By now you have an arsenal of weapons to use when you battle the market. In this lesson you will add yet another weapon: CHART PATTERNS!
Think of chart patterns as a land mine detector, because once you learn this, you will be able to spot “explosions” on the charts before they even happen, making you a lot of money in the process.
In this lesson, we will teach you basic chart patterns and formations. When correctly identified, it usually leads to a huge breakout or “explosion” in this case.
Remember, our whole goal is to spot big movements before they happen so that we can ride them out and rake in the cash! Chart formations will greatly help us spot conditions where the market is ready to break out.
Here's the list of patterns that we're going to cover:
- Symmetrical Triangles
- Ascending Triangles
- Descending Triangles
- Double Top
- Double Bottom
- Head and Shoulders
- Reverse Head and Shoulders
Symmetrical triangles are chart formations where the slope of the price’s highs and the slope of the price’s lows converge together to a point where it looks like a triangle. What is happening during this formation is that the market is making lower highs and higher lows. This means that neither the buyers nor the sellers are pushing the price far enough to make a clear trend. If this was a battle between the buyers and sellers, then this would be a draw.
This type of activity is called consolidation.
In the chart above, we can see that neither the buyers nor the sellers could push the price in their direction. When this happens we get lower highs and higher lows. As these two slopes get closer to each other, it means that a breakout is getting near. We don’t know what direction the breakout will be, but we do know that the market will break out. Eventually, one side of the market will give in.
So how can we take advantage of this? Simple. We can place entry orders above the slope of the lower highs and below the slope of the higher lows. Since we already know that the price is going to break out, we can just hitch a ride in whatever direction the market moves.
In this example, if we placed an entry order above the slope of the lower highs, we would’ve been taken along for a nice ride up. If you had placed another entry order below the slope of the higher lows, then you would cancel it as soon as the first order was hit.