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

Figure 3.27
Bullish and bearish rectangle.
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CHART PATTERN ANALYSIS
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Broadening Formation
The broadening formation is the most diff icult chart pattern to trade,
for the support and resistance line are moving apart like an expand-
ing triangle.
Figure 3.29 shows price moves to the upside and downside that
clarify the picture of consecutive and alternating new highs and lows
before a new trend direction f inally turns out.
A trader investing at breakouts will be stopped out at each new
high or low. The only way to invest safer is to wait until there are
three peaks or valleys. Broadening formations can often be found at
long-term tops or bottoms.
Flag and Pennant
Normally, the f lag slopes against the main trend and is near midpoint
of a price move.
Figure 3.28
Spring and upthrust.
Figure 3.29
Broadening formation.
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BASIC PRINCIPLES OF TRADING STRATEGIES
To play safe in a bullish f lag, traders should wait for the forma-
tion of three valleys. For a buy signal, the closing price has to be above
the resistance line. To find the initial profit target, we double the price
move from the bottom to the beginning of the f lag.
A bullish pennant is almost identical to a symmetrical triangle.
The only difference is the time span. Whereas a symmetrical triangle
can last a couple of months, the pennant usually does not last longer
than three weeks. Because the pennant often happens at the mid-
point of a trend, we double the price span from the bottom to the
highest point of the pennant for the initial prof it target. To receive a
valid breakout buy signal in a bullish pennant, we wait until three
valleys are formed.
Figure 3.30 shows both chart patterns: the f lag and the pennant.
Wedge Formation
The wedge formation looks much like the symmetrical triangle. What
makes it different is its slant. The wedge formation has a noticeable
slant against the prevailing trend. Therefore, a falling wedge is con-
sidered bullish, while a rising wedge is considered bearish.
As in all the other formations that we have presented, we should
wait for three lower valleys in a bullish wedge. In a bearish wedge,
we should wait for three rising peaks.
The wedge breakout occurs most often in the third part of the
total length of the wedge. However, the price might go all the way to
the very end of the wedge. This is one of the differences from the sym-
metrical triangle. Wedges take less time to form in downtrends than
in uptrends.
Figure 3.31 provides a graphical impression of wedge formations.