Price Trends: There is more than just up and down!

Price trendsPrice trends: There is more than just up and down!

One of the biggest challenges people face as they attempt to make decisions about the markets is which way the price trend is heading. But this is only part of the story. Much more important than defining up and down trends is the ability to define a sideways market. Why? Because they can occur as often as 70% of the time.

Defining Price trends or the story so far

Ask someone which way the Price trends are going and they will generally take one of two approaches. They will either wimp out and say that there are a lot of factors which need to be considered in determining the trend’s direction, or they will simply give a direction. When challenged to support their belief, often they stumble around in the world of generalities rather than being specific. They can’t define it.

While there are almost as many variations on the concept of defining a price trend as there are people in the markets, you, as a trader/investor, need to have some idea of what constitutes a price trend.

Some of the ideas different people use are Continue reading “Price Trends: There is more than just up and down!”

Simple Moving Average (SMA)

What is a Moving Average?

In simple words, the name is self-explanatory. Moving Average: An average, which is moving. So as the data is added, the average also moves and adjusts itself to the data. Simple enough?

There are various types of Moving Averages, Few are:

  • Simple Moving Average (SMA)
  • Exponential Moving Average (EMA)
  • Weighted Moving Average (WMA)

Etc.

Today’s topic is Simple Moving Average (SMA), I would try to explain as simply as I can :D.

Simple Moving Average

A simple moving average is made by adding the closer together, For however many days you want to be in the moving average, and then dividing by that number of days. So for a 5 day moving average you would add up the last 5 closes, and then divide by 5 to give you today’s moving average number.
Each day moving average number is plotted and forms a moving average line on the chart. Other Moving Averages, There are also other ways to calculate a moving average by giving the most recent close more importance and those are called exponential and weighted moving averages, which we will look at later, but for now let’s just stick with simple moving averages.

Reasons to Use Moving Averages

  • 1 – Smooths out price data

If a market is moving in a choppy manner a moving average will help you to see the trend. Continue reading “Simple Moving Average (SMA)”

Head and Shoulders pattern

Head and Shoulders pattern – Trend Reversal Pattern

I) Regular Head and Shoulders Pattern

Bearish, reversal pattern signaling the end of the current uptrend
Basically looks like the silhouette of a human left shoulder, head, and the right shoulder.
reversal pattern
Like the Double Top, strong volume push prices upwards forming the “left shoulder”. The pullback is on lesser volume, then another strong rally on good volume, forming the “head” … but this time, the volume causing this rally although forming higher prices, is now on relatively lower volume as compared to the vol. in the rally causing the left shoulder … as the stock pulls back to the neckline and starts rallying again to form the right shoulder, now volume is very noticeably lighter the break of the neckline confirms the H & S pattern (Neckline is the line connecting the two troughs on either side of the head).
Volume expansion is noticed as the pattern confirmation takes place … and the stock or index is now in a downtrend. (Reverse happens now … vol. expands on the downfall and decreases on a return move up)
Trading-Wise -> ENTRY

The first down day below the neckline confirms the pattern…….short as the neckline breaks or enter short on a weak rally back to the area of the neckline.This line that was formerly strong support now acts as a stiff resistance.Short half on that return move, and the other half below the low of the confirmatory bar.

TARGET
The first target would be … calculate the difference from the head to the neckline.Add that to the low of the bar that confirmed the pattern.
STOP
The high of the right shoulder.
One Important Condition
Once the neckline gets broken, expect a return move … but at all costs the price should not re-break the neckline upwards. If this happens, it is called a FAILED H&S PATTERN. Like a failed breakdown, this acts as a bear trap and is bullish. So get out if that neckline gets broken back upwards.

II) Inverse Head and Shoulders Pattern

– Reverse of the above
– Reversal pattern that ends a downtrend
– Trade-wise, all reverse of above
reversal pattern

Volume and H & S

Volume plays an important role in us calling a particular pattern a H&S. Let us go through the Volume bit.

When the left shoulder is made, in both the h&s and inverted h&s, expect strong volumes. When the head is made, it is on (usually) decreased volumes as compared to the left shoulder. But as Rahul pointed out a key difference, the rt shoulder on a h&s is on usually lower volumes. Volumes increase when necklines break, and patterns get confirmed. And as all breakdown patterns, a break below support is accompanied by strong volumes and then the return rally to what is now resistance is on low volumes, followed by strong volumes again, bringing the stock to newer lows.
But, in the Inverted H & S, once again, we have strong volumes in the forming of the lt shoulder. Again, we have decreased volumes in the forming of the Head. But, here, we have increased volumes taking prices back to the neckline, then a dip in volume as the stk tries to make the right shoulder, and then a burst in volume taking it through the neckline.

Summarizing H&S

Left shoulder   : Strong volumes
Head               : Lighter volumes
Right shoulder : Same as or lighter than the head.
*** Increase in volumes as neckline breaks to the downside.

Summarizing Inverted H&S

Left shoulder   : Strong volumes
Head               : Lighter volumes
*** Increase in volumes, sometimes higher than before the formation of left shoulder
Right shoulder             : Dip in volumes from the rally
Once again, an increase in volumes breaking the stk out over the neckline.
An important thing to remember is that markets or stocks do not need strong volumes for the breakdown from the h&s as it basically falls with its own weight, but you need strong volumes for a breakout from an Inverted h&s.
NOTE : For head & shoulders to occur , we need a prior trend needed for reversal pattern which is uptrend, h&s is incomplete till neckline is broken, neckline break with large volumes confirm it.The support break indicates a new willingness to sell at lower prices. Lower prices combined with an increase in volume indicate an increase in supply. The combination can be lethal, and sometimes, there is no second chance return to the support break.

Trading using Channels

Trading using Channels:

The Channel is an area or space created by Scrip movements in space/range which is having resistance indicated by tops and support indicated by low of an asset. Channels are the simplest of chart patterns to identify. All we have to do is sketch a line joining tops of a stock and same with the bottoms of stock. The Lines would roughly be parallel to each other or can be in the shapes of wedges. When you start joining tops & bottoms with Lines then you would realize that all the tops & bottoms you just joined make some sense. Yes, If you have discovered this, then you are on right track. See image below (Self-explanatory).
Up and down channels
Channels

Buy at supports and sell at resistance

See few Live trading examples using Channel trading. Few of you must have worked on these calls and surely reaped profits out of it. But, before that, let’s see what happens when the so-called ” Trading Channel ” is broken by price. See Image below. Upper Part of an image shows a Price BREAKOUT
Entry (My style):  The breakout from range should be with high volume. I enter/buy half Qty. On breakout. The stock will come back to retest the resistance it broke (which now becomes support).
Our stop-loss is just below the Entry line (Minor support level). If the stock holds the line and starts moving up from the Entry line. I buy the rest of the position.
Targets: The simple way is to just measure the breadth of the channel and then assume target equal to that.
The lower part of the image shows a Price Breakdown.
Entry, stop-loss and Targets Vice versa as explained above.
Trading using Channels
channel break
Buy on breakout, Sell on breakdown
Channels can be very powerful tools in the arsenal of a technical trader.Now, Let’s see TRADING EXAMPLES for Trading using Channels.

Triangles

Triangles

Triangles
Types of triangles
There are mainly three types of triangles chart patterns.
  1. Symmetrical Triangle : formed in both uptrend and downtrend. Price generally moves on the side of which the break has happened.
  2. Ascending Triangle : formed in uptrend usually and is a bullish pattern.
  3. Descending Triangle : formed in downtrend usually and is a bearish pattern.
These are very strong chart patterns in Trading. In laymen terms, and Triangles are nothing more but like a catapult, storing potential energy that energy is released with what we know as breakouts or breakdowns. The price of a stock just catapults/accelerates after leaving the triangle zone. Due to this phenomenon these are favorite of traders who follow breakouts or breakdowns. Coiled spring is the name used mostly with the symmetrical triangle.

Symmetrical Continuation Triangle

Symmetrical Continuation Triangle-Classic Pattern

A Symmetrical Continuation Triangle (Bullish) is seen as a bullish signal, indicating that the current uptrend may continue. (Bearish) is seen as a bearish signal, indicating that the current downtrend may continue.
Symmetrical Continuation Triangle
Symmetrical Continuation Triangle
Image showing Breakout and breakdown showing Breakout and breakdown showing Breakout and breakdown showing Breakout and breakdown

Description

A Symmetrical Continuation Triangle shows two converging trendlines, the lower one is ascending, the upper one is descending. The pattern occurs because prices are reaching both lower highs and higher lows. The pattern will display two highs touching the upper (descending) trend line or above the upper (descending) trend line.trendline.This pattern is valid when the price goes out of the triangle pattern to close below the bottom (ascending) trend line or above the upper (descending) trendline..trend line.
Tracking the Volume is important. Normally, the volume takes after a solid example: volume ought to lessen as the cost swings forward and backward between an inexorably
Important Characteristics
Few important characteristics of the pattern.

Event of a Breakout

Specialized investigators give careful consideration to what extent the Triangle takes to create to its peak. The general decide is that costs should break out – plainly enter one of the trend lines – somewhere close to 75% and 66% of the flat width of the development. The breakout, at the end of the day, ought to happen a long time before the example achieves the zenith of the Triangle. The nearer the breakout strikes the zenith the less solid the arrangement.

Duration of the Symmetrical Continuation Triangle
The Symmetrical Continuation Triangle is a relatively short-term pattern. While long-term triangles do form, the most reliable triangles take one to three months time to develop.
Volume
Financial specialists should see volume diminishing as the example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume.example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume.example advances.example advances.example advances.example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume..example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume..example advances toward the summit of the Triangle. At breakout, be that as it may, there ought to be a perceptible increment in volume.
Trading Considerations

Length of the Pattern

Consider the length of the example and its relationship to your exchanging time skylines. The span of the example is thought to be a marker of the length of the impact of this example. The more extended the example the more it will take at the cost to move to the objective cost. The shorter the example the sooner the value move. In the event that you are thinking about a fleeting exchanging opportunity, search for an example with a brief length. In the event that you are thinking about a more drawn out term exchanging opportunity, search for, an example with a more drawn out length.

Target Price

The objective cost gives an imperative sign about the potential value move that this example shows. Consider whether the objective cost for this example is adequate to give sufficient returns after your costs, (for example, commissions) have been considered. A decent general guideline is that the objective cost must show a potential return of more noteworthy than 5% preceding an example ought to be viewed as helpful. Nonetheless, you should consider the present cost and the volume of offers you expect to exchange. Additionally, watch that the objective cost has not as of now been accomplished.

Inbound Trend

The inbound pattern is an imperative normal for the example. A shallow inbound pattern may demonstrate a time of union before the value move showed by the example starts. Search for an inbound pattern that is longer than the term of the example. A decent general guideline is that the inbound pattern ought to be no less than two times the span of the example.

Confirm the Breakout
To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the breakout signals that the price is ready to move. A key sign of a possible false move is low volume. If there’s no pick up in volume around the breakout, investors should be wary. Typically, a good breakout from a Symmetrical Continuation Triangle formation will be accompanied by a definite surge in volume.
Criteria that Support
Support and Resistance
Search for an area of help or resistance around the objective cost. A district of value combination or a solid Support and Resistance Line at or around the objective cost is a solid marker that the cost will move to that point.
Price moves below Support Level or above the resistance level.
You can also check that the prices following the pattern have also crossed above/below a support level such as a 200-day moving average. This would provide extra confirmation that the trend is poised to continue uptrend/downward.
Volume
A strong volume spike upon the arrival of the example affirmation is a solid marker in the help of the potential for this example. The volume spike ought to be altogether over the normal of the volume help of the potential for this example. The volume spike ought to be altogether over the normal of the volume for the span of the example. What’s more, the volume amid the term of the example ought to be declining all things considered.

Avoid pattern break in following cases:

No Volume Spike on Breakout

The absence of a volume spike upon the arrival of the example affirmation means that this example may not be dependable. Also, if the volume has stayed consistent, or was expanding, over the term of the example, at that point this example ought to be viewed as less dependable.

Short Inbound Trend

An inbound pattern that is fundamentally shorter than the example length means that this example ought to be viewed as less dependable.

Symmetrical triangle Breakout on upside

Bajaj Auto Symmetrical Continuation Triangle example

Cup and Handle pattern

I) Cup and Handle Formation

Also a reversal pattern, but more obvious at the bottom rather than at the top
Basically looks like a coffee cup and a handle
There is a basing stage, accumulation phase (cup), then a breakout, followed by a pullback, forming what looks like a handle
Breaking out of the top of the cup is confirmation of a change in trend
C&H pattern
Cup & Handle

Cup & Handle

Few criteria
The cup should be more rounded than a “V”
The handle should be in the top part of the cup, not too deep
Cup pattern should take at least 7weeks to form
Volumes should contract in the handle and expand on b/out
Trading-Wise -> ENTRY
From a trade perspective, the buy is the area where the top of the cup is taken out
TARGET
Measure the distance to the low of the cup.Add that to the breakout area
STOP
At the low of the handle

I.a) Reverse Cup and Handle

Occurs at the top, rest all reverse of the above
LIVE EXAMPLE: CUP and HANDLE PATTERN:
Stock:     DCM
Pattern confirmed on 23rd March @ 83 CMP: 93 TARGET: 140+ Today I am posting a Live example of This pattern. The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout. It was developed by William O’Neil. Now trading in 180’s
BEML cup and handle formation
Cup and handle

 Contd. to Head & Shoulders pattern.

Descending Continuation Triangle

 What is Descending Continuation Triangle?

Descending Continuation Triangle
 A Descending Continuation Triangle (Classic Pattern) is considered a bearish signal, indicating that the current downtrend may continue.
A Descending Continuation Triangle features two converging trendlines. The bottom trendline is horizontal and the top trend line slopes downward. The pattern illustrates lows occurring at a constant price level, with highs moving constantly lower. The pattern displays two highs touching the upper trendline and two lows touching the lower trend line.
This pattern is confirmed when the price breaks out of the triangle formation to close below the lower trendline.
Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions made based on this pattern.

Important Characteristics

Following are important characteristics of this pattern.
Occurrence of a Breakout
Technical analysts pay close attention to how long the Triangle takes to develop to its apex. The general rule is that prices should break out – clearly penetrate the lower trendline – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The breakout, in other words, should occur well before the pattern reaches the apex of the Triangle. The closer the breakout occurs to the apex the less reliable the formation.
Duration of the Triangle
The Triangle is a relatively short-term pattern. It may take from one to three months to form.
Shape of Descending Continuation Triangle
The horizontal bottom trendline need not be completely horizontal.
Volume
Investors should see volume decreasing as the pattern progresses toward the apex of the Triangle. At breakout, however, there should be a noticeable increase in volume.

Trading Considerations

Duration of Pattern

Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach its target. The shorter the pattern the sooner the price moves. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.
Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However, you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.
Inbound Trend
The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least 2 times the duration of the pattern.

Criteria that Support

Look for a region of support at the bottom trendline and a line of resistance at the highest high of the Descending Continuation Triangle.
Moving Average
Compare prices to the 200 days Moving Average. When prices are close to or touch the 200-day Moving Average this signal is considered stronger.
Volume
A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.

Criteria that Refute

No Volume Spike on Breakout
The lack of a volume spike on the day of the pattern confirmation is an indication that this pattern may not be reliable. In addition, if the volume has remained constant, or was increasing, over the duration of the pattern, then this pattern should be considered less reliable.
Short Inbound Trend
An inbound trend that is significantly shorter than the pattern duration is an indication that this pattern should be considered less reliable.
Underlying Behavior
This pattern with its increasingly lower highs and constant lows indicates that sellers are more aggressive than buyers.

Bottom Triangle – Bottom Wedge

What is Bottom Triangle – Bottom Wedge?

Classic Pattern

Bottom Triangle and Bottom Wedges are considered to be bullish signals that mark a possible reversal of the current downtrend.

Description

Bottom Triangle and Bottom Wedge make up a group of patterns which have the same general shape as Symmetrical Triangles, Wedges, Ascending Triangles and Descending Triangles. The difference is that these particular formations are the reversal and not continuation patterns. These patterns have two converging trendlines. The pattern will display two highs touching the upper trendline and two lows touching the lower trend line. Contrary to Triangle formations, Wedges are characterized by their boundary trendlines both moving in the same direction.
This pattern is confirmed when the price breaks upward out of the Bottom Triangle or Bottom Wedge formation to close above the upper trendline.
Volume is an important factor to consider. Typically, volume follows a reliable pattern: volume should diminish as the price swings back and forth between an increasingly narrow range of highs and lows. However, when the breakout occurs, there should be a noticeable increase in volume. If this volume picture is not clear, investors should be cautious about decisions based on the particular Triangle or Wedge pattern.
Important Characteristics
Following are important characteristics for this pattern.
Occurrence of a Breakout
Technical analysts pay close attention to how long the pattern takes to develop to its apex. The general rule is that prices should break out – clearly penetrate the upper trend line – somewhere between three-quarters and two-thirds of the horizontal width of the formation. The breakout, in other words, should occur well before the pattern reaches the apex of the Triangle or Wedge. The closer the breakout occurs to the apex the less reliable the formation.
Duration of the Triangle or Wedge
This pattern is a relatively short-term. While long-term Bottom Triangle and Bottom Wedges do form, the most reliable patterns take between one and three months to form.
Volume
Investors should see volume decreasing as the pattern progresses toward the apex of the triangular or wedge-shaped pattern. At breakout, however, there should be a noticeable increase in volume.
Trading Considerations
Duration of the Pattern
Consider the duration of the pattern and its relationship to your trading time horizons. The duration of the pattern is considered to be an indicator of the duration of the influence of this pattern. The longer the pattern the longer it will take for the price to reach its target. The shorter the pattern the sooner the price move. If you are considering a short-term trading opportunity, look for a pattern with a short duration. If you are considering a longer-term trading opportunity, look for a pattern with a longer duration.
Target Price
The target price provides an important indication about the potential price move that this pattern indicates. Consider whether the target price for this pattern is sufficient to provide adequate returns after your costs (such as commissions) have been taken into account. A good rule of thumb is that the target price must indicate a potential return of greater than 5% before a pattern should be considered useful. However, you must consider the current price and the volume of shares you intend to trade. Also, check that the target price has not already been achieved.
Inbound Trend
The inbound trend is an important characteristic of the pattern. A shallow inbound trend may indicate a period of consolidation before the price move indicated by the pattern begins. Look for an inbound trend that is longer than the duration of the pattern. A good rule of thumb is that the inbound trend should be at least two times the duration of the pattern.

Criteria that Support

Support and Resistance
Look for a region of support or resistance around the target price. A region of price consolidation or a strong Support and Resistance Line at or around the target price is a strong indicator that the price will move to that point.
Moving Average
Watch for the 200-day moving average to flatten. When prices cross above the 200-day moving average (usually about two-thirds to three-quarters of the way through the pattern), the pattern is considered more reliable.
Volume
A strong volume spike upon the arrival of the example affirmation is a solid marker in the help of the potential for this example. The volume spike ought to be altogether over the normal of the volume help of the potential for this example. The volume spike ought to be altogether over the normal of the volume for the span of the example. What’s more, the volume amid the term of the example ought to be declining all things considered.
Criteria that Refute

No Volume Spike on Breakout

The absence of a volume spike upon the arrival of the example affirmation means that this example may not be dependable. Also, if the volume has stayed consistent, or was expanding, over the term of the example, at that point this example ought to be viewed as less dependable.

Short Inbound Trend

An inbound pattern that is fundamentally shorter than the example length means that this example ought to be viewed as less dependable.

 Underlying Behavior
This pattern is a result of converging trendlines of support and resistance which give this pattern its distinctive shape. This occurs because the trading action gets tighter and tighter until the market breaks out with great force. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the range of the price movements increasingly tight. As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the “apex”.
The narrowing of the trading action and the decreasing volume of trade reflect the indecision in the market. Finally, consensus or decision in the market is reached and this is reflected as the price breaks out upward to close above the triangular or wedge-shaped boundary. A spike in volume on this breakout date reflects the stronger consensus that the financial instrument should move in that direction.

Continue reading “Bottom Triangle – Bottom Wedge”