Simply Chart Patterns

Let History Guide Your Future

Classic Double Bottom & Double Top Reversal Chart Patterns With Divergence

It’s been a long time since I have updated this blog. I have been busy with my job and other life priorities.

But I have always continued with my trading and investing activities.

So tonight, I spotted two Classic Reversal Chart Patterns (Double Bottom & Double Top) that I have decided to share. The nice thing about them is that they have formed against strong resistance and support levels, and also there are accompanying  bullish and bearish divergence appearing on the RSI as well.

Anyway, take a look at daily charts below of the EURJPY and AUDNZD pairs. Because of these patterns forming close to strong support and resistance levels, the risk amounts can be small with targets that fulfil a positive Risk:Reward ratio of at least 2:1.

EURJPY Daily Chart With Double Bottom Classic Chart Pattern Forming on Strong Support Level With Bullish Divergence Appearing on the RSI Indicator

EURJPY Daily Chart With Double Bottom Classic Chart Pattern Forming on Strong Support Level With Bullish Divergence Appearing on the RSI Indicator

 

AUDNZD Daily Chart with a Double Top Classic Chart Pattern Formed Against Strong Resistance Level with Bearish Divergence Appearing on the RSI Indicator

AUDNZD Daily Chart with a Double Top Classic Chart Pattern Formed Against Strong Resistance Level with Bearish Divergence Appearing on the RSI Indicator

20 Trading Rules That Stood The Test of Time

The following article was extracted from StockCharts.com. The original article can be found here.

Donchian Trading Guidelines

Introduction

First published in 1934, many of the 20 trading guidelines from Richard Donchian are as relevant today as they were during the golden age of technical analysis. Considered by many as the father of trend following, Donchian developed one of the first trend following systems based on two different moving averages, which were cutting edge in the early thirties. Based on his experiences over time, Donchian developed 20 trading guidelines split into two groups: general and technical. The guidelines shown below have been paraphrased for a clearer explanation. The original guides are also shown in the bottom half of this page.

Eleven General Guidelines

1. Be careful buying when the crowd is excessively bullish or selling when the crowd is excessively bearish. Even when the crowd is correct, excessive sentiment in one direction or another can delay a move.

2. When prices trade in a narrow range with little volatility, look for a volume increase to confirm the direction of the next move. Subsequent strength on higher volume is bullish, while subsequent weakness on higher volume is bearish.

3. Let your profits run and cut your losses short. This guideline overrides any other guideline.

4. Trade in smaller amounts during times of uncertainty. Trading losses and whipsaws can be reduced by focusing on solid setups and robust signals.

5. Do not chase a position after a three day move. Wait for a one-day reversal to improve the risk-reward ratio.

6. Use a stop-loss to limit losses and protect accrued profits. Stop-losses should be based on the trading pattern at work. A triangle pattern will have a different stop-loss structure than a rising wedge or head-and-shoulders pattern. 7. Due to the law of percentages, long positions should be larger than short positions during a broad uptrend. This assumes that the upswings will be larger than the downswings as a series of rising peaks and troughs evolves. A short position on a decline from 50 to 40 would produce a 20% profit, but a long position on an advance from 40 to 50 would produce a 25% profit. The percentage gain on advances will be greater and the trading amount should also be greater.

8. Use limit orders when initiating a position. Use market orders when closing a position.

9. Buy securities that are in uptrends and show relative strength. Sell securities that are in downtrends and show relative weakness. These two guidelines are subject to all other guidelines.

10. A broad market advance is more likely to continue when transportation stocks lead (Dow Transports). A broad market advance is suspect when transportation stocks lag.

11. A security’s capitalization, its activity level in the marketplace and its trading characteristics are just as important as its fundamentals. (The interpretation of this guideline is rather difficult because it is unclear what Donchian means with “capitalization”).

Nine Technical Guidelines

12. A consolidation or sideways trading range after an initial advance often leads to another advance of equal proportions. After this second advance, chartists can expect a counter move and decline back towards the consolidation. Similarly, a consolidation or sideways trading range after an initial decline often leads to another decline of equal proportions. After this second decline, chartists can expect a counter move and advance back towards the consolidation.

13. A long sideways consolidation after an advance marks future resistance. Expect resistance or a bearish reversal when prices decline and then return to this level. A long sideways consolidation after a decline marks future support. Expect support or a bullish reversal when prices advance and then return to this level. 14. Look for buying opportunities when prices decline to a trendline on average or low volume. Conversely, look for selling opportunities when prices advance to a trendline on average or low volume. Be careful if prices stall around the trendline (hug) or if the trendline has been touched too often.

15. Prepare for a bearish trendline break when prices decline to a rising trendline, fail to bounce and subsequently crawl along the trendline. Prepare for a bullish trendline break when prices advance to a falling trendline, hold most of their gains and crawl along the trendline. Repeated bumping of a trendline also increases the chances of a break.

16. Major trendlines define the longer trend. Minor trendlines define the shorter trend. When prices are above a major trendline (rising), use minor trendlines (falling) to define short pullbacks and generate buy signals with upside breaks. When prices are below a major trendline (falling), use minor trendlines (rising) to define short bounces and generate sell signals with downside breaks.

17. Triangles are usually broken on the flat side. This means an ascending triangle is usually broken with an upside breakout, while a descending triangle is usually broken to the downside. Chartists must look for other clues to determine if a triangle signals accumulation or distribution.

18. Look for a volume climax to signal the end of a long move. An extended advance sometimes ends with a volume surge that marks a blow-off . Conversely, an extended decline sometimes ends with a volume surge that marks a selling climax.

19. Not all gaps are filled. Breakaway gaps signal the start of a new trend and are not filled. Continuation gaps mark a continuation of the existing trend and are not filled. Exhaustion gaps mark a trend reversal and are filled. Chartists should not count on a gap being filled unless they can determine what kind of gap it is, which is easier said than done.

20. During an advance, initiate or add to long positions after a one day decline, no matter how small the decline and especially when the decline is on lower volume. During a decline, initiate or add to short positions after a one-day advance, no matter how big the bounce and especially if the bounce is on lower volume.

Conclusions

At least three themes emerge from these rules. First, direction of the underlying trend determines position preference. Chartists should focus on long positions during an uptrend and short positions during a downtrend. Second, volume plays an important part in the analysis process. Price moves in the direction of the bigger trend should be on higher volume, while counter trend moves should be on lower volume. However, note that volume climaxes can mark the end of an extended move. Third, trading ranges and consolidations are important chart patterns. Long consolidations can mark reversals and future support or resistance levels. Short consolidations often mark a rest in the ongoing trend.

Kiwi Bat in Play Now!

Wow! It has been a real volatile week in FX for me.

Approaching the end of this week, I found this Bullish Bat Harmonic Pattern on the H4 chart of NZDUSD, and its currently in play. This pair has kept its recent price action in a range and as price approaches the bottom of the range around 0.82, it also completes the Bullish Bat Harmonic Pattern.

As usual, I’ll leave it to the market to decide how this one will go.

Bullish Bat Harmonic Pattern on NZDUSD H4 Chart

Bullish Bat Harmonic Pattern on NZDUSD H4 Chart

Will The Cypher Stop The Aussie Bears?

Looking at AUDUSD daily charts, it is quite evident that the momentum is with the bears for now. For those who are short on this pair, you might be wondering where would be a good target to aim for.

Well, I spotted a pretty good looking Bullish Cypher Harmonic Pattern forming up on the daily chart.

In my opinion, it would be a good idea at least to watch the price action when price reaches the 78.6% retracement level of the XA leg to see if a reversal back up is on the cards.

As always, only time and price will reveal what’s in store for the future.

AUDUSD Daily Chart With a Bullish Cypher Harmonic Pattern Forming.

AUDUSD Daily Chart With a Bullish Cypher Harmonic Pattern Forming.

Batting on Tesla

To say that I’m impressed with the performance of Tesla Motors (TSLA) stock price so far would be an understatement. Unfortunately, I late to the game and did not get in to enjoy the massive ride up so far.

But TSLA is now making a correction. And lo and behold, I’ve found what looks like a Bullish Bat Harmonic Pattern forming on the Daily Chart.

Bullish Bat Harmonic Pattern Forming On Tesla Motors (TSLA) Daily Chart

Bullish Bat Harmonic Pattern Forming On Tesla Motors (TSLA) Daily Chart

Looking at my chart above, the D point has confluence of:

  1. An 1.618AB = CD pattern
  2. An 224% retracement of the BC leg
  3. An 88.6% retracement of the XA leg
  4. Minor Resistance turn Support from the highs formed at the end of May 2013.

Let’s see how this one turns out.

Cyphers: They Keep Popping Up Everywhere

Following the aftermath of several central bank news announcements, all trading opportunities mentioned in my previous post “Tis’ The Season For Cyphers” proved to have been invalidated.

Remember one of the 5 Market Truths is that “Anything can happen”. Trading is a numbers game. We keep working our edge, believing that in the long run we will be profitable.

In keeping with the Cypher Season, here is one more that I just stumbled upon. Its on AUDCAD, that was featured in my previous post with a Bearish Cypher Harmonic Pattern. This time round it is a Bullish one forming. This one has one additional confluence factor, which is the lower trend line of the uptrend channel drawn on the daily chart as support near the D point. The new Cypher is in Cyan color.

Bullish Cypher Harmonic Pattern forming on AUDCAD H4 Chart

Bullish Cypher Harmonic Pattern forming on AUDCAD H4 Chart

Below is the Daily Chart showing the Uptrend Channel.

Uptrend Channel On AUDCAD Daily Chart

Uptrend Channel On AUDCAD Daily Chart

Tis’ The Season For Cyphers

While doing my regular search for trading opportunities, I found a bunch of Cypher Harmonic Patterns forming.

Bullish Cypher Harmonic Pattern On EUR/GBP Daily Chart

Bullish Cypher Harmonic Pattern On EUR/GBP Daily Chart

 

Bearish Cypher Harmonic Pattern Forming On GBP/CHF Daily Chart

Bearish Cypher Harmonic Pattern Forming On GBP/CHF Daily Chart

Bearish Cypher Harmonic Chart Pattern Forming On AUD/CAD H4 Chart

Bearish Cypher Harmonic Chart Pattern Forming On AUD/CAD H4 Chart

For more details on the engagement rules for Cypher Harmonic Chart Patterns, please click on this link

 

The 5 Market Truths

1. Anything can happen

2. You don’t need to know what is going to happen next to make money.

3. There is a random distribution between wins and losses for any given set of variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

5. Every moment in the market is unique.

[FX-USDSGD] No Go For This Bat After NFP

The price movement as a result of the Non-Farm Payroll announcement made sure that the Bearish Bat Harmonic Pattern I blogged about in my previous post is a no go.

The price has moved down and almost broke below Point C. Even though Point C was not violated to the downside, the most recent price movement after NFP (Circled in orange below),  has come close enough that the essence of a good Bearish Bat Pattern is no longer there.

I have decided to abandon this setup for now.

USDSGD 4-Hour Chart Showing An Invalidated Bearish Bat Harmonic Pattern

USDSGD 4-Hour Chart Showing An Invalidated Bearish Bat Harmonic Pattern

 

[FX-USDSGD] Bearish Bat Harmonic Pattern Spotted

Here’s one from my home currency… A potential Bearish Bat Harmonic Pattern forming on USDSGD 4-Hour Charts. The potential reversal zone is around the 161.8% extension of the BC leg and the 88.6% of the XA leg. I will be watching the price action when and if price reaches this zone.

In this particular case, because the preceding high is so close to Point X, the stop loss for this trade, if it is taken, would be placed above the preceding high.

USDSGD 4-Hour Chart With a Potential Bearish Bat Pattern Forming

USDSGD 4-Hour Chart With a Potential Bearish Bat Pattern Forming

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