Graphical Figures in Technical Analysis
Generally speaking, graphical figures in technical analysis are formed on the basis of candlestick patterns. They represent the most frequently encountered price behavior models. Each figure has an approximate profit target, and is considered active only after it breaks through its characteristic price level. Figures can be trend-reversing or trend-sustaining. I would advise you to concentrate more on the direction of the breakthrough, rather than on the preceding trend. You must be aware, however, that false breakouts are also possible, in addition to breaks that are followed by periods of testing. That’s why it’s important – when you open a position with the goal of “playing out” a particular figure – that you consider the overall market situation, and use other analytical tools as well.
The most popular figures are: head and shoulders, reversed head and shoulders, triangle, symmetrical triangle, flag, wedge, pennant, double top, triple top, double bottom, triple bottom; in addition to the still popular, but less frequently encountered – diamond and cup and handle. There are also harmonious patterns, such as – deep crab, bat, butterfly and others. Similar to the ordinary ones, the harmonious figures comprise candlesticks as well. The main thing about them is that they are based on Fibonacci numbers. It is insufficient if they only look as they should, they should also have the correct ratios.
Head and shoulders is typically traded after a break happens around the “neckline” – that is, the imaginary line, linking the bottom formed between the left shoulder and the head, and that between the head and the right shoulder. The expected price movement following the break equals the distance from the head to the neckline. Head and shoulders is consider a trend-reversing figure.
Triangles can exemplify a narrowing range. They can be subdivided into symmetrical, ascending, and descending. The symmetrical ones usually mean that the trend is about to continue. The two lines, locking the consolidation between them, incline towards one another. The ascending triangle is characterized by an upper horizontal line and a lower inclining one, pointing towards the upper trend line. It forms a 90º triangle. The descending triangle, on the other hand, is a mirror image of the ascending one. It is characterized by a lower horizontal line and an upper inclining line.
When you notice a triangle, you should wait for a break – either crossing the level of resistance, or the level of support. After this takes place, you can enter the market, by following the direction of the breakout. Your target should be the triangle’s height, measured from its base, which is then superimposed on to the break point. Wedges are similar to triangles. They are considered a trend-sustaining figure, in which the target could be much higher than the wedge’s height. If the figure comprises lesser than 30 candles, it is a wedge; if it comprises more than 30, then it is a triangle.
A wedge is usually preceded by strong, concentrated movement, without any or with very few corrections. It represents a sideways or diagonal line to that of the trend consolidation. The flag is characterized by the same features as the wedge. It is a trend-sustaining figure that represents strong, consolidated movement – similar to the pole of a flag – followed by sideways consolidation, against the trend. The only difference between a flag and a wedge is is that the flag’s consolidation is locked between two parallel lines, whereas in the wedge – it decreases, locked between two crossing lines.
It is important to understand that these figures – as is the case with any kind of trading setup – are not 100% reliable. False breaks occur frequently and there are other kinds of misleading movements. What you gain by being acquainted with this figures is a certain “edge.” If you combine knowledge of these figures with other types of analyses, you can achieve great results.