Most of this text is fairly straightforward.

The terms and descriptions that we use are

often self-evident, and we hope that even someone with no experience of trading will be
able to grasp the essence of the discussion with a little effort. Theres but one point wed
like to clarify.

At various points in this text, we speak of a bullish or bearish trend, or bullish or bearish
traders who want to take the price up or down. The terms bullish and bearish are used
in analogy with the stock market, and do not have any intrinsic value in the forex market.
When someone sells the USDCHF pair, for example, it is possible to regard him as a bull
and a bear at the same time. When he sells the pair, he is selling the CHF, and buying the
dollar (USD); as a result, hes both a dollar bull, and a franc bear at the same time. And,
of course, the opposite is also true. Although were used to hearing that theres always a
bull market in forex, the dual nature of transactions means that theres also a bear market
in parallel.

Thus, those who buy stocks in a US exchange are bullish on stocks, but bearish on the US
dollar, by definition. However, since stocks and currencies are different asset classes,
most beginning traders ignore this relationship, and only consider the stock market aspect
of trading. You should keep this difference in mind while going through our text and
interpreting the occasional references to bulls and bears.

Various Trend Patterns

Those with even a brief experience with charts know that price action on an ordinary day
is highly unpredictable and volatile. Although long term price trends depend on economic
factors which are non-random, short term prices depend on money flows and positioning
which are independent of fundamental realities. Thus, in order to smooth out the day-to-
day fluctuations of the market, traders have long been using simple lines drawn on the
chaotic price action, and these lines are termed trend lines.

Trend lines are lines drawn between two prices on a chart. As the beginning and end of a
trend is arbitrary, it is possible to speak of a trend between any two points on any time
frame. Lets see an example.
As we see, depending on the extreme values chosen, its possible to define lots of micro
and macro trends on a given chart pattern. While some trend are longer lasting than
others, the fractal-like nature of the price charts precludes the outlining of a particular
time period which can constitute a reference value for the most reliable trend line. For
example, a three hour long trend may sound like a brief and unimportant one, but if it is
broken down into its 5-minute long micro trends and patterns, it is no less complicated
than a daily or weekly trend when it is broken down into its 30-minute long constituents.
It is possible that on an ordinary day the trend will be an uptrend on a monthly chart, a
range pattern on a weekly chart, a downtrend during the past week, a channel on an
hourly chart, and a flat consolidation pattern on a five minute chart.

Consequently, it is difficult to find the criterion that will help us determine the reliable
extremums for drawing trend lines. In order to overcome this problem, our advice is that
the trader avoid predicting the beginning of a trend, and instead focus on those that are
already strong and developing. Since technical tools are insufficient for identifying a
trend at its earliest stages, the technical trader must choose a trend following strategy,
instead of a trend seeking one.
The strength of a trend can be measured in a number of ways, some of which are
technical, while others are fundamental. In general, a widely accepted rule of thumb
among technical traders is that the more often a trend line holds, the more reliable it is.
Similarly, a longer-lasting trend is more reliable than one that has been in existence for a
shorter period of time. In fact, the longer a trend lasts, the greater its potential for
developing into a bubble, and consequently the safer it is for cooler-headed trend
followers who will exit it just a while after the price graph takes the form of a parabola.

In this weekly chart of the EURUSD pair, we notice that between 2002 and 2005 the
price maintained a formation that presented a clear periodic spiking pattern and was the
mere outgrowth of the prevailing trend. However, between Autumn 2007, and Summer
2008, and anomalous parabolic price pattern developed, which also possessed the nature
of a bubble, at least technically. In general, the conservative trader would have exited the
trend a short while after the development of the parabolic pattern. Enough profits have
been made, and as the trend keeps spiking, invalidating the signals generated by most
technical tools, theres little point in engaging in a dangerous speculative game.
Identifying bubbles is not easy with technical tools alone, but we will confine our
discussion to technical approaches in this text.
It is often the case that the longer a trend lasts, the higher its volatility will be. Since
technical strategists, and other speculators favor trends that are longer lasting, a longer
lasting trend will act like a vacuum cleaner for all sorts of individuals who express an
opinion in favor of the trend only because others do so also. As such players have little
understanding of the causes of a trend, they are more prone to quitting their positions in
response to short term fluctuations which deepens those fluctuations, and consequently
increases volatility. Eventually, at the later stages of the trend these actors outnumber
those who know what they are doing, and that is also the phase where the trend turns into
a bubble.

Based on all of the above, we recommend that the trader choose trends that present a
clear, and visually identifiable price pattern with a unmistakable directionality to it.
Lower volatility is a sign that the trend is in a relatively early stage of development, and
is safer to exploit. A trend with large swings can also be exploited for profit, but is more
demanding on the nerves of the trader. On the other hand, large counter-trend swings in a
solid and long term trend can constitute exceptionally profitable entry/exit points, if the
emotional aspect of trading is mastered. Bubbling trends are dangerous because the large
price swings make it very hard to distinguish an ordinary counter-trend movement which
constitutes a trading opportunity, from the eventual collapse of the bubble which
constitutes an extremely destructive scenario for the trend follower who attempts to bet in
harmony with the trends overall direction. That is why we advise against participating in
parabolic price movements..

In this text, we will examine downtrends and uptrends, and will then turn our attention to
trend channels.

Downtrends and Uptrends

A uptrend is a situation where the consensus of market participants takes prices higher on
the longer term. In other words, for the duration of the trend the bids of the buyers cannot
be met by the offers of the sellers, and the price is driven higher as a result. Ideally, each
successive high is higher than the previous one, and sometimes each successive low is
also higher than the one preceding it. Needless to say, such perfect patterns are rare, and
in general the trader must make some arbitrary decisions on the validity of the trend
beyond the signals generated by the price action.
In the hourly chart of the EURJPY pair above, we see a gently sloping trend line that is
touched three times by the developing uptrend. Each time the trend line survives an
attack of the sellers, so to speak, its credibility, as perceived by the various speculative
actors in the market, increases, and so does its volatility, as a result. As we see, as soon as
the trend was established at around April 1st, by surviving the initial assault by the
sellers, more and more traders joined the action, and causing a steeper slope on the price
chart. Eventually, the price returned and touched the hourly trend line, as the buying
spree failed to gain enough momentum to create a mini-bubble.

A downtrend is the opposite of the uptrend, where the market consensus favors the sellers
in the longer term. The buyers are unable to drive the long term patterns on the price
chart, and each successive low is lower than the previous one, while successive highs are
also registered at lower values.
In this example, we see the highly volatile daily downtrend of the USDJPY pair. The
trend line was hit four times, and following the third, a short term parabolic movement (
the very long red candles around 15th August) created a brief bubble which also signaled
the end of the brief daily trend. The reaction of the buyers was swift and strong, and after
a few swings, the price broke out of the downtrend line and rallied.

The longer term that we mentioned above is long only in terms of the charts period. For
instance a three-hour long trend on a five minute chart is a long term trend, just like a
trend that lasts for one year on a daily chart. Of course the price action on such different
time periods will differ greatly with respect to the role of the fundamentals, but they are
same as far as technical analysis is concerned.

An important point to remember is that the trend line is drawn above the price action in a
downtrend, and it is drawn below the price action in an uptrend.

Trend Channel

A trend channel is a fairly regular and predictable formation that is created when the
price action is confined between two parallel lines. The trend maybe an uptrend or a
downtrend, but the repeated attempts by the drivers of the trend to break out of the range
indicated by the channel fails repeatedly, creating the channel pattern.

We may think of the upper and lower bound of the channel as dynamic support and
resistance lines which are readjusted as the price develops in a particular direction. For
instance, in an uptrend channel, the buyers are able to move the price higher, but their
exuberance is checked by a determined group of sellers and profit takers who create a
temporary resistance line that cannot be breached by the buyers. The opposite is true
when the channels is part of a downtrend.

As with the trend lines, a channel will attract more traders each time it holds at its parallel
support and resistance lines. Unlike the trend line, however, it is very easy to identify a
bubbling trend that grows out of a channel, because the breach and breakdown of the
pattern is unmistakable.

In this daily chart of the EURUSD pair, we see a developing channel between early
February 2007, and mid-June of the same year. The channel is tested three times on the
upper, and three on the lower line, and eventually breaks down as the sellers temporarily
manage to overwhelm the buyers determination. During this period, each of the several
tests at both the upper and lower lines posed excellent trading opportunities. By the
beginning of March the channel pattern was clearly identifiable.

Obviously, the main problem of trading the channel is the difficulty of identifying where
and when the pattern will breakdown. Since in most cases this is not possible (and
especially for short term trends), the trader must protect his position by a carefully placed
stop-loss order which will liquidate the position if clear signs of a breakout are present, or
if the fluctuations become too difficult and costly to accommodate.

The channel consists of parallel trend lines, but it is also a range pattern. Thus, the
methods used in range trading, including technical indicators, can be utilized to analyze
and understanding channels too. Consolidation patterns, ranges, and channels are all
prone to breaking down in the aftermath of violent breakouts, and the trader should keep
this fact in mind when deciding on leverage, trade size, and capitalization.

Head and Shoulders Patterns

The head and shoulders pattern is one of the reversal patterns. In other words, it indicates
that the ongoing price action is in peril of reversing direction at least on a temporary
basis. But while this is so, as with most technical patterns and indicators, it can arise in
situations that have no relationship with a reversal, and the trader must make sure that he
confirms his reversal scenario with data from other sources and indicators.

In general, the head and shoulder pattern is similar to a triple top or bottom formation. In
a triple top or bottom, the price attempts to break out of a support or resistance line three
times, and in each case the attempt results in a failure. In the head and shoulders
formation, the second of the three tops or bottoms appears to break out of the support or
resistance line, but eventually falls back as the price action fails to generate enough
momentum. As it can be seen in the following charts, the pattern vaguely resembles the
head and shoulders of a human being.

As we mentioned, the head and shoulders formation often signifies a reversal, but by
definition it also necessitates the existence of a new trend high. What is the cause of this?
Lets examine the chart below to discuss this.
As we see in this example, the slightly irregular shoulders of the price action slopes with
angles below 45 degrees, indicating a trend that is sustainable. On the other hand, the
large spike in the middle, the head, resembles a parabola strongly. As we had discussed
before, parabolic price graphics are impossible to maintain in the long term, except under
very unusual circumstances. Thus, the head of the head and shoulders pattern represents a
period of euphoria, indicating that the price action is developing in such a way that the
inevitable reaction will necessitate a large swing which may well invalidate the previous
trend. Eventually, as the head is also completed, and the final leg of the formation
develops, most of the traders abandon their effort to drive the trend to new heights, and
the trend ends.

The head is the most important component of this pattern, its form is usually
unmistakable. The shoulders can be one of the various possible triangle patterns, or they
might be the part of a wider range pattern that develops along with the head and
shoulders formation. In either case, the identification of this pattern will depend on the
mid-section, that is, the head of HS formation.

One important point to be remembered when analyzing a head and shoulders pattern is
that the signaled reversal may be temporary. The development of this pattern consists of
two periods when the various traders are speculating on a breakout, preparing themselves,
but nobody in the market is willing to be the one who initiates it.
Upward Head and Shoulders

There are two types of head and shoulders patterns, one of them develops in an uptrend,
the other occurs in a downtrend. While they are very similar in both appearance and
function, well examine them separately for the sake of clarity.

Towards the end of an uptrend, many traders will be unsure about driving the price
higher, but there will not be enough of those whod want to take strong counter-trend
positions either. These traders, who are skeptical of the trend, but are unwilling to bet
against the bullishness of the crowd, will instead choose to sell into strength, as the trend
registers successive highs. Eventually, as the see-saw play between the buyers and the
sellers is close to culmination, the head and shoulders pattern may develop, indicating a
temporary victory by the buyers who then drive the price to much higher levels, possibly
breaking successive resistance lines in a bout of euphoria. Unfortunately for some of
them, the market is not yet ready to sustain such bullish energy, and soon enough, the
price collapses, in downward v-reversal pattern, taking the quote back to the level of the
shoulders. As the buyers make one final attempt at rally, the second shoulder of the
pattern is formed too, completing the last part of the HS formation, and eventually
leaving the scene for a full-scale reversal.
In this hourly chart of USDCHF pair, we have outlined the development of the USDCHF
pair with a large ellipse. Starting from January 21st, the price keeps moving in a
somewhat subdued uptrend which nonetheless keeps registering higher highs during its
development. After the early hours of January 22nd, however, a period of range trading
ensues, lasting for a whole day, indicating the unwillingness of buyers to take greater
risks in the direction of the main trend. Once this range pattern breaks down, in the early
hours of January 23rd, a small portion of buyers assume the control of the price, and the
rally fuelled by their action takes the price from 1.152, to 1.17, a rise of about 200 points.
Unfortunately, we cannot be certain, but the volatile and sharp movement of the price
indicates that the volume was contracting during this period too.

As the inevitable reversal occurs, the ensuing price action is fast, sharp, and severe. The
buildup during the development of the head and shoulders pattern is unleashed in full
power, as the price breaks all the resistance levels in a 300-pip downward move, erasing
all the gains of the previous uptrend.

Head and shoulders patterns absorb the tension in the market, and the ensuing formation
usually shares some properties with ranges too. As a result, and just as with the breakout
from an ordinary range pattern, the end of a HS formation can be wild, swift, and
powerful. In order to avoid this problem, we may initiate our sell-order when the
oscillators reach very low levels, and volatility is low.

Reverse Head and Shoulders

The reverse head and shoulders pattern signals that an ongoing downtrend is in danger of
reversal. It is most often found at the end of a strong and long-lasting downtrend, where
most market participants are confident that the prices will keep falling, but are also aware
that the trend is developing too fast, and dont want to be the first to take risks. In this
case, the head of the formation is driven by panic selling (although, due to the nature of
the forex market, we might speak of overenthusiastic buying too.) The shoulders can be
considered as a continuation of the ongoing trend, rather than saying anything about the
ultimate outcome of the price action. As usual, the head and shoulders pattern may
ultimately be proven to be nothing but a temporary period of consolidation, and the prices
may continue on the previous direction with hardly a pause.
On this hourly chart of the USDCHF pair, the head and shoulders pattern, depicted by the
large circle in the middle, signals the end of a previous downtrend. Between 17th
December, and 18th December, we see prices consolidating in an irregular formation
which we choose to identify as the left shoulder of the HS pattern. But this is clear in
hindsight only. At the moment, the traders would regard the price action as but a
continuation of the downtrend prior to the development of the head and shoulders.

Later, as the price makes one very sharp dive, and a similarly sharp spike a few hours
later, we note the development of the head of the HS pattern. This time, the indications
are strong that the downtrend is in danger of being exhausted. As we see on the graph,
prior to the spike which erased all the gains of the downtrend, all the downward legs were
final, and marked new lows of the trend.

Finally, the right shoulder of the HS pattern develops between 18th and 19th December,
and eventually the hourly downtrend ends as the price completes the reversal, and a long
period of consolidation ensues in a triangle pattern that lasts between 19th and 23rd
December.

The reverse head and shoulders pattern is the exact opposite of the ordinary head and
shoulders formation. It is easy to interpret it on that basis, and we provide this example
for the sake of clarity.
Triangle

A triangle is a closed formation where the range is not constant, unlike a true range
pattern. True triangles are created when the range gets increasingly narrower in time, the
expanding triangle is the case where the range is wider. Triangles that occur after a major
spike in the market are classified as flags and pennants, depending on the shape of the
eventual range pattern.

Triangles are continuation and consolidation patterns; they appear where the trend slows
down, as the existing market participants reconsider their positions, readjust their plans,
and await the entry of new money flows to decide on the next phase of the trend. As the
price moves to the upper line, also called the supply line, or resistance, the sellers are
dominant, but when the price reaches the lower line, which is also called the demand line,
or support, the buyers are dominant. Consequently, the price oscillates between these two
lines just as in a true range, but at the same time, the bounds of the range contract,
increasingly resembling a consolidation phase.

As continuation patterns, triangles can occur on any phase of the trend, but to see them
develop in the aftermath of exhaustive, and sudden spikes is more usual. Under such
circumstances, the triangle is defined as a pennant or flag, and is more reliable as a
continuation signal.

As with every other technical pattern, a developing triangle can be difficult to interpret in
the absence of additional information provided by indicators, volume data, or
fundamental factors. To overcome this problem, stock market analysts will use the
volume statistics provided by exchanges. Unfortunately, due to the decentralized nature
of the foreign exchange market, it is difficult to obtain market wide volume statistics, and
many traders use option market positioning, such as the put/call ratio, or the positioning
of the major speculative actors in the market, as defined by the COT report, to overcome
this aspect issue. Of course, data derived from these sources is often lagged; as a result, it
can be used to confirm developments on a weekly/monthly basis only.

In this section we will discuss all the different kinds of triangles that can be encountered
on a typical day of trading. It is usual that a large triangle on a monthly, weekly, or daily
chart consist of many shorter term trends and consolidation patterns. The same graph may
present us many different kinds scenarios, depending on the time frame chosen.
a. Symmetrical

The first type of triangle that well examine in this text is the symmetrical triangle which
represents the purest form of the triangle as a continuation pattern. In this case, the price
movements during the triangle fail to present any kind of scenario with respect to the
bullish or bearish nature of the eventual breakout. The sellers and buyers are close to a
state of equilibrium, and neither side is willing to put too much money into a scenario
that will favor a long term breakout of the triangle. The behavior of technical indicators,
such as moving averages, and most kinds of oscillators is also predictable; they will enter
a quiet hibernation phase during which all movements are subdued, and the amplitude of
the oscillations contract.

Symmetrical triangles develop in quiet markets. They are often seen during periods that
lead to major news announcements, or when liquidity in the market is low. Usually, the
larger players will guard the upper and lower bounds of the triangle, leaving the smaller
speculators and trader the task of driving the price action in between. Of course, the
smaller players are still very large in comparison to the capital of the retail trader, but in
terms of the forex market, they are the smaller hedge funds, non-bank actors who are still
bound to follow the desires of the largest commercial banks and government institutions.

As with all triangles, the identification of this pattern is easy, and the positioning of stop
loss or take profit orders is also straightforward. As soon as a contracting range pattern is
established, the trader can anticipate the formation of a triangle, and then test his
assumption with the related technical tools.
Lets examine this symmetrical triangle on the hourly chart of the USDCAD pair. As we
can see, after a brief spike on 8th April, 1 am, the price begins a six hour long downward
movement, which culminates in the symmetric triangle which depicted in blue on our
chart. The slope of the demand line (the lower side of the triangle) is a bit steeper than the
slope of the supply line, but the difference is not significant to justify the identification of
an ascending triangle on this chart. reflecting the confusing nature of the symmetrical
triangle, the eventual breakout that comes at around April 9th is a false one, resembling
an uptrend at first, but eventually reversing an completing a 130-pip movement to the
downside between 1 am and 9 am. These fake breakouts are very common with
symmetrical triangles, and complicate the trading decisions

If we had entered a position here, it would need to be confirmed by some kind of

crossover, and/or extreme value on a range indicator, such as the RSI, or Stochastics.
Better yet, we would await clear signals and a number of closing prices before we could
commit our capital. The symmetrical triangle is a difficult to interpret formation, and the
directionless trading that may follow it often does not present the best risk/reward
potential for the beginning trader.

b. Expanding Triangle
During the development of most triangle patterns, indicators settle to tight ranges, and
volatility is reduced. The expanding triangle is the one exception to this rule where
indicators become more and more unpredictable, the price makes wider fluctuations, and
volatility keeps increasing as the bounds of the range expands.

Unlike the other triangle patterns, the expanding triangle is a reversal pattern. It is rare to
find it during a continuation phase, and it certainly doesnt signify a period of
consolidation. Instead, the expanding triangle is often found accompanying double, triple
tops or bottoms, where one side of the triangle remains somewhat static, as the other leg
expands to the other side, depending on the nature of the trend. It is a clear sign that the
trend is running out of momentum, and that the traders see a large counter trend
movement as more viable and logical than another leg in the direction of the existing
trend.

Expanding triangles can be classified further into the three usual symmetrical, ascending
and descending patterns that we discuss in this section, but as the details are more or less
the same, we will handle the subject without examining the various types of it.
On this hourly chart of the USDJPY pair, we see the expanding triangle developing
between 10 am on March 4th, and 5 am on March 5th. Prior to the triangle, the price had
made a very sharp and fast spike to the upside, but as the price action lost its momentum,
the bullishness of the traders gave way to the increased volatility of the expanding
triangle in which the price oscillated.

As we can see clearly, the upper and lower bounds of the triangle are support and
resistance lines which slope in opposing directions, creating an expanding range beyond
which a breakout is sought. The highest price registered inside the triangle pattern is at
around 99.70, hardly a very significant improvement on the first preceding leg of the
trend, which had its maximum at around 99.43. And indeed, the expanding triangle does
indicate a reversal here, and the eventual long red candles on our chart demonstrate the
strength of the breakout.

To trade the expanding triangle, we need to place our stop loss order on the supply or
demand lines, depending on the nature of the trend. For instance, if the trend is an
uptrend, and we anticipate that the expanding triangle, as a reversal pattern, will
culminate in a breakout to the downside, well place our stop-loss order on the
supply(upper) line to protect our account from a violent and unanticipated breakout in
that direction. Of course, on a large scale expanding triangle in a monthly or weekly
chart, it is equally possible to trade this pattern as a range; we would buy and sell at the
support and resistance lines, using a range indicator like the RSI to time our trades.

c. Descending

A descending triangle occurs as a consolidation and continuation pattern during a

downtrend, but it can also signify a reversal. It is similar to the symmetrical triangle,
however, unlike the complete indecision of market participants in the former, the
descending triangle represents a scenario where the momentum of the sellers is stronger
in comparison to that of the buyers. Consequently, the lower lows that are created during
the triangles existence slope with a greater angele than the line that connects the
successive highs.

As with all continuation patterns, the descending triangle will cause volatility to decrease,
as the indicators settle to relatively subdued levels, and money flows through.
Nonetheless, when one of the two sides of the triangle is sloping with an angle that is a
lot greater than 45 degrees, it is possible that volatility be sustained during the
development of the triangle, or even increase. A developing triangle with high volatility
may make false breakouts likelier, which the trader must recall while evaluating his
trading options.

On this thirty minute chart of the EURJPY pair, we see a strong upward movement which
developed during the first half of February 19th settle into a descending triangle
following a large spike at around 12 am February 19th. The reaction at 20.30 was too
strong for the buyers, causing the price to fall more than 100 points, at which point the
two sides of the triangle became established. As the price continued to oscillate between
the two sides, the range kept contracting, until the triangle broke down before reaching
the apex, and the trend also reversed its direction.

Trading a descending triangle, well place out take profit point on the side with the lesser
slope, where we will enter out buy or sell orders. Since we expect the eventual breakout
to be to the downside, and because the lower lows of the descending triangle follow the
side with the steeper slope, we choose to use this edge as the take profit point.

It is also possible not to trade the descending triangle itself, but to use it as an entry point
for trades that will follow the main direction of the trend of which the triangle is a part.
Well discuss all these matters as we examine various trading strategies based on the
various types of triangles.

d. Ascending

The opposite of the descending triangle, the ascending triangle implies an eventual
breakout that will continue a upward trend. Since triangles are continuation patterns, the
ascending triangle is usually encountered in an uptrend. If it is found in a downtrend, it is
regarded as a reversal signal. The occurrence of an ascending triangle is rarer in a
downtrend.

During the development of the ascending triangle, traders are unwilling to sustain a major
movement to the upside, as orders of the buyers are repeatedly exhausted by the sellers
on the supply line. On the other hand, the market consensus is more bullish than in a
symmetrical triangle, and the demand line slopes with a greater angle in comparison the
the demand line. As a result, when the angle approaches the apex point, there are more
bullish traders than there are sellers, which results in the eventual upside breakout.

The behavior of indicators during the development of the ascending triangle is more
interesting than during a symmetrical triangle. It is often the case that oscillators will
keep registering higher values as the triangle pattern develops. If a bearish divergence
develops, with the indicator registering lower values in response to the higher prices on
the demand line, the breakout may occur to the downside, or it may fail altogether, and
disappear after a few up and down fluctuations.
On this thirty-minute chart of the USDJPY pair we have highlighted the developing
triangle pattern in blue. At around 7 am on April 2nd, a major spike that takes the price
up to 99.85 loses its momentum, but no major counter trend reaction develops, and a
triangle pattern is established. The lowest value of the triangle keeps climbing as time
passes, but the upper side of the triangle remains more or less stable around 99.80.
Eventually, as the buyers keep pressing on, and the triangle reaches the apex at around 3
pm on April 3rd, a very brief consolidation phase ensues, leading to a rather violent
breakout which results in a 150 point rally with the maximum registered at around
101.340.

This triangle was perfectly predictable, as it developed during an uptrend, and culminated
with an upward breakout. But this will not often be the case the trader must always
remain alert to unanticipated developments that can be supplied by news or money flows.
In order to successfully trade this pattern, wed enter a buy order at around 99.30-35, in
the early hours of April 3rd, as the developing triangle pattern is obvious and
unmistakable. The stop loss order would be rounded to 99.25, and the take profit order
would be placed at the next fibonacci extension first leg of the ongoing uptrend. It is also
possible to avoid a take profit point altogether, and to place it once the momentum of the
eventual breakout becomes better defined.

e. Flags
Another of the continuation patterns, the flag is not a triangle, but since it is so similar to
the triangle with respect to both its development, and breakdown, and also because its
twin, the pennant is a triangle in both form and purpose, it is often considered as a part of
that category.

The flag is perhaps the purest of all continuation patters. Indeed, due to its ubiquity
during the course of a trend, it could also be examined as part of the trend category. The
flag rarely results in reversals, is often brief, and coincides with calm and realignment
among market participants. Thus, we could notice successive flags between two very
important news releases which are expected to confirm the ongoing trend. Similarly, a
long term trend can resemble a row of successive flags, as the price action appears to leap
from one level to another, using the price pattern as if it were a ladder.

Like the triangle, the development of a flag has three phases. First, the price makes a
strong and sharp move, and a brief period of consolidation ensues, as the body of the flag,
which often looks like a parallelogram, is constructed. Eventually, the price breaks out of
this parallelogram, and continues its movement in the direction of the first move which
preceded the creation of the flag pattern.

Flags are associated with falling volume when they appear on stock charts. As we noted
before, its not possible to obtain volume data in the forex market, as a result the trader
must seek other sources of information to confirm his convictions about the developing
flag pattern. Options market data can be substituted for volume statistics, but such data is
not available on hourly, or short term basis. To overcome this problem, it is possible to
seek flags outside of the busiest market hours; since market volume diminishes outside of
these periods usually, the trader can attach greater significance to flag patterns that occur
beyond the most hectic phases of market action.
On this hourly chart of the USDCHF pair, we notice a number flag patterns developing
between 11 am, April 6th, and 11 am, April 8th. The first leg of this succession occurs
during the spike that takes the price up to 1.1393, following which a horizontal,
rectangular price pattern develops, confining the price action in a tight range. After the
price breaks out of this range, at around 10 pm April 6th, another sharp spike takes the
price to 1.1473, after which another flag pattern develops, this time creating a clear
parallelogram which we have highlighted with a circle. After about ten hours of
fluctuations within the confines of the patters, the price breaks out once more, again in
the anticipated direction, and rises above 1.15.

Once identified, it is fairly easy to trade the flag pattern. Since its fairly regular, a wider
than usual stop loss order, situated at either the upper or lower side of the parallelogram,
can be utilized to better accommodate the random fluctuations of the price. Depending on
the value of indicators, (are they extreme, or not?) the take profit order can be placed at
the fibonacci extension of the trends development so far. It is also possible to avoid
entering short term trades during the course of the flags; since they confirm that the trend
is ongoing, one could avoid trading the short term movements, and trade the main trend
as long as the flags and similar reliable continuation patterns persist.

f. Pennants
As continuation patterns, pennants are similar to flags and other triangle patterns. But
they differ in their brief duration, and the lack of consolidation during their development.
In fact it is possible to consider the pennant as a straight horizontal line where the traders
briefly mark the time, rather than doing anything that can influence the direction of
trading.

That the pennant follows a very sharp and swift movement of the price is its most
important aspect. Not only are does the pennant develop in a very tight range by nature,
but all the counter trend gains registered during its brief life are usually erased on the first
movement of the price that negates the pennant. Pennants develop even faster during a
down trending market, as market actors try to close their positions and minimize profits
as fast as they can. But in all cases, the pennant is brief, swift, and relatively insignificant.

Consequently, the best way to trade a pennant may be use the period of its development
to enter a new position in alignment with the main trend that generated in the first place.
The pennant is probably not the best choice for either range trending or brief counter
trend positioning.

In this hourly chart of the EURJPY pair, we see an uptrend developing between 10th
April, and around 12:00 am, April 13th. Following the development of an expanding
triangle, the breakdown of which also brings the end of the uptrend, we see a new trend
developing during April 14th and 15th. This rapid and violent trend consists of a number
flags and pennants along with the usual spikes and collapses, and wherever a pennant is
created, the ensuing collapse is rapid and possesses great momentum. In many cases, the
pennants develop so fast that it is not possible to speculate on when or how their
termination will occur. Technical indicators or patterns are not very helpful in evaluating
such brief phases of the price, unless were willing to shorten the time frame of our
charts, and examine the subject in greater detail at a lower level.

In light of the above discussion, we will use the pennant only as an entry point in the
direction of the main trend. The chart stop that we may use for such a position may be
based on the extreme value of a trend indicators, or a moving average crossover at a
shorter time frame than that of the chart were trading. Since we anticipate that the next
leg will be rapid and sharp, the placement of the take profit order can be delayed, but it is
also possible to make use the fibonacci time series, or the extension, to decide on where it
will be.

4. Bottom and Top formations

The basis of trading the multiple top and bottom formations is the premise that prices
have memory. In other words, the failure of the price to breach a price level signals that
the traders will take note of this fact and will support that level once it is tested again. We
have discussed the issue of event string that possess a memory, in the forex strategies
section, and the interested trader can read that part, and reach his own conclusions.

The bottom and top formations appear easy to recognize, but in fact they are quite a bit
more complex than many people take them to be. Technical analysts simply count the
number of times a price level fails to be breached in either direction, and define it as a top
or bottom. Although this is the purest form of defining top or bottom, its also the most
precarious, and error-prone way of doing so.

These formations are usually accompanied by other consolidation or continuation patters,

including triangles that confine the price to a range. Depending on the nature of the
range, however, indicators can show wide fluctuations, and volatility can be high or low.
The repeated tops or bottoms cause more and more traders to become
The best way of trading the top/bottom patterns is to couple our trading choices with
some kind of periodic move on the indicators. In other words, we should seek to confirm
the repeated tops with repeated extreme values of the indicator, and attempt to establish
some kind of relationship between the two, so that we only take the trades that offer the
greatest profit potential. Of course, on a long term chart, it would be even more beneficial
to match our analysis with volume statistics from the options market, but when this is not
possible, we can still add an extra dimension to our study by examining the width and
duration of the spikes that occur as the pattern repeats itself.

An important point to keep in mind when analyzing these patterns is that its impossible
to know where a double top or bottom will develop on the basis of location of the
previous top. While every now and then there are severe movements that indicate a
potential double, triple, or quadruple bottom/top for the price, it is not possible to decide
when they will occur in the absence of data on order flows.

a. Double top

A double top is the most basic of these formations. In this case, the trend attempts to
erase a price level twice, and in both cases fails. Many traders try to confirm the ultimate
reversal of a long-lasting, strong trend with a double top or bottom in order to avoid the
whipsaws and false breakouts associated with sharp, quick , but unconfirmed reversals.

Usually, the first leg of a double top pattern is a v-reversal. As buyers attempt to breach a
particular price level, they are checked by a large number of sell orders which reverse the
direction of the trend. However, a short while later (in terms of the chart period, zsix
minutes, or six months later, for example), sellers yield the control of the trend back to
the buyers and the price rallies, consequently, to test the resistance level which had
managed to reverse the trend previously. When the second attempt is made at a breach of
the price level, the result is once again a failure, and as the buyers give up, the price
moves downwards without a hindrance.

Double tops can occur in upward or downward trends. In a downward trend, the double
top is a continuation pattern; in the context of an uptrend, the pattern is a reversal
formation. In both cases, however, it is a good idea to confirm the potential reversal with
data from other sources, be they fundamental or technical.
Finally, let us take a look at a double bottom formation which resulted in a trend reversal.

Between 23rd and 27th January 2009, the EURJPY pair rallies sharply to reach the
119.52 level, where the price action is halted, and the trend reverses. Apart from the top
formation that will be obvious a short while later, the reversal at this price level is a
downward v-reversal pattern, indicating that the reaction was strong and decisive.
However, there are still enough buyers in the market to justify another attempt at
breaching the 119.52 level, and consequently, a few days later, the price rallies and
touches that level, but once again fails to break through the resistance line.

At this point, the double top formation is obvious. The price cannot sustain the highs, and
a second downward v-reversal formation initiates a large downward phase of the trend
which takes our price down to 113.140 in a rather large, but measured movement. In this
case, the trend reversal was indicated by the large double-top formation that developed
during the course of two days, and was accompanied by two sharp downward v-reversal
patterns. When the preceding sharp upward is also taken into account, we can consider
this a credible setup for a sell order.

We would place our stop-loss order at the nearest Fibonacci extension of the price
movement between 23rd January, and 27th January. Our take profit movement would be
at 61.8 retracement of the same movement.
b. Double bottom

A double bottom is the opposite of the double top formation. The traders attempt to break
out beyond an existing support line, but the attempt results in a failure.

c. Triple, quadruple, quintuple top

Triple, quadruple tops and those with a greater frequency occur at the end of trends, but
they are most often found on the support and resistance levels that define a range. In fact,
although these patterns are rare during the course of a trend, they are natural and
commonplace in ranges. Consequently, their significance is much greater if they occur in
a trending market.

In a range, triple, quadruple tops and related formations indicate that theres a powerful
layer of sellers at a price level, and that they are not impacted by the short term changes
in the situation of the market. Rising or falling money flows, changes in volatility, and
the entry of new players is not enough to dislodge these actors from their position. It is
often the case that those who guard the daily, or weekly price level at which the price
creates multiple tops are large scale speculators or major commercial players with deep
pockets and clout in the market. Even at shorter periods, such as hourly, or 30 minute
charts, the existence of a triple top is an indication that theres a deep, and layered stream
of sell orders that cannot be broken down easily.
When these formation occur in a trend, its common that other reversal patterns, such as
expanding triangles, head and shoulders patterns, v-reversals will also develop. Coupled
with these, the significance of the tops and bottoms is naturally greater, but even then, the
development of the trend will not present sufficient clues as to facilitate predictions about
the eventual direction of the price.

In a range, it should be clear to the trader that the best way of trading these tops or
bottoms is to trade in harmony with them, and not to contradict them. It is hard to predict
when these patterns will break down, but since more and more traders take up the range
trading opportunity every time a top or bottom is registered, the risk/reward scenario
often favors trading on the assumption that the resistance level will hold.

In a trend, the scenario is a lot more complicated, and we must make our decisions on the
basis of a careful risk/reward analysis. Well examine this subject in other articles on this
website.

To illustrate our point, lets examine the graph of this hourly chart of the EURJPY pair.
As we observe, the very sharp rally from 114.230 up to 119.67 occurs in the course of
just two days, but the volatility of the price action indicates that the total number of pips
that the price has absorbed during the rise is even greater than this 500-point movement.
In short we have all the indications of an unsustainable, volatile spike that is in danger of
culminating an equally violent reversal.

Nonetheless, as with all sharp movements, the scenario created by this large spike
remains valid for a long enough time to punish those reckless speculators who enjoy to
bet on imminent reversals. The 119.67 level is touched three time, but each time the
buyers have to pull back, and a triple top is formed. Needless to say, the highly volatile
price action that followed the various attempts at breakout was very punishing on those
who were on the wrong side.

For trading this pattern, wed place our stop-loss on our sell order at a few pips above the
resistance line, and our take-profit order would be at the 61.8 retracement level of the
movement between 11.230 and 119.67

d. Triple, quadruple, quintuple bottom

These formations are the mirror images of the triple, quadruple, quintuple top patterns,
and can be interpreted accordingly.

V-Reversal pattern

A reversal pattern is a very sharp price movement which occurs in the space of two bars,
or a little more. As a reversal pattern, it signifies the end of a trend, or at least the
beginning of a major countertrend movement that will bring the price down to previously
untested levels, and check the convictions of the main drivers of the price action. As the
two consecutive phases of this pattern present a picture that resembles the letter V,
technical analysts call the scenario a v-reversal pattern,

This pattern usually occurs when the price breaks out of a previously significant support
or resistance line, and, in the absence of any further obstacles, registers new highs or lows
one after the other, without being checked by any countertrend selling or buying.
Eventually, however, as the price action seems more and more like a bubble, volume
falls, and the number of traders driving the trend forward is also reduced. Finally, and
usually at a price level where theres a significant number of limit orders, the now thin
advance of the trend is checked severely, and a very violent countertrend movements
ensues, as the actors driving the trend are forced to take profits, or quit with losses, and a
reversal is confirmed.
The V-reversal pattern is thought to be a powerful signal which can indicate a major
reversal of the ongoing price trends. However, a careful examination of the charts shows
us that the formation is in fact quite common, and the distinction between a valid,
credible reversal and a temporary, or fake one is arbitrary. As usual with technical
patterns, the reversal scenario must be confirmed by other, less common technical
phenomena, such as a divergence, or an extreme value in one of the indicators. As a
result, the best course in evaluating a v-reversal pattern is to confirm it by use of other
indicators.

Finally, this pattern may be interpreted differently depending on the underlying price
action that precedes and follows it. For example, a reversal pattern following a
consolidation or continuation pattern may not present the same technical picture as that
created by a v-reversal pattern that comes after a long lasting, and powerful trend. In
general, the longer, and more powerful the preceding period, the more credible a sharp
and fast v-reversal pattern is.

a. Downward reversal pattern

A downward v- reversal pattern occurs in an uptrend, and represents a bubble, and its
collapse. In this case, the buyers are so confident in their ability to sustain the trend that
they throw all caution to the wind, and keep buying the pair as it registers new highs one
after the other. On a long term chart, such a situation is usually accompanied by
declarations of a new era by the news media and some analysts. When such a bubble like
situation develops on the hourly charts, it is only noted by traders, but the nature of the
price action is the same.

Of course, one-sided markets do not last forever, and when the exuberance and euphoria
that drive the uptrend to successive new highs breaks down, the reaction by the sellers is
reinforced by profit taking, and margin-call related selling by the buyers, and a severe
and sharp upward movement ensues. This sharp upward movement, and the ensuing
collapse are termed an downward reversal pattern by technical analysts.

Lets examine this on a chart.

In this hourly graph of the USDJPY pair, we notice a sharp movement upwards,
following a consolidation period between 13th February, and 17th February 2009. Until
the price reaches the resistance line at 92.7, a series of five hourly spikes keep driving the
price higher, and all the indicators that measure overbought/oversold conditions lose their
significance and value. Eventually, when the 92.7 point is reached, theres a large wave
of selling triggered by the exhaustion of the buyers, probably joined by opportunistic
selling by short term speculative players. The result is a downward v-reversal which
develops in several legs in about 7 hours, taking the price back below 91.7.

As it can be seen on the chart above, the reversal pattern necessitates little guesswork on
the part of the trader during its development. The price movement is sharp, decisive, and
unmistakable. It is obvious that a sell order is the necessity here. On the other hand, the
eventual direction of the price action after the v-formation is far from being clear. And
indeed, in our example, all that can be said is that the v-reversal in our scenario precedes
a period of directionless, volatile trading

b. Upward reversal pattern

A upward v-reversal pattern presents the culmination of a uptrend. The v-reversal pattern
has two phases, the first is in line with the main uptrend, and is usually sharp, and swift.
The second phase is counter trend, and leads to a breakdown of the technical picture.
While discussing the downward v-reversal, we had noted that the first leg of the V was a
short or long term bubble. In the case of the upward v-reversal pattern, the first leg
represents a panic phase. But due to the dual nature of all trades in the currency markets,
however, the panic phase corresponds to a bubble phase for those who are on the opposite
side of this trade.

Lets take a look at an example of the upward reversal pattern:

In this hourly chart of the USDJPY pair, we see an ongoing downtrend between March
26th, and March 30th of 2009 culminating in a downward v-reversal. During the run from
98.720 to 95.87 where the downtrend reached its extreme value, the direction of trend
was clear: most upward movements were erased by engulfing candlesticks, and the brief
flags or range patterns that arose were erased by the momentum of the downtrend. During
29th March, the momentum of the price movement strengthened even further, creating a
very clear parabolic pattern, at the end of which the upward v-reversal was finally
realized.

Following the last leg of the downtrend, with most indicators registering extreme values,
the buyers moved back in to the market in a measured manner, eventually negating all the
gains of the price four days. The upward movement of the price finally stopped around
99.09, after which a period of range trading and consolidation ensued.

In trading this v-reversal pattern, wed await the confirmation of the reversal by the
appearance of a number of green candles on the price chart. The take-profit value of the
trade would be at the 38.2 or 50 percent fibonacci retracement of the downtrend, while
stop-loss order would be at 95.87, the previous low of the downtrend.

support and resistance lines

Support and resistance lines are price levels where an ongoing trend goes through a
temporary or permanent reversal. If the main trend is upward, and the price movement is
halted, the level at which this pause occurs is termed a resistance level. Conversely, when
the trend is downward, and the movement is reversed or halted by bids at a price level,
that price level is called a support.

These levels represent clustered limit orders which exhaust the buy or sell orders of the
trends drivers. In other words, as market buy orders are placed, driving the price higher,
and also triggering previously placed limit-buy orders on their path, a price level is
reached where the buyers or sellers in the market cannot exhaust the bids or offers,
depending on the nature of the obstacle. This could be because the trend runs out of
momentum even as the price registers new highs (and divergences appear on the
indicators, while volume falls, or money flows decelerate), or because there are too many
limit orders at a price which even a strong and healthy trend with good momentum is
unable to exhaust. In either case, the previously mentioned price levels are called support
or resistance lines, as multiple attempts to breach them fail.

Support and resistance lines are ubiquitous on the charts, but many of them are caused by
the random fluctuations of the price, rather than a truly significant cluster of orders in
either direction. In order to gauge the importance of a support or resistance level, the
technical trader will count the number of times it resisted attempts of breakout, and
classifies the levels in accordance.

One very important rule about support and resistance lines is their chameleon nature.
When a support line suffers a clear breakdown, it will act like resistance level if the price
action attempts to move above this level in the future. Similarly, when the price breaks
out of a resistance line, it will act as a support line when the sellers attempt to drive the
quote back below the price resistance.

Lets take a brief look at these lines and how they develop.

In this four-hour chart of the GBPUSD pair, we note a very sharp spike which takes the
price from around 1.38 up beyond 1.45 in about a day. The first attempt to breach the
major support line at 1.445 is successful, and the price manages to hold on to this
previous resistance line as a support during the ensuing countertrend movement.
However, the brief but large momentum of the trade is exhausted already, even as the
price holds above the newly created support line duringthe many attempts to breach it by
sellers which last for more than a week. Eventually, we see a somewhat difficult to
identify head and shoulders pattern developing, with the reversal breaking the support
line, and sending the price down.
In this hourly chart of the GBPUSD pair, we have indicated a major resistance line with
the red horizontal line. We observe that this hourly resistance level was checked five
times at various points, and that all the attempts were failures. Only around midnight on
April 2nd, was a significant breach of the resistance line achieved, but the breakout was
invalidated as more and more sellers forced the price back under the resistance line.
Naturally, when the breakout did occur, it was sharp and powerful, with the price rallying
strongly, with the resistance line also acting as a support level when the sellers attempted
to check the strength of the ongoing uptrend, as observed on this chart.

a. Sideways trend, consolidation

A consolidation pattern, or a sideways trend occurs when the price settles into a relatively
tight range between a support and a resistance level, and remains there for a long time. A
true consolidation pattern usually lasts more than ten bars at the very least, but as with all
rules in technical analysis, it is possible to identify consolidation phases that last much
shorter. Still, in this text well examine the true consolidation pattern which lasts long,
reduces volatility significantly, and is confined between a support and resistance level.

As its name suggests, the pattern represents a phase during which volume falls, money
flows diminish, and the indicators all retreat to the signal line, or the center value. For
example, the Williams oscillator approaches zero, while the RSI settles at a level close to
50. In its purest form the consolidation pattern represents a frozen market where the
ongoing trade activity is netted out, that is, buyers and sellers are in complete
equilibrium. Such a situation is a very rare in the markets, and of course it cannot be
maintained indefinitely. When the pattern breaks down,, the ensuing price movement is
rapid, with volatility, and volume increasing in harmony.

Consolidations usually occur as the market awaits news releases or important economic
data that can have an important impact on the future price trends. Traders are nervous and
indecisive, but this attitude is not born of any misgivings on the strength or justification
for the ongoing trend itself. Instead, attention is directed to the market-moving data and
the aim is to maximize profits, as soon as the other markets expectations are confirmed
by the developments.

In this hourly chart of the EURCHF pair, we notice the price fluctuating between 1.457,
and 1.483, as show by the horizontal red lines. As a range pattern, the price action is not
very volatile, but we still do not see the very subdued price movement that represents a
true consolidation pattern. Yet, as we move further to the right on the chart, between 10th
March 9 am, and 12th March 9am, when the price registers a massive breakout, we see
both the stochastics indicator, and the price settle to a very subdued pattern which
signifies that the upward movement from the support level at 1.457 is going through a
consolidation phase. The value of the stochastics indicator settles around 50, as seen on
the chart.

When the eventual breakout occurs, its very violent ant rapid, and fully confirms our
expectation that the price action following a true consolidation phase will be rapid, sharp,
and powerful. It is highly likely, judging from the nature of the spike and its duration,
that the catalyzing news flow confirmed the expectations of the market, with the traders
moving very fast to capitalize and build up on their positions.

b. Range patterns

Now that we know what a support and resistance line are, we can discuss the ranges
formed by the price fluctuating between two such levels. Range patterns are created when
theres no overwhelming opinion among market participants on where the price should be
headed. Consequently, money flows, buy and sell orders are in equilibrium with each
other, but this situation becomes established only at the support and resistance lines
themselves. Otherwise, during the oscillations inside the confines of a range pattern, the
equilibrium is disrupted, and the price can move in either direction depending on the
usual market dynamics.

As ranges develop, indicators also establish an oscillating pattern. The best way of
exploiting this situation is to identify the bounds of the range on the price chart,.and to
couple that with confirmation signals received from the indicators. Sometimes the
breakdown of the price range is coupled with a divergence between the price action, and
the indicator; the trader should do his best to capture such developments.

It is often said that range patterns provide the greatest risk/reward potential for traders, as
the entry and exit points are clearly defined, and the volatility in between allows the
realization of maximal profits. The certainties that a strong range pattern offer to the
trader are undoubtedly useful, but the problem is with identifying these formations before
they have already broken down.

How to identify a profitable range pattern with technical tools? Theres no method which
can create constantly profitable results, but there are a few principles that will help you
reduce the risk of a false trade. Most traders wont trade a range unless it is confirmed
with at least one candlestick in the direction of the anticipated reversal at the support or
resistance lines. For example, when the price fails to breach a previous top that defines
the limit of the range, the trader will await confirmation through a large bearish
candlestick which will confirm that the trend has reversed. It is also possible to use the
Fibonacci retracement levels for trading inside the range, without worrying about the
resilience of the support or resistance lines that define the range formation itself.

We
have studied this chart before, but because the formation is so clear, we will use it once
more while discussing the range pattern. Ir is an hourly chart of the EURCHF pair,
showing one breakout that connects two successive ranges. During the first range which
develops between March 4th and March 12th, we note the price moving with a gentle
slope and mild speed between the two support and resistance lines at 1.457, and 1.4836.
The upper and lower limits of the price action (support/resistance lines, in other words)
are touched five times during this pattern, and the final, 5th one results in a breakout
which takes the price to much higher levels in a short time.

Not only does the breakout eliminate a previous range pattern, as seen on the lower part
of the chart, but once the sharp movements of the breakout die out, the resulting
formation is another range pattern too. You can try to draw the support and resistance
lines on the chart visually, if you like, as a kind of exercise. Thus, in this case, the price
has been leaping from one range to another, consolidating before going on with its
movement. The second range formation on the upper side of the chart also resembles a
flag pattern, but we cannot be sure of that, since we dont know what happened in the
aftermath of the second range breakdown

c. Breakouts

After discussing the various range patterns, consolidations and continuation formations,
we can now briefly examine breakouts. As we all know, no support or resistance line will
be able capable of halting the price action indefinitely, and no range pattern can remain
valid forever. Sooner or later, the range will be breached either upwards or downwards,
and the price will keep registering new lows or highs. Breakout is the name given to this
process, where the range breaks down, the price jumps in a fast and sharp movement, and
sometimes price gaps occur.

Breakouts are not predicted, but confirmed by indicators such as the Bollinger band, as
volatility increases, bullish or bearish crossovers occur, range patterns break down, and
the price begins a rapid movement to either side. While it may be possible to anticipate
that a breakout will occurs, in the absence of special situations like divergences, it is very
difficult to anticipate the direction of the breakout. For example, on day with an
important news release, everyone knows that a breakout is highly likely at around 8 am
New York time, but few can be confident about the direction.

Breakouts are like double-edged swords. The violent nature of the price ensures that both
the risk and reward will be equally high.

Lets examine the breakout on one of the previously studied charts.

On this beautiful hourly chart which offers a very clear breakout between two successive
range patterns, we notice the price leaping from 1.4836 right up to 1.5304, as the
previous range that had constrained the price action breaks down. We note that the
stochastics indicator prepared the breakout by moving from a level around 50 to 30 just
prior to the violent price movement, and then moved to a value close to 90 as the
breakout ran its course. We also note that the price is squeezed in a very tight range
before the breakout.

In comparison, the above is an exceptionally clear-cut sample, and it is unusual to find

such a well-defined pattern on the charts where the breakout is prepared clearly, and
occurs with great power, as the price action never looks back. In many cases, we must
use our own judgement, and make some arbitrary choices before the reliability of the
pattern is established.

Exploiting this breakout, wed place our stop loss order at a value below 50 on the
stochastics indicator, and our take profit order would be placed at between 80 and 90 on
the same chart, in order to profit from the price action to the maximum extent.

Conclusion
On a concluding note, let us note that the various technical patterns which we have
discussed here do not provide us infallible solutions to our problems. In many cases, we
need confirmation from different technical or fundamental sources before we can
establish credible scenarios that can be acted upon. As this text aims to present technical
solutions to the problem of identifying credible profit/loss opportunities, we have not
concerned ourselves with the various fundamental approaches to the problems discussed.

What is the use of these patterns? They are used to analyze market psychology during the
different phases of a trend. Although market psychology is volatile, and unreliable as a
guide of market direction, its the only force deciding short term events, and the only tool
the trader has with any kind of predictive capability in that time frame.

It is possible to have a descending triangle as a continuation pattern on an uptrend, as a

reversal pattern on a downtrend, as well as a reversal pattern on an uptrend. It is
important to keep in mind that the descriptions in this text are all generalizations.