possible pattern.

3. Falling Wedge

A falling wedge in an uptrend is commonly a continuation pattern, but it can likewise be a reversal when the uptrend is weak or fictional. When falling wedges occur in a downtrend, they are invariably reversal patterns.

Uptrend falling wedges are ordinarily the start of a more substantial reversal, so be conscious of the breakout may rise up of the triangle and turn around. Observe volume as this pattern develops. Volume will be high during the initial downturn from the high, then dwindle as traders wait for a definitive direction. Once the breakout occurs, volume will are inclined to spike as everyone jumps in. Look for an immediate test of the wedge line after the first breakout. If the test holds, you may want to get in.

4. Bull Flag

A bull flag in an uptrend is commonly bullish. Bull flag patterns have two important elements – 1. a near-vertical, short-term price increase with high volume, and 2. a lower volume consolidation of profit-taking as the market takes a breather from the recent dramatic increase. Be certain that the bull flag is fairly brief, otherwise the consolidation may stifle the current uptrend. Most bull flags occur during the middle of a bigger move upward.

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With 1,000′s of securities listed in the stock exchange for trading, how does a trader approach his stock selection? I am not refering to the fundamental approach where the trader studies the fundamentals of the business, and research the functioning results of the company, check its price/earnings ratios or check its balance sheets and turnover and its dividend yield.

As a whole among those people successful traders who really make a profit off by trading professionally in the stock exchanges, their preferred method seems to be the technical analysis approach.

By this, they begin using charting, and technical indicators put on to the securities. They will devise filters or explorations, to scan for securities that meet some selected indicators to show that the securities are beginning to move or have started to move.

Professional traders who trade for a living have an array of trading tools to aid them, but one of the most commonplace tools they begin using to good effect is the signal called On Balance Volume.

Popularized by Joseph Granville, the On Balance Volume or OBV in short is in reality a cumulative volume, where the underlying principle is that similar OBV need to support equivalent price. By utilizing this sign, short term traders will be in a position to identify when there is a difference in this setting, or where OBV has outbreak already but price has still lagged behind, producing the circumstance where an impending price jump is expected.

But how large is the imminent surge? Whenever there is indeed an OBV outbreak, and by inference the price need to follow in the next few trading sessions, one will also need to make sure that the impending jump is of sufficient size to warrant a good margin of profit attractive enough for him to buy.

Included in this trading signal, traders add one more trading stipulation to nail those individual giant changes. We know in Elliot wave theory that the 3 and 5 waves of any stock are the impulsive and strong waves up.

I have observed much success from traders who scan their securities with an OBV outbreak and are in their impulsive 3 and 5th waves which are their longest and strongest waves.

Armed with this understanding, when a stock is found to have just undergone an OBV Outbreak upwards and is moving within either its 3rd or 5th wave, you have an excellent candidate that will in all probability to escape in price, and letting you reap a handsome profit within a short trading period.

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