Technical analysts and traders believe
that certain chart patterns and shapes are signals for
profitable trading opportunities. Many professional and amateur
traders claim that they consistently make trading profits
by following those signals. In this chapter we introduce some
types of chart patterns and the corresponding trading strategies,
that, according to our extensive historical tests, give the
trader an advantage.
Candle Stick Trend Reversal
A candle stick chart is a good presentation of
momentum. On a candlestick chart, one can easily see the secession of up days,
down days and sudden changes in the pattern. The following figure is an example
of what is sometimes called "First Sunny Day", a typical buy
Figure 11. A Trend Reversal pattern. After a long, long decline, the
rate suddenly goes up in significant magnitude. Furthermore,
it closes much higher above its open. This "First Sunny
Day" sends a short-term buy signal.
The trading strategy for a "First
Sunny Day" pattern is to buy the contract and hold until
it recovers the range lost by the recent secession of down
days, or to cut losses if it drops back to the prior day's
low. This pattern usually signals a very good profit-risk
Figure 12. This
is a short-term Trend-Reversal pattern. After a long, long
rise, the rate suddenly drops; its close is much lower
than its open. This pattern hints that something has suddenly
gone wrong with the stock. This so-called "Sudden Cloudy
Day" pattern indicates one should sell
In this example of the, "Sudden Cloudy Day" pattern, the trading strategy is to short
the financial asset and hold it until it retraces the recent secession
of up days or to cut losses if it breaks the previous day's high.
For longer-term trend-reversal patterns, we often look for the "Shooting Star"; as
shown in the example above. We also look for the "T-Shape" which signals a bounce-back buy signal.
Figure 13. The price soared considerably in the past few days. At
present, it shoots up, as if exhausting all its energy.
This Shooting Star pattern hints that the market has lost
confidence in the further potential of the underline, indicating
a likely downturn.
Figure 14. The rate dropped over several days. Presently, it drops
precipitously, then bounces back to close near the open,
forming a "T" shape. This may indicate that the market finally
has finally decided the financial asset has dropped enough, with many
bullish traders and investors coming to the rescue.