Every trader is looking for the so-called "golden grail", which will lead him to richness and give him an advantage in the market. This search makes us forget what is the real essence of the market, what to pay attention to and what is the key to success - systematic earnings, which is the main task of every trader. Unfortunately, the truth is that the market is brutal and has our grail in its nose, often trying to trick us in the moments when we least expect it. To avoid this, we can use price formations, which are a basic tool for technical analysis. Depending on the nature of the formations concerned, they may have a pro-upward or pro-declining tendency.
We divide the formations into:
- trend reversals,
- the continuation of the trend.
They are characterized by a certain shape, which is created on the basis of the volume and over a certain time. The art is to properly recognize the formation in its early stages, which is sometimes quite difficult. Trend reversal formations occur in the accumulation and distribution phases, that is at the top and bottom. However, in this lesson we will look at the continuation patterns of the prevailing trend (we have talked about trends - what they are - in previous lessons).
As continuation formations, we distinguish:
- Symmetrical triangle
- Upward triangle
- Descending triangle
- Pennants 6 Rectangular formations (consolidation)
- Wedge formations
It is characterized by the fact that the share price is within 2 lines, which resemble the sides of a triangle in their shape. Although it is considered to be a continuation formation, it is worth noting that the break-out can sometimes occur unexpectedly in the opposite direction. What is important here is a very clear increase in volume during a price break-out from the triangle formation.
THE ASCENDING TRIANGLE
It is characterized by a completely horizontal single line. In the case of an ascending triangle, the upper line will be horizontal, which is also a resistance to the price of the instrument. As in the case of a symmetrical triangle, it is important that the break-out from the formation is accompanied by a high volume, otherwise the break-out may prove to be false.
A DISCOUNTED TRIANGLE
A descending triangle, as opposed to an ascending rectangular triangle, appears in an existing downward trend and is usually considered a pro-declining formation. A break in the support line should be accompanied by a high volume.
They are one of the basic formations for continuing the trend. A specific feature of flags is their short period of formation. As in the case of triangles, the break-out from the formation is accompanied by an increased volume. Flags occur in both upward and downward trends.
The period of their formation is relatively short. The shape of the formation is determined by two convergent lines resembling the shape of isosceles triangles. The volume, which is originally high, usually decreases from the moment of entering the formation. Then a strong increase in activity should accompany the break-out. Pennants usually appear in the middle of strong price movements.
THE RECTANGULAR FORMATION
The break-out from the formation is accompanied by an increased volume. The longer the consolidation takes, the more confident and violent the break-out will be. Please note that with a previously formed upward trend the breakout is likely to occur at the top. The opposite is true when you are in an uptrend. Then we will have a fall in price. An interesting fact is that the longer the consolidation lasts, the more impatience investors become and the sale of the instrument begins, resulting in a sudden price drop. Here is an example of consolidation in an upward trend (in violet):
And here, in turn, the effect of the reaction of impatient investors. Let's look at the volume, which started to grow extremely:
THE WEDGE FORMATION
This formation is divided into ascending and descending wedges.
a) ascending wedge - is a formation which usually announces a fall in prices. It often takes shape during short increases with long declines or in the last phase of a boom. The break-out from a wedge should take place not earlier than 30% before its end.
b) descending wedge - is a formation that usually announces price increases. It is more likely to be in a medium-term upward trend correction than in a long-term downturn. The wedge does not say much about the range of its signal, but it is quite clear and visible. Here too, the 30% break-out rule applies, before the end of the wedge.
That's the basic information about the trend continuation pattern. I hope it will have a positive impact on your positions. In further materials we will describe the trend reversal formations and I also invite you to keep track of the page.