Chart Analysis

Learn to trade Chart Analysis

Symmetrical Triangles
Ascending Triangles
Descending Triangles
Double Top
Double Bottom
Head and Shoulders
Reverse Head and Shoulders

Symmetrical Triangles
Symmetrical triangles are chart formations where the slope of the price’s highs and the slope of the price’s lows converge together to a point where it looks like a triangle. What is happening during this formation is that the market is making lower highs and higher lows. This means that neither the buyers nor the sellers are pushing the price far enough to make a clear trend. If this was a battle between the buyers and sellers, then this would be a draw. This type of activity is called consolidation.

In the chart above, we can see that neither the buyers nor the sellers could push the price in their direction. When this happens we get lower highs and higher lows. As these two slopes get closer to each other, it means that a breakout is getting near. We don’t know what direction the breakout will be, but we do know that the market will break out. Eventually, one side of the market will give in. So how can we take advantage of this? Simple. We can place entry orders above the slope of the lower highs and below the slope of the higher lows. Since we already know that the price is going to break out, we can just hitch a ride in whatever direction the market moves.

In this example, if we placed an entry order above the slope of the lower highs, we would’ve been taken along for a nice ride up. If you had placed another entry order below the slope of the higher lows, then you would cancel it as soon as the first order was hit.

Ascending Triangles
This type of formation occurs when there is a resistance level and a slope of higher lows. What happens during this time is that there is a certain level that the buyers cannot seem to exceed. However, they are gradually starting to push the price up as evident by the higher lows.

In the chart above, you can see that the buyers are starting to gain strength because they are making higher lows. They keep putting pressure on that resistance level and as a result, a breakout is bound to happen. Now the question is, “Which direction will it go?” “Will the buyers be able to break that level or will the resistance be too strong?”

Many charting books will tell you that in most cases, the buyers will win this battle and the price will break out past the resistance. However, it has been my experience that this is not always the case. Sometimes the resistance level is too strong and there is simply not enough buying power to push it through.

Most of the time the price will in fact go up. The point I am trying to make is that we do not care which direction the price goes, but we want to be ready for a movement in either direction. In this case, we would set an entry order above the resistance line and below the slope of the higher lows.

Descending Triangle
As you probably guessed, descending triangles are the exact opposite of ascending triangles (I knew you were smart!). In descending triangles, there is a string of lower highs which forms the upper line. The lower line is a support level in which the price cannot seem to break.

In the chart above, you can see that the price is gradually making lower highs which tell us that the sellers are starting to gain some ground against the buyers. Now most of the time, and I did say MOST; the price will eventually break the support line and continue to fall. However, in some cases, the support line is too strong, and the price will bounce off of it and make a strong move up.

The good news is that we don’t care where the price goes. We just know that it’s about to go somewhere. In this case we would place entry orders above the upper line (the lower highs) and below the support line.

In this case, the price did end up breaking the support line and proceeded to drop rather quickly. (*note- The market tends to fall faster than it rises which means you usually make money faster when you are short).

Double Top
A double top is a reversal pattern that is formed after there is an extended move up. The “tops” are peaks which are formed when the price hits a certain level that can’t be broken. After hitting this level, the price will bounce off of it slightly, but then return back to test the level again. If the price bounces off of that level again, then you have a DOUBLE top!

In the chart above you can see that two peaks or “tops” were formed after a strong move up. Notice how the 2nd top was not able to break the high of the 1st top. This is a strong sign that a reversal is going to occur because it is telling us that the buying pressure is just about finished.

With double tops, we would place our entry order below the neckline because we are anticipating a reversal of the uptrend.