Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

Selected Continuation Patterns
Symmetrical, Ascending, and Descending Triangles
A symmetrical triangle has two merging trend lines. For this forma-
tion, at least two peaks and two valleys are necessary. To reduce false
Figure 3.25
Key-reversal day.
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CHART PATTERN ANALYSIS
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breakouts, investors should wait until there are either three peaks
and two valleys or three valleys and two peaks. With this approach,
however, it is possible to completely miss a trend.
To receive a valid signal, a closing price has to be above the resis-
tance line or below the support line. The more the price moves to the
very end of a triangle, the weaker will be the breakout in either
direction.
Figure 3.26 covers the three alternative chart patterns that are
based on triangle formations.
In an ascending triangle, the resistance line runs parallel while
the support line is rising. To avoid false breakouts, we again recom-
mend waiting for three peaks (or three valleys, respectively). And
again, the price to pay for more safety in trading is sometimes miss-
ing a trade. We get a signal when the closing price is either above the
resistance line or below the support line.
In a descending triangle, the support line runs parallel while the
resistance line falls from the left to the right side. Once more, we rec-
ommend waiting for three peaks and valleys even though this might
Figure 3.26
Clockwise from upper left: Symmetrical, ascending, and descend-
ing triangle.
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BASIC PRINCIPLES OF TRADING STRATEGIES
result in missing a breakout. The initial prof it target is the biggest
distance measured from high to low of the triangle.
Bullish and Bearish Rectangles
Bullish and bearish rectangles are usually called continuation pat-
terns. However, they can be reversal patterns as well when they turn
out to be triple top or triple bottom formations. Support and resis-
tance lines run horizontally. To avoid false breakouts, it pays to wait
for three peaks and valleys despite sometimes missing a breakout (see
Figure 3.27).
To receive a trading signal, wait until a closing price is above the
resistance or below the support line. The initial prof it target is the
maximum distance (the total height from high to low) of the bullish or
bearish rectangle.
Spring and Upthrust (False Breakout)
A spring is a false breakout from a support line. The market price
trades for a very short time below the support line and then moves
back above the support line in a volatile price move that opens very
low and closes very high.
The upthrust is a false breakout through the resistance line. The
market price trades for a brief time above the resistance line and
moves back below the resistance line in a volatile move that opens very
high and closes very low.
Spring and upthrust are shown in Figure 3.28.