Educator, writer and trader with a private equity fund located in the US. Trading methodology based on astronomical and Gann based time cycles with a focus on price action only charting for trade execution and trade management.
Of all the bullish continuation patterns that exist, few are as sought after as the ascending triangle. Like all triangle patterns, their development and construction are dependent on two trendlines that intersect and form an apex. The two primary identifying conditions of an ascending triangle I a flat, horizontal top and an upward sloping trendline.
Ascending Triangle
In addition to the two trendlines, there is a specific kind of behavior that the candlesticks must perform. The upper trendline and the lower trendline must be touched at least twice. Ideally, and according to Bulkowski, there should not be much open space inside the triangle. The same volume behavior that occurs in other triangles occurs here in the ascending triangle: price often breaks out in the final 2/3rds of the triangle, and volume decreases before the breakout. The psychology behind the formation of the ascending triangle is essential to understand. The pattern represents an apparent battle between longs and shorts. Short traders are under the impression that because the resistance level has been tested and has held, it will remain stronger. Long traders are under the impression that prices will move higher because of the formation of higher lows and an upward sloping trendline. Ultimately, shorts cover very quickly, just before or immediately after the breakout of the upper resistance.
Bulkowski recorded that, in equity markets, the breakout direction of an ascending triangle is upwards 64% of the time. Dahlquist and Kirkpatrick recorded that upwards breakouts occur 77% of the time. Interestingly, the performance of this pattern is roughly average across all patterns – this is contrary to the belief of many traders who self-report a high positive expectancy of upwards breakouts. Dahlquist and Kirkpatrick did warn that there are many false breakouts and that failure rates are between 11% and 13%.
As with any pattern, it is essential to pay attention to price action first and then find tools to help you filter whether an entry at the breakout is appropriate. Additionally, be wary of throwbacks as they are frequent over 50% of the time – many conservative traders wait for a retest of the breakout to confirm a valid break from the ascending triangle.
Sources:
Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
This is the second article in a series of articles highlighting the importance and effectiveness of Japanese candlesticks in your trade plan.
Chart 1 – Original Trade Idea
If you haven’t read my first article in this series, you can read it here. That first article describes my approach to trading and how I identify trade setups. The trade I took back in December 2018 to go long on GBPNZD was one of the best performing trades I’ve had in the past two years. It remains a great trade! I wrote the following as justification for my trade idea.
Dec 12, 2018
Holy 2,000+ pip trade batman
The GBPNZD pair has a massive upswing potential, with little risk. And I’m just talking about a move to the center of the linear regression channel.
The weekly chart shows two hammer candles – with the current week showing strong buying from the lows. Massive buying actually – firm rejection lower so far.
The Chikou Span/Lagging Span is right near the bottom of the cloud – the probabilities of the Chikou Span just crossing below the bottom of the cloud on a weekly chart is very little, especially given that we’ve had ten weeks down without any meaningful retracement.
YUGE bullish divergence that goes from July of 2017 to the present weekly low. It’s ridiculous.
This could be one of the biggest trades I’ve ever made – and the realistic target is 2,000 pips above, and the risk is only 275 – I’ll take those odds. And it’s very probable we trade higher than the center of the regression channel.
Using Candlesticks
If you are interested in learning about Japanese candlesticks, you should really pick up the Bloomberg Visual Guide to Candlestick Charting by Michael C. Thomsett. There are over 200 different candlestick patterns in his book. And that is not even all of them! There are some patterns that exist that are very rare and very powerful. One of those rare and powerful patterns is on the GBPNZD weekly chart below:
Dragon Fly Doji
The candlestick highlighted above is known as a dragonfly doji. As I wrote in my original trade idea, my entire purpose for going long was based on the existence of two consecutive hammers. When I saw these candlesticks occur on the weekly chart, I knew I was onto a big trade opportunity. Why? Because candlesticks are incredibly useful on weekly charts. Candlesticks were never meant to be used on anything less than a weekly chart – that might explain why they are more powerful on weekly charts. Just look at that dragonfly doji. It’s important to remember something about Japanese candlesticks: they tell a story. What does the dragonfly doji tell us? Panic and fear. Panic and fear for anyone short on the GBPNZD.
Look how long the wick is! That means a ton of sellers were able to push prices lower but gave up all of those gains – bulls took over. Anyone who was short during that weekly candlestick either covered immediately or experienced significant pain and had to cover eventually. Ultimately, the trade idea and initial profit target ran from the entry at 1.8457 to the bottom of the regression channel, where it wicked against at 1.9494 – a 1,037 pip move.
This article is the first in a series of articles over the practical use of Japanese candlesticks. Japanese candlesticks are an excellent and powerful analytical tool. Candlesticks are three-dimensional because, to interpret and use candlesticks properly, we need price, time, and volume.
Each of these guides will utilize a trade idea I’ve shared on TradingView in the past. The nice thing about trade ideas that you share on TradingView is that you can hit ‘play’ and watch how price action played out after your idea. It’s one thing to say, “I called Gold dropping to this level, and it did” – it’s another to show evidence of that idea. I will also share some of my trade results from that same time period.
Identifying a Trade
I am a Gann-based trader through and through. I believe that time is the most important factor in the market, and that time is the reason why trends change. Gann Analysis is the study of cycles and finding the rhythm of a market. It is almost singular in its approach to financial analysis in that Gann Analysis is a Leading form of analysis. In other words, Gann Analysis seeks to predict what will happen in the future. We do that through the use of natural cycles like Lunar Phases, the cycles of Planets, Gann’s cycles, and numerous other measurements. I can’t get into all the details of what Gann analysis is but suffice to say; it is how I identify when I should take a trade.
In the trade idea for this setup, I identified the following reasons for wanting to short XAUUSD on Feb 19, 2019:
Feb 19, 2019
Time is the reason for trend changes.
Feb 18 was a time pivot in the current Law of Vibration cycle, a powerful 6/8th time-harmonic which acts as a source of resistance in time to the trend in force.
Feb 19 is a Full Moon, and the Moon is Apogee – trends reverse violently if these two astronomical cycles occur near a swing low/high.
Gold has been an uptrend for 186-days – which is well within the 180-day Gann Cycle of the Inner Year.
Violent short term reversal ahead.
Additionally, not shown is the Longitudinal position of Jupiter, which rests at 1330. When it comes to Gann’s Planetary Lines, I’ve learned to give equal weight to those levels as I would to Gann’s time cycle. Price has moved above that line – so the time cycles could just be conditions for further and swifter moves higher.
I updated the trade idea with an additional short:
Added to shorts at 1345.30 – 1235 CST
Ultimately, I took profits on Mar 6, 2019.
Using Candlesticks
Gold (XAUUSD) Daily Chart
The image above is the daily chart for Gold (XAUUSD). I’ve highlighted in a light blue box the trading period of this trade idea. Observe the first candlestick on the chart (red triangle above it). I consider that top candlestick a shooting star. Now, there are some real sticklers out there who are very dogmatic about what is an actual candlestick pattern and what isn’t. Japanese analysis is very dynamic and allows for a significant amount of interpretation. I only need to know a couple of things about the shooting start pattern:
Did it show up at the top of a move?
Is the shadow at least twice as long as the body?
Both 1 and 2 are true. The small wick below the body is irrelevant. When I combine this candlestick pattern – which is one of the most bearish candlestick patterns – to my Gann analysis, I get a very high probability setup for a short. But then I added to the short again, one day later on the 20th.
Gold (XAUUSD) 30-minute chart.
Switching to the 30-minute chart, I’ve labeled the additional short entry. Why did I enter that short? First, there is a rising wedge against the prior swing high. Second is the nature of the candlestick itself. The candlestick with the price label on it is two different patterns – but both are bearish. That candlestick is both a shooting star and a bearish engulfing candlestick. When we add the bearish engulfing candlestick to the shooting star and a break of the rising wedge, we get handed one of the highest probability short setups that you could see.
Something that I stress repeatedly throughout our series on chart patterns is the difference between traditional markets like the stock market and the forex market. I’m sure a good number of readers have spent time reading books on technical analysis and have recorded and have seen various statistics regarding the performance of the various chart patterns that exist. There’s a big problem that exists in the realm of technical analysis and its use in forex markets, and that is related to nearly 100% of all technical analysis trading material focused on the stock market. Why is this a problem? Several reasons.
Statistical performance values for chart patterns based on the pattern’s performance in the stock market is overwhelmingly long-biased: the stock market has been in a bull market for over a decade.
Forex markets do not ‘trend’ in the traditional sense of financial analysis, they range.
In a nutshell, just because a particular pattern in the stock market may not perform that well in the forex market, it does not mean that its performance isn’t positive in forex. I’ve learned that most underperforming chart patterns in the stock market perform very well in forex markets. As always, make sure you do your own due diligence and research – investigate each pattern for yourself and see how they play out in your own trading.
To begin learning about Chart Patterns, follow this series of education articles.
Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
I want to stress, again, that the frequency and positive expectancy of patterns in technical analysis will vary from market to market. Most of the literature is written for the stock market, which is an overwhelmingly long-biased market. So, bullish patterns perform much better than bearish patterns in the stock market. I don’t have any real statistics to reference other than my years of trading experience. It has been my experience that wedge patterns are one of the most profitable setups in the forex market.
Wedges look like (and in fact, are) extended triangles. Wedges are made of two trend lines that are drawn just like a triangle. The difference between wedge patterns and triangle patterns is simple: the trendlines in a wedge pattern point in the same direction. Ascending triangles have flat tops and a rising bottom. Descending triangles have flat bottoms with declining tops. Symmetrical triangles have a downtrend line and an uptrend line. Wedges are different. Rising wedges have a trendline both above and below price sloping up. Falling wedges have a trendline both above and below, but sloping down. Depending on the technical analysis material you read, you will see wedges that may look like channels, and that is fine – many do.
Wedge patterns should tell you one thing: the end is coming. Because wedges have two trendlines that point in the same direction, the slope of the move is often extreme and is indicative of a climax move. These are incredibly profitable and favorable patterns when you spot them – and they are horrible to trade against if you are trading inside of them. If you read Bulkowski’s work, you’ll know that he recommends at the trendlines in a wedge should be touched at least five times in order for the wedge pattern to authentic. This is true in the stock market as well as in the forex market.
Rising Wedge
Rising Wedge
You might think that a rising wedge pattern shows up at the top of a trend, and it often does. But you will also find the rising wedge appear at the bottom of a trend. When you see the rising wedge appear after a prolonged downtrend, be careful! The rising wedge that forms after a long bear move is often a continuation pattern. An easy way to think of the rising wedge is that it is an overwhelmingly bearish pattern. It doesn’t matter where it shows up in any trend – it is an extremely bearish pattern.
When I am trading the rising wedge, I generally take the initial breakout that moves below the second to last test of the bottom trendline. The example above shows that there is no immediate retest of the breakout lower. Retests do happen, but they are less frequent than what we see in the ascending, descending and symmetrical triangles.
Falling Wedge
Falling Wedge
The inverse of the rising wedge pattern is the falling wedge pattern. It can show up at either the end of an uptrend or a downtrend. If you see a falling wedge that occurs at the top of an uptrend, then you could we witnessing a false breakdown lower and see a resumption of the prior bull move. If you see the falling wedge at the end of a downtrend, then you can expect a swift reversal or deep throwback. Just like the rising wedge, the falling wedge is heavily biased towards one direction: overwhelmingly bullish.
On the image above, I’ve added an Impulse Wave to show how you can use Elliot Waves to help determine whether or not a wedge pattern is valid. Remember: Bulkowski said that that a wedge pattern is only confirmed when the trendlines have been tested at least five times. Another condition on the chart above that we didn’t see on the falling wedge is the attempted retest of the break. Again, retests are common in all patterns, but they are definitely less frequent with wedge patterns – that has been my experience with them in forex markets.
When trading the falling wedge, I like to enter when price moves above the second to last swing high. On the chart above, the entry would be above wave four.
Sources:
Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
Chart Patterns – Broadening Pattern & The Diamond Pattern
Chart Patterns – Broadening Pattern & The Diamond Pattern
Chart Patterns – Broadening Pattern & The Diamond Pattern
Broadening Top
This pattern is also called a funnel or a megaphone pattern. It’s an inverse symmetrical triangle. This pattern is definitely not that common, and it’s a tricky pattern to trade. The behavior of price in a broadening pattern is to increase swing ranges where new higher highs and new lower lows are made. In my opinion, it is best to ignore this pattern. The breakout and retest of the upper or lower trendlines are the prevailing trade strategies utilized for this pattern. Of all the patterns, to trade, this is one of the least profitable. However, I’ve learned that the breakouts are often false, due to the nature of the final swing in the pattern being mostly overbought or oversold. It is not uncommon to see megaphone patterns turn into a triangle pattern – which results in a rare but profitable pattern known as a Diamond.
Chart Patterns – Diamond Pattern
Diamond Top
The diamond pattern is rare. It is also difficult to even notice if it exists. In fact, Thomas Bulkowsi writes on his site, ‘Let me clear about this. I don’t like diamonds. They are as tough to spot as nightcrawlers in the grass on a summer night.’ I believe that is a pretty accurate description. But, while diamond patterns are challenging to spot, they are a very powerful pattern that often results in fast and violent moves in the opposite direction – higher for diamond bottoms and lower for diamond tops. It is ok for the patterns to have one side that seems more slanted than the other and, in fact, they often do not appear as symmetrical as the example above. We trade a diamond pattern the same way we would any other triangle pattern.
Sources:
Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
Of all the patterns that exist in any market, the most well known is the Head And Shoulder Pattern. Kirkpatrick and Dahlquist’s book, Technical Analysis, detailed many studies on the performance of this pattern. The result of all the data is that the Head And Shoulder Pattern is the most profitable of all standard patterns. Interestingly, Dalquist and Kirkpatrick made no distinction between the performance of the head and shoulder pattern and the inverse head and shoulder pattern (sometimes called the bottom forming head and shoulder pattern). While this pattern is successful across many markets, it is also the pattern that causes the most losses to new traders. We’ll get into the specifics of why this pattern destroys a good number of traders. First, we need to understand what the pattern is.
Regular and Inverse Head & Shoulder Pattern
The image above shows two head and shoulder patterns, the regular pattern and the inverse pattern. It just so happened that the daily chart of the AUDUSD conveniently had both of the patterns right next to each other – not a common occurrence. Now, you can and will read a lot of rules and theories behind the head and shoulder pattern. I could go into the behavior of this pattern, the psychology behind the three triangles that make up the broader pattern, the symmetrical nature of the left and right shoulders, etc., etc., etc., but we don’t need to complicate a pattern that can be very easily understood.
There’s a great book by Larry Pesavento titled Trade What You See. While the book Trade What You See is focused primarily on Harmonic Patterns, the title always stuck with me. If you were to stand in front of a mirror, you would more than likely notice the symmetrical nature of your left and right shoulders (unless you’ve had some significant injury or disease. There’s a good number of people who believe that both the right and left shoulders need to be as exact as possible – but this isn’t necessary.
Here’s a simple rule to follow:
If it doesn’t look like a human head and shoulder, then it probably isn’t a head and shoulder pattern.
Are you familiar with the poker game Texas Hold’em or any other form of poker? There are several maxims that poker players follow, one of them is ‘Don’t chase the straight or the flush.’ Why? Because when you get dealt a hand that is missing just one card for your straight or one more suite to complete your flush, the odds are overwhelmingly against you getting that final card to complete the straight/flush. Head and shoulder patterns are the same way. The head and shoulder pattern is only complete when the neckline has been broken. Let me repeat that three times for you:
A head and shoulders pattern is not complete until the neckline is broken.
A head and shoulders pattern is not complete until the neckline is broken.
Failed Head & Shoulder Pattern
Many a trading account has been the victim of trying to anticipate the completion of a head and shoulder pattern, only to have it be broken. In addition to being the most profitable basic pattern, the head and shoulder pattern is also one of the most rejected patterns. We don’t chase straights or flushes in poker, and we don’t chase patterns in trading. In addition to the information above, here are some other factors that can help you interpret the head and shoulder pattern:
If the volume in the left shoulder is greater than the right shoulder, there is an increased likelihood of the head and shoulder pattern completing.
If the volume in the right shoulder is greater than the left shoulder, failure rates are higher.
Horizontal necklines increase the probability of a head and shoulder pattern completing.
The more dramatic the slop of the neckline, the more likely the pattern will fail to develop.
Aggressive entries can be taken immediately when the price breaks the neckline.
Conservative entries can be taken after the neckline has been re-tested post-breakout.
If price breaks the neckline, retracements occur almost 70% of the time.
Sources:
Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
Flags and Pennants If you’ve ever traded a chart and you’ve seen what looks like a reversal in the trend, but as soon as you enter the trend seems to continue, odds are you were trading against a continuation pattern. Flags and pennants are titles given to patterns that show up as small countertrend moves […]
Flags and Pennants
Flags and Pennants If you’ve ever traded a chart and you’ve seen what looks like a reversal in the trend, but as soon as you enter the trend seems to continue, odds are you were trading against a continuation pattern. Flags and pennants are titles given to patterns that show up as small countertrend moves […]
Flags and Pennants
If you’ve ever traded a chart and you’ve seen what looks like a reversal in the trend, but as soon as you enter the trend seems to continue, odds are you were trading against a continuation pattern. Flags and pennants are titles given to patterns that show up as small countertrend moves that ultimately trap participants and then use their momentum to keep the price moving in the direction of the trend. Flags are represented as rectangular channels, and pennants are represented as triangles.
Before a flag or pennant can be identified, we first need a flag pole. A flag pole is any clear trending price action that, well, looks like a pole. See below:
Flags and Pennants
The images above show examples of bearish flags and bearish pennants, as well as bullish flags and bullish pennants. If you are unfamiliar with how to trade triangles or rectangles, refer to the articles that discuss the various triangle patterns. But we can review the basics of entering these great continuation patterns.
Bearish PennantBear FlagBullish PennantBull Flag
Learning how to trade flags and pennants is one of the most useful and enjoyable things that you can learn – especially as a new trader. Flags and pennants help train your brain to get used to buying dips during bull runs and shorting rallies during bear moves. If you get to a point where you can profitably trade flags and pennants, then you have transitioned into a trader who is very near outperforming the vast majority of your peers. It may seem like an easy thing to do – but it is an entirely different thing to execute. Analyzing and identifying a flag or pennant is easy; trading it is difficult.
I can not stress enough how profitable these patterns can be – and how easily you can miss them even in plain sight. The problem resides with your brain – that ‘lizard’ part that kicks in when you are are fearful of your account. When you begin to feel the fear of your account losing money, that triggers a powerful part of your brain known as the limbic system. The limbic system controls fear and pleasure. And when your fear sense is triggered, it hyper focuses the synapsis across your brain. Things that you would passively identify like flags and pennants are tertiary in their importance when the limbic system is acting in your defense. You need to find ways to ‘pause’ the process with things like alerts. On the images above, you saw horizontal lines above prior swing highs and below prior swing lows. Placing alerts at those points may be enough to interrupt your primary fear response and allow you to make money on your emotions.
Because if you are feeling it, so is everyone else.
Sources:
Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
Out of all the triangle patterns, symmetrical triangles are perhaps the most common and the most common and the most subjective. Symmetrical triangles have a standard neutral bias; however, symmetrical triangles most often form after a prior trend, because they most commonly form after a prior move. The preference of their trading direction is determined by the direction from the previous move. If the preceding move was bullish, then the symmetrical triangle is viewed as a bullish continuation pattern. Like all triangle patterns that form after a trending move, they are known as pennants.
The construction of a symmetrical triangle is like any other triangle: it requires to trendlines that intersect: one upward sloping angle and one downwards sloping angle. Price action should touch both the upper and lower trendlines at least twice – but ideally three times. A lack of open space within the triangle is ideal. Breakouts often occur in the final 1/3rd of the triangle. Volume typically falls before the breakout.
I believe that understanding the psychology of how this pattern forms is essential. The symmetrical triangle is the result of a condition that is very common in any traded market: consolidation. It’s not just common; it’s normal. Consolidation is representative of two things: equilibrium on the part of buyers and sellers and indecision by active speculators. The psychology of price action inside a symmetrical triangle is different than what occurs in an ascending or descending triangle, which both have a marked bias during the construction. Symmetrical triangles are the epitome of indecision, and traders can very quickly fall victim to whipsaws.
Symmetrical triangles, while the most common, are also the most confusing. Take the image below:
The symmetrical triangle on the daily chart for the AUDJPY is a bearish pennant – a bearish continuation pattern. While any triangle that forms after an established trending move has a high probability of pushing the price in the direction of the trend, it doesn’t always happen that way. As I wrote above, symmetrical patterns are inherently neutral – so it is important to watch them. We can see that this symmetrical triangle did not cause a continuation move south – it reversed. Regardless of the direction of the breakout, some rules should be applied when entering a trade based on a breakout of a symmetrical triangle.
Symmetrical Triangle – Long Entry
First, unlike the ascending and descending triangles, we don’t enter on the break. We want to enter when price breaks the prior high (or low). For the chart above, we would enter long above the previous swing high that touched the downtrend line.
Symmetrical Triangle – Short Entry
The short entry from a breakout below a symmetrical triangle is the inverse of the bullish entry. On the chart above, the short entry is when price moves below the prior swing low that tagged the uptrend line – not on the initial breakout.
Pullbacks and throwbacks occur 59% of the time. Symmetrical triangles are notorious for many false breakouts, so look for frequent wicks/shadows to pierce the trendlines. Dahlquist and Kirkpatrick wrote that volume that increases on the breakout increases the performance of the pattern, but it is otherwise below average in its performance.
Sources:
Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
The descending triangle is another version of the many triangle patterns in technical analysis. It is the opposite of the ascending triangle. This pattern is overwhelmingly bearish and is one of the more common bearish continuation patterns. If you’ve read Dahlquist and Kirkpatrick’s Technical Analysis, you will find that this pattern is treated with some considerable positivity. It was one of the best-performing patterns. But there is a caveat to why this is.
Descending Triangle
The two trendlines required for the formation of a descending triangle are a flat, horizontal trendline that acts as support with a downward sloping trendline that acts as resistance. Ideally, price should touch both the upper and lower trendlines twice. Volume typically decreases as price gets closer to the apex. Breakouts occur within the final 1/3rd of the pattern. Dahlquist and Kirkpatrick report that increasing volume is actually more favorable for this pattern. The most common breakout is lower at 64% of the time.
I’ve written in prior articles about the dangers of putting to much stock into technical analysis books where the initial testing of patterns and results have been in traditional equity markets (stock markets). I believe that one of the reasons that Dahlquist and Kirkpatrick have reported such powerful and swift moves with a downward breakout is due to the nature of bear moves in equity markets. Because markets like the stock market are exceedingly long-biased, any dramatic drop below crucial support will have an exceedingly more dramatic move when compared to the forex markets – which are primarily range bound. Another factor that may attribute to the overperformance of this pattern in stock markets vs. forex markets is the ease of shorting in forex vs. the stock market.
Sources:
Kirkpatrick, C. D., & Dahlquist, J. R. (2016). Technical analysis: the complete resource for financial market technicians. Upper Saddle River: Financial Times/Prentice Hall.
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
The most common term people associate with retracements in price that retest prior areas of support or resistance is a pullback. There is another term that goes with pullback, and that is a throwback. Let’s review the differences between these two definitions. Pullback Pullbacks occur after the price has moved lower. Think of any pattern […]
Throwback
The most common term people associate with retracements in price that retest prior areas of support or resistance is a pullback. There is another term that goes with pullback, and that is a throwback. Let’s review the differences between these two definitions. Pullback Pullbacks occur after the price has moved lower. Think of any pattern […]
The most common term people associate with retracements in price that retest prior areas of support or resistance is a pullback. There is another term that goes with pullback, and that is a throwback. Let’s review the differences between these two definitions.
Pullback
Pullback
Pullbacks occur after the price has moved lower. Think of any pattern or support line that has price breaking out to the downside. When price pulls back up to the price level of the initial break, that is known as a pullback. Pullbacks occur during breakouts lower.
Throwback
Throwback
Throwbacks occur after the price has moved higher. Think of any pattern or level of resistance that has price breaking out to the upside. When the price is thrown back down to the first level of the break, that is known as a throwback. Throwbacks occur during breakouts higher.
While there are different definitions for retests of breakout zones, know that people will often call throwbacks, pullbacks. In practice, the description itself does not matter as much as you see the behavior that price exhibits after breaking out of support or resistance. The table below identifies the average occurrence rate for a pullback or throwback from the following patterns.
The table above comes from Thomas Bulkowski’s book, ‘Visual Guide to Chart Patterns.’ His book is part of the Bloomberg Financial Series. Bulkowski is, by far, the authority on the frequency of patterns experiencing pullback and throwbacks. His work focuses extensively on chart patterns. However, there is one problem, and it has nothing to do with his phenomenal work. This is a problem for anyone who focuses primarily on the Forex markets. Why? Because Bulkowski’s work and the broader technical analysis writer/education community focuses primarily on equity markets. This is a big deal because equity markets spend the vast majority of their time in one direction: up. This is especially true over the past decade. Again, this is not a dig towards the truly phenomenal authors and analysts who spend years creating their written work – it’s just a reality of the world we are in. It’s important to understand that the Forex markets, as we know them, are still a relatively new market – especially when compared to the stock market.
If you read Bulkowski’s work or any other work studying the frequency of throwbacks and pullbacks from patterns and support/resistance – I would recommend attributing the same rate of throwbacks to pullbacks in the forex market.
Sources:
Bulkowski, T. N. (2013). Visual guide to chart patterns. New York, NY: Bloomberg Press.
Bulkowski, T. N. (2008). Encyclopedia of candlestick charts. Hoboken, NJ: J. Wiley & Sons.
Bulkowski, T. N. (2002). Trading classic chart patterns. New York: Wiley.
If you have not first read my article, ‘You’re still misusing Fibonacci retracements,’ please do so before reading this article. This article will continue where we left off in discussing the new and improved way of drawing accurate and efficient Fibonacci retracements using the Brown Method. I am going to use the same Forex pair that we used in the first article. The purpose of this article is to show you how you can create Fibonacci Confluence Zones to create natural price levels that act as future support and resistance. First, I am going to start my first swing using the March 2001 low and then retracing back to the confirmation swing high in March 1997. See below.
Fibonacci Retracement from low to confirmation lower swing high.
First, I want to know if this retracement is appropriate given how much time has passed – we’re 23 years from the March 1997 high and 19 years from the March 2001 low. Do these Fibonacci retracement levels still work? Do they remain valid? The black vertical line is the start of the retracement, so anything before the retracement is not used, it’s the data afterward that matters. Let’s look.
Fibonacci Retracement – testing of 20 year old retracement range.
Are these Fibonacci retracement levels we drew still relevant? I would say so. A quick look at A, B, C, and D prove it. Especially for the most recent data at D on the AUDUSD weekly chart – seven-year lows bounce off of the 61.8% Fibonacci retracement level from 20+ years ago! But let’s look at some more Fibonacci retracements made off of other significant swings. Fair warning: there’s going to be several images here.
Fibonacci Retracement 2011 to 2008
The Fibonacci retracement above is from the swing high in July 2018 to the confirmation swing low in October 2001. Like the previous Fibonacci image, we can see that prices have respected the retracement levels even a decade after the retracements were established. But we’re not done.
Fibonacci Confluence Zones
The above image is the first retracement we looked in this article (the same swing low in March 2001) using the same swing low; we draw more retracements to the next confirmation swing lower highs. I’ve drawn two additional Fibonacci retracements in Red and Orange. Notice how some of the Fibonacci retracements occur within proximity of one another. Letter A is shared retracement zones of the 50% and 61.8% of two different retracements. B has a confluence zone of three Fibonacci retracement levels, 50%, 61.8%, and 38.2%. And C has two overlapping retracements of 50% and 38.2%. Now let’s get to the fun part.
The previous image showed three Fibonacci retracement confluence zones at A, B, and C. Those confluence zones were just three of many that will appear on any chart on any time frame. What happens if we draw a series of retracements using major swings as the start point of the Fibonacci retracements and then retrace to the next confirmation swing highs and lows? We’ll get a chart that looks like the one below.
Full Confluence Zones
I’ve added some other letters to identify more confluence zones. I admit the chart does look like a mess. And it should. Not every Fibonacci retracement to a new confirmation swing high or low will coincide with shared Fibonacci levels, but they frequently do. Once we’ve drawn out a series of retracements, we should see a set of these confluence zones. Now begins the cleanup phase. We’re going to place horizontal lines where there are confluence zones of Fibonacci retracement levels.
Horizontal Lines replace confluence zones.
The letters A, B, C, D, and E show where the Fibonacci confluence zones have formed, and are represented by horizontal lines (black) on the chart. Now, you can either delete or hide all of the Fibonacci retracements so that we are left with only the horizontal lines at A, B, C, D, and E.
Just the horizontal lines
I know that the horizontal line at D represented the most confluence zones on the AUDUSD weekly chart, but it also represented some of the longest-lasting and respected Fibonacci retracement levels. Starting at the horizontal level at D, I draw a box from D down to the major low on the AUDUSD chart. Now, the width of this box doesn’t matter – just the range.
First Box
After I’ve established that box from D down to the major low, I can remove the horizontal lines. Then I start to copy the box all the way to the top of the range. All I’m doing here is copying and pasting the box so they ‘stack.’
Stacking Boxes
Now comes the cool part. I’m going to treat each box like its own range and place Fibonacci retracements inside each box, moving from bottom to top.
Fibonacci Retracements drawn inside boxes
No matter how many times I’ve done this, it still blows my mind. But there is probably a lingering question. You’re probably looking at the chart and saying, ok, cool, but there are some massive gaps between these Fibonacci levels. You are correct if you are thinking about this. Now, Connie Brown never wrote about this next part; it’s something I discovered and developed on my own. The approach comes from the idea that markets are fractalized and proportional, so we should be able to break down like zones into smaller ranges. This is especially important and useful for traders who prefer to trade on faster time frames like four-hour or one-hour charts. Using price action that is more recent and relevant, I can draw a Fibonacci retracement from the 50% level at 0.71688 to the start/end of the box at 0.6368.
Intra Fibonacci level retracements
Letters a and b on the chart above identify the 50% Fibonacci level and start/end level described in the prior paragraph. The black horizontal lines represent the Fibonacci retracement drawn from a to b. I’ve also switched the chart from a weekly chart to a daily chart. When we see that daily chart, we get a real idea of how powerful the Brown Method of Fibonacci analysis is and how precise the study of these confluence zones can be.
In summary, to utilize the Brown Method, the followings steps are as follows:
Create Fibonacci retracements by using a major swing high/low and drawing to the confirmation swing with a strong bar – not the next extreme high/low.
After identifying Fibonacci confluence zones, place horizontal lines on the major price levels where multiple Fibonacci levels share the same price range.
Delete or hide the Fibonacci levels so that only the horizontal lines are present – make sure you identify which horizontal line had the most powerful collection of Fibonacci levels.
After identifying which horizontal line was the most potent and relevant, determine if it is closer to the all-time high or all-time low. Draw a box or a price range from that horizontal line to the all-time high or low – whichever is closest.
Repeat the boxes by copying the same box and ‘stack’ it to the all-time high/low – the opposite of whichever was used to establish the box/price range.
Draw Fibonacci retracements in the boxes.
Sources:
Brown, C. (2010). Fibonacci Analysis: Fibonacci Analysis. Hoboken: Wiley.
Brown, C. (2019). The Thirty-Second Jewell: Thirty Years Behind Market Charts From Price To W.D. Gann Time Cycles. Tyton, NC: Aerodynamic Investments Inc.
You’re still using Fibonacci retracements incorrectly Like any discipline or field of study, Technical Analysis goes through changes. Old theories and approaches are rigorously utilized and tested, new ideas are studied, and advancements in the field occur. And, like any discipline or study, it takes a while for people to adapt to the new way […]
Brown Method: Confirmation higher swing low
You’re still using Fibonacci retracements incorrectly Like any discipline or field of study, Technical Analysis goes through changes. Old theories and approaches are rigorously utilized and tested, new ideas are studied, and advancements in the field occur. And, like any discipline or study, it takes a while for people to adapt to the new way […]
You’re still using Fibonacci retracements incorrectly
Like any discipline or field of study, Technical Analysis goes through changes. Old theories and approaches are rigorously utilized and tested, new ideas are studied, and advancements in the field occur. And, like any discipline or study, it takes a while for people to adapt to the new way of doing things. There is a shocking amount of updated theory and application in Technical Analysis that has yet to make its way down to the retail trader and investor – some of it is almost 25+ years old! One of the updates to old application and practice is how we use a tool known as a Fibonacci retracement. For many years, the method has been to draw a retracement from one extreme swing to the next (from swing high to swing low or swing low to swing high). In practice, there are a few incidents where this may work out just fine, but the new and better way shows how much more accurate and useful the update has been.
Old vs. New
I want to start off right away by showing you the difference between the old and new methods – I reference the new approach as the Brown Method. The AUDUSD Weekly chart below shows the old way of drawing Fibonacci retracements. With the old process, the Fibonacci retracement is drawn from the extreme swing high on the week of August 5th, 2011, to the extreme swing low on the week of October 31st, 2008. The vertical line delineates the starting point of the retracement, and no data to the left of that vertical line should be used to determine the efficacy of the retracement. It is only the data after the vertical line that is important and relevant.
Fibonacci Retracement: Incorrect
Now, contrast the image above with the new Brown method below.
Fibonacci Retracement: Correct
You will observe how much more accurate the Fibonacci retracement levels are on the Brown Method vs. the old method. What changed? Observe the swing low retracement on both charts – they are different. They both start at the same level, but the retracement end for the Brown method is drawn to the swing low on the week of February 6th, 2009. But why? Why do you draw to a seemingly random or ‘off’ swing and not the extreme? The reason for this is based on the writings of W.D. Gann.
The Brown Method
I call this new Fibonacci retracement method, the Brown Method, after Connie Brown. It is Connie Brown who discovered this new theory and wrote about it in her 2008 book, Fibonacci Analysis. It is not a very large book, under 200 pages, but it is one of the single most important works in Technical Analysis of the past 15-years. Her discoveries of how confluence zones of Fibonacci retracements dictate the normal rhythm and pulse of the market are truly groundbreaking. But to the first question of why I did not draw the retracement to the extreme low? Connie Brown points out that W.D. Gann made the point that the end of a trend is not established by the extreme high or low – it is the secondary high/low that confirms the change in trend (sometimes known as the confirmation swing). This makes sense because the extreme is very rarely the level where the participants in a market agree that a trend is finished.
So how do we identify what swing to use? How did I identify what candlestick was the confirmation swing low on the weekly AUDUSD chart? Again, this goes back to Brown – but this information is from her penultimate work (her magnum opus in my opinion), The 32nd Jewel. The first chapter of her massive book (it weighs about eight lbs., is three inches thick and nearly 1100 pages long) addresses some of the problems students of hers have had with the application of her updated Fibonacci retracement method. To identify the correct swing to use, we look for the strongest bar. Let’s take a ‘zoomed’ in look at the swing low used on the AUDUSD weekly chart above.
Brown Method: Confirmation higher swing low
It will take you some practice to find the swing bar (also, gaps are used, but that is for another article) that would be considered the ‘strong bar.’ What constitutes a strong bar? That can be somewhat subjective, but look at the candlestick that I’ve identified as the strong bar compared to the candlesticks before it and around it. Why did I pick this candlestick? First, it is a bullish engulfing candlestick on the weekly chart. Second, that candlestick rejected any further downside pressure after a consecutive four week period of weekly candlestick closes below the open. Third, the open and low of the candlestick created the support zone for the next five weeks. In a nutshell, the candlestick is massive, its sentiment overwhelmingly one-directional, and the lows of that candlestick were respected. That candlestick was the confirmation swing low because it confirmed the end to lower prices and was the most substantial candlestick before the new uptrend occurred.
Side note: Connie Brown also said to look for gaps in the price action as areas to draw the confirmation swing. Finding gaps is a much easier process when looking at traditional markets like the stock market. Forex data can vary from broker to broker as some data providers show gaps, and others do not.
The following articles will go into further detail on how to implement more of the Brown Method. I believe that what you will read and learn will be one of the ‘wow’ moments you experience in the study of Technical Analysis. To say that what Connie Brown has discovered is truly amazing is an understatement when we learn about the confluence of Fibonacci zones and how they create the natural price zones that an instrument swings to, it is a truly eye-opening experience.
Sources:
Brown, C. (2010). Fibonacci Analysis: Fibonacci Analysis. Hoboken: Wiley.
Brown, C. (2019). The Thirty-Second Jewell: Thirty Years Behind Market Charts From Price To W.D. Gann Time Cycles. Tyton, NC: Aerodynamic Investments Inc.
Something new traders struggle with is trying to find appropriate profit targets and stop targets. Point & Figure charts make a process that is a struggle into something that is very, very easy. Two methods can be used to identify profit targets on a Point & Figure chart: Vertical Method and Horizontal Method. I am only going to show you the Vertical Method because the entire series I’ve done here has strictly been on the use of 3-box reversal Point & Figure charts.
The Horizontal Method can be found in Jeremy Du Plessis’s work. The Horizontal Method is more applicable to the most traditional form of Point & Figure – the 1-box reversal chart. There’s a formula for calculating the profit target on Point & Figure. Don’t get freaked about the word formula – the process is very simple.
Long Profit Target
Buy/Long Profit Target = (number of Xs in prior column * box size) * (reversal amount) + lowest O of the current O column.
Short Profit Target
Short Profit Target = (Number of Os in prior column * box size) * (reversal amount) – highest X of the current X column.
Stops
Regarding stops, I always stick with the reversal amount – so my risk is always, no matter the trade, 3-boxes worth. On my standard 20-pip box size Point & Figure charts, 60 pips are my max loss on any trade. Some authors suggest putting the stop one box below (or above) the reversal amount, but I’ve always stuck with the reversal amount being my stop.
The Blind Entry Trading System
I want to tell you something that might be a little mind-boggling. I’ve been teaching Point & Figure to another class this year, and we’ve focused on live testing the ‘blind entry’ trading strategy in Point & Figure – which is nothing more than taking every single multiple-top or multiple-bottom break without any other filter. We focused on the following pairs:
GBPUSD, AUDUSD, USDCAD, USDJPY, GBPJPY, EURGBP, EURUSD, and AUDJPY.
We did not use any profit targets. We exited trades only when the reversal column appeared. So our losses were always limited to just 60 pips on a 20-pip/3-box reversal Point & Figure chart. We traded from March 1st, 2019 through December 7th, 2019. The results below detail the net pips at the end of our trading period:
Net Total pips = +6,280 (the average for the class was +5443 pips).
To put that into perspective, with a 0.1 (10,000 unit) Lot size, that’s a net $6,280.00. A full Lot would have equaled a net $62,800. I had one woman who traded an odd 3.33 Lots as her standard position size (I guess it is not that odd if you think about it). She led the pack with her real net pip count at +6,880 – with a 3.33 lot size that meant she made a net $229,104. I was and remain very envious of her performance – she should probably be teaching!
Sources:
Dorsey, T. J. (2013). Point and figure charting: the essential application for forecasting and tracking market prices (4th ed.). Hoboken, NJ: John Wiley & Sons.
Kirkpatrick II, C. D., & Dahlquist, J.R. (2016). Technical Analysis: The Complete Resource for Financial Market Technicians (Third). Old Tappan, NJ: Pearson.
Plessis, J.J. (2012). Definitive Guide to Point and Figure – a comprehensive guide to the theory (2nd ed.). Great Britain: Harriman House Publishing.
DeVilliers, V., & Taylor, O. (2008). Point and figure charting. London: Financial Times/Prentice Hall.
Of all the chart styles and trading styles I’ve used in my years of trading, Point & Figure is by far the least stressful and most profitable I’ve ever used. Point & Figure, for a trader, I believe, is the most stress-free form of charting available.
Bearish Catapult Pattern
Of all the chart styles and trading styles I’ve used in my years of trading, Point & Figure is by far the least stressful and most profitable I’ve ever used. Point & Figure, for a trader, I believe, is the most stress-free form of charting available.
Of all the chart styles and trading styles I’ve used in my years of trading, Point & Figure is by far the least stressful and most profitable I’ve ever used. Point & Figure, for a trader, I believe, is the most stress-free form of charting available.
There is no need for economic reports or balance sheets. Point & Figure is concise, logical, and it eliminates guesswork and emotion. It is the most scientific and fact-based chart form. From an analysis perspective, I believe chart forms that include time, volume, and price are superior to Point & Figure (Japanese Candlesticks and American Bar Charts). From a trading perspective, Point & Figure is superior to all. I believe this because trading is an emotional career, and the more we can filter out the stimuli that cause emotional reactions, the better traders we become.
This section will review common patterns and strategies for Point & Figure charts. These are limited to 3-box reversal charts. I have debated whether to write about 1-box and 2-box reversal charts, but I have decided against it. The reason is that I do not use them, I stick with 3-box reversal charts only for Forex markets.
The following are chart patterns, as described in the books I’ve identified as sources at the end of these articles. Many of these patterns I’m going to show are from Dahlquist and Kirkpatrick’s phenomenal book, Technical Analysis – The Complete Resource for Financial Market Technicians (3rd Edition). If you want to get an understanding of how vital and powerful Point & Figure is, compare the size of the Point & Figure chapter against all the other sections in that book (consequently, that book is part of the required reading for the CMT certification.
I have ping-ponged the idea of skipping some of the patterns in Dahlquist’s and Kirkpatrick’s book because some of the patterns were determined to be ineffective in their cited research. The sources Kirkpatrick and Dahlquist’s reference showed pattern results in equity markets. Equity markets and Forex markets are not the same, so while some of the patterns described in Technical Analysis indicate they should be ignored, I am going to include them because they may work better in Forex markets. You will find this a constant throughout technical analysis literature: the positive expectancies of patterns, strategies, and theories have almost exclusively been tested in equity markets.
Trap Patterns
I am starting off our study with a pattern that you will frequently encounter. Trying to avoid them is near impossible, but because losses are extremely limited in Point & Figure, even successive traps generate minimal losses compared to gains. But I believe it is imperative to understand that traps do occur, they can be frequent, and you will have to get used to them. There are two types of traps, bull traps, and bear traps. Traps occur when a breakout from a multiple top or bottom creates an entry, but price changes direction, and the next column generates a trade entry on the opposite side of the trade.
Bull Trap Pattern
Bull Trap: Bull traps occur when price breaks a multiple top and creates a buy entry, but then the X column reverses to an O column that creates a new short entry.
Bear Trap Pattern
Bear Trap: Bear traps occur when price breaks a multiple bottom and creates a short entry, but then the O column reverses to an X column that creates a new buy entry.
Rising Bottoms
Rising Bottoms Pattern
A rising bottom pattern may look like a regular double top pattern, but it is different. It is different because of the columns of Os in this pattern. The Rising Bottoms pattern has at least four columns with sequential higher lows. The last O column must have a higher low than the first column of Os, and the previous X column must have a higher low than the first X column. The long entry occurs when the double top is broken.
Declining Tops
Declining Tops Pattern
The Declining Tops pattern is the inverse of the Rising Bottoms pattern. The Declining Tops pattern has at least four columns with sequential lower highs. The last X column must have a lower high than the first column of Xs, and the previous O column must have a lower high than the first O column. The short entry occurs when the double bottom is broken.
Split Tops and Bottoms
Split Bottom PatternSplit Top Pattern
Split Tops and Bottoms generally occur in the form of Split Triple Tops and Split Triple Bottoms. Split Tops and Bottoms have a ‘gap’ in between the tops and bottoms. How many columns do you consider in the formation of a Split Top or Bottom? It is generally believed that 6 to 10 columns are appropriate for finding Split Tops and Bottoms. We trade Split Tops and Bottoms patterns the same way we trade any other multiple top or bottom.
Triangles
Triangles
Triangles are common patterns you will find on Point & Figure charts. But it is important to remember that just because price breaks through a triangle, that doesn’t mean that we take an immediate entry on the break – we still have to wait for a multiple top or bottom to be broken.
Catapults
Bullish Catapult Pattern
Catapults can be a somewhat confusing pattern, but they are compelling. The Catapult Pattern was one of the few patterns in Technical Analysis that generate equally positive returns on the short side of equity markets as it did on the long side. The strength of these patterns is related to the psychological component of trading. Catapults generally show up after a trendline break or after multiple top or bottom (at least a triple top/bottom or a split triple top/bottom). Catapults are most often pullback/throwback trades, and that is why they are so powerful.
Spike Patterns
Bearish Spike PatternBullish Spike Pattern
Spike Patterns (along with Pole Patterns) are the only patterns that have a small amount of subjectivity and interpretation. Even Dalquist and Kirkpatrick could not identify consensus from other Point & Figure experts on what constitutes a Spike Pattern. A spike pattern is a massive column that is around 15 to 20 boxes in length. This is my absolute favorite pattern because it has such an enormous reward and minimal risk. This is also only one of two patterns (the other being the Pole Pattern), where the entry does not require a multiple top or bottom. Spike patterns are entered immediately on the reversal column.
Pole Patterns
Pole Pattern
Pole patterns are hands down the most subjective pattern in Point & Figure. The problems with identifying with what qualifies as a Pole comes down to broad interpretation. A Pole is very much like a Spike Pattern in that it’s a substantial column, but it is smaller than a Spike. Poles are any column that is less than sixteen boxes but also more significant than ‘normal’ size columns. One of the identifying factors of a Pole Pattern is the same as a Spike Pattern: they show up at the end of swings. Trading a Pole Pattern is relatively simple. All we do is measure the length of the Pole with a Fibonacci retracement tool (doesn’t matter where you start) and then enter long or short when price moves beyond the 50% level.
Sources:
Dorsey, T. J. (2013). Point and figure charting: the essential application for forecasting and tracking market prices (4th ed.). Hoboken, NJ: John Wiley & Sons.
Kirkpatrick II, C. D., & Dahlquist, J.R. (2016). Technical Analysis: The Complete Resource for Financial Market Technicians (Third). Old Tappan, NJ: Pearson.
Plessis, J.J. (2012). Definitive Guide to Point and Figure – a comprehensive guide to the theory (2nd ed.). Great Britain: Harriman House Publishing.
DeVilliers, V., & Taylor, O. (2008). Point and figure charting. London: Financial Times/Prentice Hall.
If the only chart style you have ever been familiar with is Japanese candlesticks or American bar charts, then no doubt Point & Figure charts will look very foreign. They have the appearance of random and new while also being very organized and very old looking. Point and Figure charts are the earliest known forms of technical charting that we know of, and many civilizations have generated some Point and Figure charts out necessity. Another concept that may be difficult to grasp if you are new to price action only chart styles is that Point and Figure charts are an intraday charting style, but is void of any time component. Live data is necessary when using Point and Figure charts. The fact that Point and Figure is an intraday chart style will confound most people who are familiar with charts that utilize the component of time, like Japanese candlesticks. Most of you who are learning about Point and Figure charts will assume that Point and Figure is a long term chart form. It is tough to create the mindset that time is not a factor in Point and Figure. But let’s get to the chart.
Point & Figure Chart Basics – Box Size and Reversal Amount
Point & Figure charts are represented by a Box Size and a Reversal Amount. Boxes are represented as Xs and Os. The trader or analyst determines the Box Size. Depending on the market you are trading and the Reversal Amount, the Box Size will vary from one market and instrument to the next. I will provide a table with the box sizes I use in my trading at the end of this article. On a Point & Figure chart, Xs and Os represent price direction. Xs, often colored green, represent price moving up. Os, usually colored red, represent price moving down.
The trader or analyst also defines the Reversal Amount. Historically, Point & Figure charts were 1-box Reversal charts. Today, 3-box reversal charts are the most common. There is no limit on the number of boxes required for a reversal. I only use 3-box reversal charts – they perform exceptionally well in Forex markets. The Reversal Amount dictates how many boxes price needs to move to print a new column of Xs or Os. Let’s look at the Box Size and Reversal Amount on the chart below.
How much time does it take for a column to change from X to O?
Your transition to a price action only chart from a Japanese candlestick chart is going to continually be hampered by continuing to think that ‘time’ has someplace on a Point & Figure chart. You will look at a chart and say to yourself, ‘Well, that column of Xs has been there for a while, it can’t move anymore, it will probably reverse.’ While the concept of time is not used, some pieces of software will allow you to imprint the month on the chart where the month’s number will appear at the price level it was trading at when the month started. This can give those who are transitioning to Point & Figure as a new chart style some ‘grasp’ of time. See below.
Months on Boxes
Some traders may find having the month displayed as a benefit. Is it useful? I think so. It does at least give a sort of perspective of time and how long something has remained in a single column or how many reversals have been printed on the screen. Additionally, cycle analysis teaches that we often see some of the highest probabilities of trend changes or corrective moves occurring at the start of a new month. If we observe a new month starting near an extreme high or low, we could be looking at an imminent reversal with at least a high probability short term trade option.
Trend Lines and Patterns
Another concept that people new to a price action only chart style might find difficult to understand is that P&F charts are always in a bear or bull market. And depending on the time frames you trade on a Japanese candlestick chart, Point & Figure charts may change bull and bear trends frequently or infrequently. Two types of trendlines can be drawn on a Point & Figure chart:
Objective (requires only one point to draw).
Subjective (requires two or more to draw).
Trendlines
Objective Trend Lines or Dominant Angles are also called 45-degree angles. Dominant angles only require one point to be drawn, and they are always drawn from O to X or X to O (in 3-box reversal charts) – and always to the column right next to eachother. The software I am using for these articles is called Optuma by Market Analyst. In Optuma’s software, they auto-draw some of the dominant trend lines. Subjective trendlines are drawn the same way you would draw any other trendline on a Japanese candlestick chart. I rarely, if ever, utilize subjective trendlines. In some of the strategies I will go over, the dominant/45-degree trendlines are useful in determining the direction of the trading you should take.
Patterns such as flags and pennants will show up on Point & Figure charts just like you would see on Japanese candlestick charts. The same principles that we would apply in trading continuation patterns like flags and pennants are the same on a Point & Figure chart. There are some stark differences between the breakouts of a pattern on a candlestick chart versus a Point & Figure chart. There is a primary difference between how we treat breakouts of patterns and trendlines on a Point & Figure chart versus a candlestick chart.
Most Important Rule To Follow
There is one primary rule that must be followed when trading on Point & Figure charts.
Only Enter Trades After Multipletops/Multiplebottoms have been broken.
I’ve said that Point & Figure charts are unambiguous. The entry rules in Point & Figure reinforces that statement. When a multiple top appears, the entry is always on the next X above the multiple top. When multiple bottoms appear, the entry is always on the next O below the multiple bottom. See the charts below:
Double Top & Double BottomMultiple Tops and Bottoms
A question often arises when an X or O breaks a trendline: do you enter a trade when the trendline is broken? It depends. The entry rules of multiple tops and multiple bottoms still apply. Even if the price breaks a trendline, a multiple top or bottom needs to be broken to take an entry. Further discussion into entry rules and entry strategies will be discussed in further articles.
Sources:
Dorsey, T. J. (2013). Point and figure charting: the essential application for forecasting and tracking market prices (4th ed.). Hoboken, NJ: John Wiley & Sons.
Kirkpatrick II, C. D., & Dahlquist, J.R. (2016). Technical Analysis: The Complete Resource for Financial Market Technicians (Third). Old Tappan, NJ: Pearson.
Plessis, J.J. (2012). Definitive Guide to Point and Figure – a comprehensive guide to the theory (2nd ed.). Great Britain: Harriman House Publishing.
DeVilliers, V., & Taylor, O. (2008). Point and figure charting. London: Financial Times/Prentice Hall.
One of the big buzz words or methodologies used in trading over the past ten years has been the term and/or style called ‘Price Action Trading.’ It is also known as ‘Naked Trading’ or, much less known as ‘Dynamic Impulse Trading.’ Price Action Trading is a style and methodology that teaches students to utilize candlesticks charts with no lagging indicators or oscillators. Students learn to utilize very little in the form of any tools beyond trend lines, subjective horizontal support/resistance, and pattern recognition. Not surprisingly, many people fail at Price Action Trading. I would venture that out of all the methodologies taught to new traders and analysts, Price Action Trading with Japanese candlesticks causes more new trader accounts to go bust than almost any other trading style or system.
The problem with Price Action Trading using Japanese candlesticks gets exacerbated the faster the time frame used. Japanese candlesticks are, believe it or not, a very advanced form of analysis that requires a significant amount of study to interpret and apply today’s financial markets properly. Traditionally, the application of Japanese candlesticks did not occur on fast time frames. Instead, they were limited to longer time frames such as weekly and monthly charts, and those are timeframes where the analysis, interpretation, and execution of Japanese candlesticks have very few equals. To make Japanese candlesticks work on fast time frames in modern markets requires the use of a myriad of supporting tools such as oscillators and indicators. The use of oscillators and indicators with Japanese candlesticks is necessary is because Japanese candlesticks are three-dimensional: price, time, and volume. Point & Figure only records price.
Point & Figure Analysis
For the Price Action Trader, no chart style is purer than Point & Figure because Point & Figure records only price. In Point & Figure Analysis, time is not measured or used, and volume is anecdotal. That may seem anathema to many traders, but it makes perfect sense from the perspective of a Point & Figure user. Because Point & Figure only records price moves, it makes sense why volume is anecdotal and not significant. If you think about it, the volume itself isn’t relevant unless there is a corresponding price move. Price is the only thing that matters. One of the greatest authorities and written works of Technical Analysis is de Villiers and Taylor’s Point and Figure Charting. They make a compelling case for the weight and authority of this chart and analysis style.
Point & Figure is logical in its application.
Simple and easy to master.
Point & Figure is void of mystery, guessing, and complications caused by subjective analysis.
News, economic reports, and other sources of market noise are not necessary.
Losses are limited while profits accrue – easy stop and profit target calculations.
Point & Figure signals are clear and unambiguous.
The method avoids and dismisses manipulation.
Inside information not necessary.
Volume manipulations are pointless and irrelevant.
Solo traders outperform professional money, proprietary trading firms, and traditional buy and hold investors with this method.
Insignificant price moves are ignored.
Support and resistance easy to identify.
Sources:
Dorsey, T. J. (2013). Point and figure charting: the essential application for forecasting and tracking market prices (4th ed.). Hoboken, NJ: John Wiley & Sons.
Kirkpatrick II, C. D., & Dahlquist, J.R. (2016). Technical Analysis: The Complete Resource for Financial Market Technicians (Third). Old Tappan, NJ: Pearson.
Plessis, J.J. (2012). Definitive Guide to Point and Figure – a comprehensive guide to the theory (2nd ed.). Great Britain: Harriman House Publishing.
DeVilliers, V., & Taylor, O. (2008). Point and figure charting. London: Financial Times/Prentice Hall.
Harmonic Pattern – Walkthrough
[caption id="attachment_48985" align="aligncenter" width="3682"] Bearish Butterfly Pattern against 180-degree Square of 9 angle.[/caption]
The chart above is the AUDJPY Forex pair on its 6-hour
Harmonic Pattern – Walkthrough
[caption id="attachment_48985" align="aligncenter" width="3682"] Bearish Butterfly Pattern against 180-degree Square of 9 angle.[/caption]
The chart above is the AUDJPY Forex pair on its 6-hour
Harmonic Pattern – Walkthrough
Bearish Butterfly Pattern against 180-degree Square of 9 angle.
The chart above is the AUDJPY Forex pair on its 6-hour chart. If you are unable to identify this pattern without referencing notes or the prior articles, you are not ready to use this form of technical analysis. Regardless, the pattern above is a Bearish Butterfly Pattern.
Harmonic Patterns are by there very nature indicative of imminent price reversals. The PRZ (Potential Reversal Zone) is, in my opinion, the most critical level when determining whether to utilize a Harmonic Pattern in my trading. A Harmonic Pattern itself is not a sufficient enough form of analysis to decide whether or not to take a trade. Harmonic Patterns, in my opinion, should not be used as a primary form of analysis, but rather a complementary or confirmatory form of analysis. The chart above is an excellent example of this.
The horizontal levels on AUDJPY’s chart are derived from W.D. Gann’s Square of 9 – natural number values that represent angles. The methods and theories in Gann Analysis are an entirely different topic and require years of study and research – but for this article, one component of his work will help make my point. The red horizontal line at the top is a 180-degree Square of 9 angle. The 180-degree Square of 9 angle is already a strong and naturally powerful level of resistance. When I see price is near the 180-degree Square of 9 angle, I know one thing is for sure:
There is a high probability that the AUDJPY will have difficulty crossing this level and a high probability of price, at least initially, being rejected from moving higher.
So I would naturally look to be taking a short trade if the market shows rejection at that level. That is where the presence of a Harmonic Pattern is desirable. The Bearish Butterfly Pattern is one of the most reliable and most powerful reversal patterns in all Scott Carney’s work. I know that the Butterfly Pattern typically shows up at the end of a swing – not necessarily a trend, but the end of a swing. If I see a Bearish Butterfly Pattern, I know one thing is for sure:
The Bearish Butterfly Pattern is a reversal pattern. I also understand that the Bearish Butterfly Pattern appears at the top of a swing, indicating an extended and overdone market.
After seeing price approach, the naturally strong reversal level of the 180-degree Square of 9 angle, and then the completion of a Bearish Butterfly Pattern, I believe that there is a sufficient amount of analysis to risk taking a short trade. A short trade is further validated by the completion of a bearish engulfing candlestick, as well as some lengthily bearish divergence on the RSI.
Harmonic Patterns are an advanced form of analysis and require more than a basic understanding of the technical analysis of financial markets. For those of
Bearish Butterfly Pattern against 180-degree Square of 9 angle.
Harmonic Patterns – Start Here
Harmonic Patterns are an advanced form of analysis and require more than a basic understanding of the technical analysis of financial markets. For those of
Harmonic Patterns – Start Here
Harmonic Patterns are an advanced form of analysis and require more than a basic understanding of the technical analysis of financial markets. For those of you who have familiarized yourself with the application of Fibonacci levels, Harmonic Pattern Analysis will, perhaps, be of use to you. The following is a list of the Harmonic Patterns available for learning here at Forex Academy. The suggested order of learning about these patterns is below.
The article above provides an example of how to use Harmonic Patterns in your own analysis and trading.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley
Ichimoku Guide – Start Here
The Ichimoku Kinko Hyo system is a powerful, tested, and vetted trading system. This guide will lead you in the direction of the articles you
Ichimoku Guide – Start Here
The Ichimoku Kinko Hyo system is a powerful, tested, and vetted trading system. This guide will lead you in the direction of the articles you
Ichimoku Guide – Start Here
The Ichimoku Kinko Hyo system is a powerful, tested, and vetted trading system. This guide will lead you in the direction of the articles you should follow.
In this article, you will learn a short history of Japanese technical analysis. It is not necessary to read this article to understand the Ichimoku Kinko Hyo system, but I would suggest reading it.
Ichimoku Kinko Hyo Guide – A walk through a trade.
I want to preface this guide with a screenshot of my account.
Trade History
The screenshot is a series of some of the trades I’ve made in early April 2019. I do this because this guide on trading with Ichimoku will target the trade that is highlighted. Additionally, I think it is important that if I am showing you an example of a trade for a guide, I should show that I had skin in the game. There are a great many guides and strategies that authors, analysts, and traders suggest, but few will share if they took the trade. The highlighted trade for the EURGBP is the trade I will be using for this guide. It is a great example of the trading methodology I use with the Ichimoku System.
Multiple Timeframe Analysis – Daily, 4-Hour, and 1-Hour
The Ichimoku Kinko Hyo system is most effective when utilizing multiple timeframes. It is the only way that I use the Ichimoku system. In my trading, I use the Daily, 4-hour, and 1-hour time frames. Multiple timeframes are extremely useful in filtering your trade entries and ensuring higher probability trade setups. The process below will go through the process I used to take the trade.
Step One – Daily Chart Check: Price greater than Kijun-Sen, NOT inside the Cloud.
Step One – Check Daily Cloud
The very first thing I check is the daily chart. If the price is inside the Cloud on the daily chart, I skip the chart. It’s dead to me. If the price is not inside the Cloud, I then look for where the price is in relation to the Kijun-Sen. The daily chart determines my trading direction. If the price is above the Kijun-Sen, I only take long trades. If the price is below the Kijun-Sen, I only take short trades.
Step Two – 4-Hour Chart Check: Price above the Cloud, Chikou Span above candlesticks.
Step Two – Check the 4-hour chart.
If the daily chart determines the direction of my trading, the 4-hour provides the filter for the entry chart (the 1-hour chart). The only things I am concerned about with the 4-hour chart is that the Chikou Span is above the candlesticks, and that price is above the Cloud. Preferably, the Chikou Span would also be in ‘open space’ – but I don’t use it as a hard rule. I have not found the open space to be as important during the change of a trend or corrective move.
(a note about ‘Open Space’ – Open Space is a condition where the Chikou Span won’t intercept any candlesticks over the next five to ten trading periods. When the Chikou Span is in open space, this represents ease of movement in the direction of the trend with little in the form of resistance (or support) ahead.)
The EURGBP trade we are analyzing is a good example of why, at the current position, I don’t consider the open space as strict as I would on the hourly. I want to refer you back to the daily chart. If, on the daily chart, both price and the Kijun-Sen are below the daily cloud, but price moves above the Kijun-Sen – I don’t consider the open space variable as important on the 4-hour chart.
Step Three – 1-Hour Chart Check
Step Three – 1-hour Entry
The 1-Hour chart is my entry chart. As long as Step One and Step Two are true, the 1-hour chart is where the bread and butter of the trading occurs. My entry rules are this:
Future Span A is greater than Future Span B.
Chikou Span above the candlesticks and in ‘open space’ – for five periods.
Price is greater than the Tenkan-Sen and Kijun-Sen.
I generally look for a profit target of 20-40 pips, depending on the FX pair. For example, on the NZDUSD, I would look for 20 pips, and on the GBPNZD, I would look for 40 pips. But there are some hard technical reasons to leave a trade before that profit target is hit. The list below represents my exit rules on the 1-hour Chart – I exit the trade if any of these conditions occur.
Exit if Chikou Span below candlesticks for more than three consecutive candlesticks.
Exit if price enters the 1-hour Cloud.
Exit if Tenkan-Sen below the Kijun-Sen for more than five candlesticks.
Step Four – Reentry Rules
Step Four – Reentry
Entry rules are fine, but the problem isn’t always finding the entry. One of the hardest problems is creating rules for re-entering a trade. Mine are as follows:
Tenkan-Sen and Kijun-Sen must be above the Cloud.
Chikou Span above the candlesticks.
Price greater than Kijun-Sen and Tenkan-Sen.
A quick summary of steps taken
Checked the daily chart, the price was above the daily Kijun-Sen. The trade direction is long/buy.
Check the 4-hour chart, the price was above the Cloud, and the Chikou Span was above the candlesticks.
All 1-hour rules confirmed an entry; profit taken at 40 pips.
Re-entered trade on 1-hour chart, exited when price entered the 1-hour Cloud.
Sources: Péloille, Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
The Three Principles – Timespan Principle
In another correlation to Western analysis, Hosada’s Ichimoku Kinko Hyo system has a timing component within the system. The numbering system used in Ichimoku
Timepsan Principle - Combined Counts
The Three Principles – Timespan Principle
In another correlation to Western analysis, Hosada’s Ichimoku Kinko Hyo system has a timing component within the system. The numbering system used in Ichimoku
The Three Principles – Timespan Principle
In another correlation to Western analysis, Hosada’s Ichimoku Kinko Hyo system has a timing component within the system. The numbering system used in Ichimoku is unique when compared to Western analysis. The reason for the numbering and counts in Ichimoku is related to the cultural importance of some numbers in Japan versus others. Numbers that would be considered ‘lucky’ in Japan are the same numbers in the West and many other cultures – particularly 7 and 9. But those numbers themselves are not what is important. How, exactly, this numbering and count system came to be developed in the fashion that it was developed I do not know. The following is directly from Ichimoku Chats – An Introduction to Ichimoku Kinko Clouds by Nicole Elliot – I heavily suggest getting her book (the 2nd edition). The important numbers are:
9, 17, 26, 33, 42, 65, 76, 129, 172, 257
If you ever study the work of WD Gann, then these numbers are not only familiar but non-random.
Numbering
Numbering the candlesticks in a pattern is done with traditional Arabic numbers (1,2,3,4,5, etc.) and English letters (A, B, C, D, E, etc.). When counting how many candles are in a trend/wave, the last candle in an uptrend is counted as the first in the down wave and vice versa. See below:
Timespan Principle – Candle Counts
Notice that candle 19 is also A, candle H is also 1. Also, notice that the time counts (total number of candles) in this ‘N’ wave all represent essential numbers in the Ichimoku number system. 19 is close to 17, H is close to 9, and 8 is close to 9.
Kihon Suchi – ‘Day of the turn.’
Nicole Elliot’s work is fantastic – it’s refreshing to read an analyst and trader who updates her work and goes through the grueling process of keeping it relevant. Kijun Suchi (‘the day of the turn’). The Kihon Suchi is the Hosada’s Timespan Principle put into practice. It is very similar to the use of Gann’s cycles of the Inner Year or horizontal Point & Figure counts to identify turns in the markets. Let’s use the image above again as an example. Below, I’ve separated the ‘N’ wave into A, B, and C.
Timespan Principle – Combined Counts
When adding the number of bars in A, B, and C, we always subtract 1 from each wave after the first. For example, if we counted five waves and the total was 100 bars, we would subtract 4 from 100; 96. On the chart above, the total number of bars of A, B, and C is 33 bars. We subtract 2 from 33 to get 31. This is where the Timespan Principle using Kihon Suchi comes into play. We should be able to project the end of the down drive that will occur after wave C. Does it work? Let’s see.
Timespan Principle – A+B+C = D
Below is another example. In reality, the use of the Timespan Principle is a very simplified version of a phenomenon known as a foldback pattern. But Japanese analysis focuses on the quality of equilibrium, so it makes sense to see this kind of behavior from a method that focuses on balance in all things.
Timespan Principle – Symmetrical Inverse Head & Shoulder Pattern
Sources: Péloille, Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
The Three Principles – Price Principle
This will be the shortest article over the three principles, mainly because it is the same as many other Western styles of price projection.
Price Principle - N Price Target
The Three Principles – Price Principle
This will be the shortest article over the three principles, mainly because it is the same as many other Western styles of price projection.
The Three Principles – Price Principle
This will be the shortest article over the three principles, mainly because it is the same as many other Western styles of price projection. I do not need to go into any significant detail here. If you want further detail into this method, I would suggest Nicole Elliot’s book, Ichimoku Charts – An Introduction to Ichimoku Kinko Clouds (2nd Edition).
Elliot identified four price target methods from Hosada’s work: V, N, E, and NT. Elliot does mention that she (myself included) does not use this analysis and relies instead on traditional Western methods. However, she does cite that for investors and traders with short time horizons that this Japanese method of the Price Principle is superior to many techniques.
V Price Target
V = B + (B – C)
Inverse: B – (B+C)
Price Principle – V Price Target
N Price Target
N = C + (B – A)
Inverse: C – (B + A)
Price Principle – N Price Target
E Price Target
E = B – (A – B)
Inverse E: B + (A + B)
Price Principle – E Price Target
NT Price Target
NT = C + (C – A)
Inverse NT: C – (C – A)
Price Principle – NT Price Target
Sources: Péloille, Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
A man named Hidenobu Sasaki brought Hosada’s Ichimoku system and the three principles to contemporary times. He worked for Citigroup in Japan when he published his 1996 book, Ichimoku Studies.
A man named Hidenobu Sasaki brought Hosada’s Ichimoku system and the three principles to contemporary times. He worked for Citigroup in Japan when he published his 1996 book, Ichimoku Studies.
A man named Hidenobu Sasaki brought Hosada’s Ichimoku system and the three principles to contemporary times. He worked for Citigroup in Japan when he published his 1996 book, Ichimoku Studies.
These three principles have shared characteristics of many various styles and theories in Western technical analysis. A couple of examples of those would be Elliot Wave Theory and Tom DeMark’s Sequential. I would encourage all readers to pick up Nicole Elliots 2nd edition of Ichimoku Charts – An introduction to Ichimoku Kinko Clouds. It is my opinion that her work is the most in-depth on these three principles – even though she reports she does not use them. I also do not use any of these three principles. Nonetheless, they are a component of the entire Ichimoku system.
Principle One – The Wave Principle
The Wave Principle is an enigma. It is both singular in its nature when compared to Western analysis but also very complimentary. Ichimoku is a very dynamic form of analysis with broad interpretation and flexibility available for the analyst/trader. Elliot Wave Theory is a very static form of analysis with strict rules that must be adhered too.
Much of these patterns are going to be very much the same patterns that new traders and analysts first discover when learning Western-style technical analysis. One of the more interesting elements of the Wave Principle is the naming of each pattern. I am not sure if it was Sasaki or Hosada who used English letters to identify the shapes of these patterns. Many of these patterns are self-explanatory and familiar.
One Wave – ‘I’ Wave
Wave One – ‘I’ Wave
Called the ‘I’ Wave, it is a simple (probably overly simple) single wave. I would call it a trendline more than a wave, but that is what Hosada calls it.
Two Wave – ‘V’ Wave
Two Wave – ‘V’ Wave
The ‘V’ wave is one of the most common patterns in technical analysis, it’s one of the first patterns we learn, but it’s not a specific pattern that we learn by itself. The ‘V’ wave is part of the M or W structure that makes up the majority pattern theory in technical analysis.
Three Wave – ‘N’ Wave
Three Wave – ‘N’ Wave
Again, this is a common pattern that most of you are already familiar with. The ‘N’ wave pattern in Nicole Elliot’s book shows symmetrical waves – which is important because the ‘N’ wave is essentially an AB=CD pattern, one of the building blocks of Harmonic Patterns. It is also a perfect description of what an A-B-C corrective wave in Elliot Wave Theory looks like.
Five Wave – ‘P’ Wave and ‘Y’ Wave
Five Wave – ‘P’ Wave
The ‘P’ wave is essentially another name for a popular and powerful continuation pattern known as a pennant. ‘P’ waves can also represent ascending or descending triangles. You will also see them in Ending Diagonals in Elliot Wave Theory. The pattern should also be called a ‘b’ pattern because the inverse of the ‘P’ pattern, a bullish pennant, is a ‘b’ shaped pattern – a bearish pennant.
Five Wave – ‘Y’ Wave
The ‘Y’ wave is probably more commonly referred to as a megaphone pattern, broadening top or broadening bottom.
Combined Patterns
Combined Waves
Although it may not need to be said, charts will show multiple patterns at any given time. And due to the fractalized nature of technical analysis, patterns within patterns are normal.
Wave Counts
Wave Counts
So this part is the one where it will either make little sense or no sense. If you are new to technical analysis and/or never learned Elliot Wave Theory, the wave count component of the wave principle will make little sense. If you know the Elliot Wave Theory, then the wave count component will make no sense. Waves in Ichimoku are measured by time – a very Gann based approach. Trends are either Long-term or Short-term with no delineation between whether it is a bull market or bear market. There is no limit to the number of waves that can exist in a Long-term trend, but Short-term trends must be in single, double, or triple waves. The Ichimoku wave count is similar and very different from how we measure wave counts in the Elliot Wave Theory. In Elliot Wave Theory, moves occur in either three (corrective) or five (impulse) waves.
Sources: Péloille, Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
The Two Clouds Discovery
In Manesh Patel’s book, Trading with Ichimoku Cloud – The Essential Guide to Ichimoku Kinko Hyo Technical Analysis, he made a fantastic discovery. When I first
The Two Clouds Discovery
In Manesh Patel’s book, Trading with Ichimoku Cloud – The Essential Guide to Ichimoku Kinko Hyo Technical Analysis, he made a fantastic discovery. When I first
The Two Clouds Discovery
In Manesh Patel’s book, Trading with Ichimoku Cloud – The Essential Guide to Ichimoku Kinko Hyo Technical Analysis, he made a fantastic discovery. When I first read his work, I almost missed it. Whether he knows it or not, Mr. Patel made a discovery and an observation that his peers have not written about in their work. I call this the ‘Two Clouds Discovery.’ It’s one of those moments where you know you’ve probably been aware of this phenomena, but no one put words to it. It’s one of those things where you go, ‘huh, why didn’t I think of that?’ or ‘I can’t believe no one else noticed this.’
Two Clouds
The Two Clouds discovery puts a label on the component we already know: the Kumo (Cloud). The names we are giving to these two components are the Current Cloud and the Future Cloud. The Current Cloud is where price action is currently trading. The Future Cloud is the further point of Senkou Span A and Senkou Span B – so Future Senkou Span A and Future Senkou Span B. It’s important to think of it this way:
The Current Cloud is the average of the Tenkan-Sen and Kijun-Sen from 26 periods ago.
The Future Cloud is the current average of the Tenkan-Sen and Kijun-Sen.
And here is the main point and of the Two Clouds Discovery: When a significant trend change occurs, the Future Cloud is thin with both the current Senkou Span and Senkou Span B pointing in the direction of the Future Cloud.
The image below is Gold’s daily chart. Using the market replay feature in TradingView, I have used November 20th, 2018, as the starting point for this article. It’s important to remember what we are looking for: Current Senkou Span A and Current Senkou Span B pointing in the direction of Future Senkou Span B and Future Senkou Span A.
First, we look to see if the Future Cloud is thin. The thickness or thinness of the Cloud is going to be very subjective, but I believe most people can determine whether something is thick or thin based on the instrument they trade and the timeframe they are trading in. For Gold, this is a thin cloud.
Thin Future Cloud
Next, we want to see if the Current Senkou Span A and Current Senkou Span B are pointing in the direction of the Future Cloud – they are.
Current Senkou Span A and Current Senkou Span B
Now, let’s see what happens when we populate the screen with the price action that occurred after November 20th, 2018. What we should see if a significant trend change is occurring when both the Current Senkou Span A and Current Senkou Span B are pointing in the direction of a thin Future Cloud.
Bull Move
Go through any Daily or Weekly chart and find a thin Cloud and then utilize the market replay – odds are you will see what I have discovered: a high positive expectancy rate of markets trending strongly when price is trading near where the current Senkou Span A and current Senkou Span B are pointing towards the direction of a thin Future Cloud.
Sources: Péloille, Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
The Ideal Ichimoku Strategy is the first strategy in my series over Ichimoku Kinko Hyo. There are two sides to a trade, and so there will be two different setups
Bearish Ideal Ichimoku Strategy Entry
The Ideal Ichimoku Strategy is the first strategy in my series over Ichimoku Kinko Hyo. There are two sides to a trade, and so there will be two different setups
The Ideal Ichimoku Strategy is the first strategy in my series over Ichimoku Kinko Hyo. There are two sides to a trade, and so there will be two different setups for long and short setups. This strategy comes from the phenomenal work of Manesh Patel in his book, Trading with Ichimoku Clouds: The essential guide to Ichimoku Kinko Hyo technical analysis. Buy it, don’t pirate.
Patel identified this strategy as the foundational strategy. Because it uses all of the components of the Ichimoku system, I believe that this is the strategy that people should be able to know so well, that they can glance at a chart and understand what is happening. You should see this strategy and be ready to trade it profitably before you transition into trying other Ichimoku strategy. If you don’t, you can run the risk of being disenfranchised with the system and believe that it is another trading system that doesn’t work.
Moving on to the other strategies without mastering this strategy first is very dangerous to your trading development and your understanding of the Ichimoku Kinko Hyo system.
Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in a thick Cloud.
Bullish Ideal Ichimoku Strategy Entry
Ideal Ichimoku Bearish Rules
Price below the Cloud.
Tenkan-Sen below Kijun-Sen.
Chikou Span below the candlesticks.
The Future Cloud is ‘red’ – Future Senkou Span A is below Future Senkou Span B.
Price is not far from the Tenkan-Sen or Kijun-Sen.
Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in a thick Cloud.
Bearish Ideal Ichimoku Strategy Entry
Sources: Péloille, Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
The Kijun-Sen Crossover (Crossunder) Strategy is the second in my series over Ichimoku Kinko Hyo. There are two trades setups provided for the long and short side of a market.
K-Cross Strategy Bearish Entry
The Kijun-Sen Crossover (Crossunder) Strategy is the second in my series over Ichimoku Kinko Hyo. There are two trades setups provided for the long and short side of a market.
The Kijun-Sen Crossover (Crossunder) Strategy is the second in my series over Ichimoku Kinko Hyo. There are two trades setups provided for the long and short side of a market. This strategy also comes from Manesh Patel’s book, Trading with Ichimoku Clouds: The essential guide to Ichimoku Kinko Hyo technical analysis.
Patel called this the day-trading strategy. He warned that this trading strategy has the lowest risk factor out of all of his strategies. The positive expectancy rate is lower, and so being stopped out of trades is a normal consequence of this strategy. He also indicated that the win/loss ratio could be extremely high.
If Future Senkou Span A is less than Future Senkou Span B, then Future Senkou Span A must be pointing up.
Price, Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in the Cloud. If they are, it should be a thick cloud.
Price not far from the Tenkan-Sen or Kijun-Sen
Optional: Future Cloud is not thick.
K-Cross Strategy Bullish Entry
Kijun-Sen Cross Bearish Rules
Prices cross below the Kijun-Sen.
Tenkan-Sen less than the Kijun-Sen.
If the Tenkan-Sen is less than the Kijun-Sen, then the Tenkan-Sen should be pointing up while the Kijun-Sen is flat.
Chikou Span in open space.
Future Senkou Span B is flat for pointing down.
If Future Senkou Span A is greater than Future Senkou Span B, then Future Senkou Span A must be pointing down.
Price, Tenkan-Sen, Kijun-Sen, and Chikou Span should not be in the Cloud. If they are, it should be a thick Cloud.
Price not far from the Tenkan-Sen or Kijun-Sen
Optional: Future Cloud is not thick.
K-Cross Strategy Bearish Entry
Sources: Péloille Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku Technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
The Ichimoku Kinko Hyo System
When I use the Ichimoku Kinko System in my trading, I can look at a chart and immediately know whether a trade can be taken
Ichimoku Kinko Hyo system
The Ichimoku Kinko Hyo System
When I use the Ichimoku Kinko System in my trading, I can look at a chart and immediately know whether a trade can be taken
The Ichimoku Kinko Hyo System
When I use the Ichimoku Kinko System in my trading, I can look at a chart and immediately know whether a trade can be taken in less than a minute. Ichimoku means, at a glance. Use this system enough, and you will be able to glance at a market and know if a trade is viable or not. What is singularly fascinating about this trading system more than any other is that it encompasses nearly every element of Japanese and Technical Analysis in a single system with just five components. The system measures momentum, volatility, breadth, depth, and even incorporates things we associate with the later part of the 20th century Western analysts like ATR (average true range) and the Bollinger Squeeze (see Bollinger Bands by John Bollinger).
This lesson will be an introduction to the components of the Ichimoku Kinko Hyo system. While Ichimoku is often listed as an indicator in much charting software, it is not an indicator. It is a trading system. It is a trading system made up of 5 indicators.
Books you should own
I loathe the illegal dissemination and downloading of technical analysis literature. One of the significant deterrents for expert traders and analysts in our field from publishing their work is that it is to easily copied and pirated. Additionally, there is a substantial amount of incorrect, incomplete, and false information regarding the Ichimoku system. I am recommending that the books below be on your trading bookshelf. The authors are experts in the field of technical analysis and traders themselves. I am very grateful that they have risked the fruit of their labors from being stolen so that they can share their knowledge for a fair price in a medium that will last for many, many years.
Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. – Karen Peliolle
Trading with Ichimoku Cloud: the essential guide to Ichimoku Kinko Hyo technical analysis – Manesh Patel
Cloud Charts: trading success with the Ichimoku technique – David Linton
Ichimoku Charts: An introduction to Ichimoku Kinko Cloud – Nicole Elliot
The 5 Components that make up the Ichimoku system
Ichimoku Kinko Hyo system
You will more than likely observe that the system appears to made up of several moving averages. And you would be correct. While I a staunch opponent of the use of any moving average based trading system, the Ichimoku system is an exception. If you remember the first article in this series, I ended it by pointing out the importance of ‘balance’ and ‘equilibrium’ in Japanese technical analysis. This system is a pure form of equilibrium in a market. The moving averages that you will first learn about are the Tenkan-Sen and Kijun-Sen. These are not moving averages calculated using the close of a candlestick. Instead, these moving averages are calculated by determining the highest high and lowest low of a period and then dividing that number by two. The moving average then plots the average of that line. Equilibrium, balance, and the mean is a consistent behavior in this system.
A quick note regarding the nomenclature of this system: Depending on the charting software you are using, the labels for the components will be in Japanese or your native language. For traders utilizing the beginners trading software of TradingView, TradingView utilizes the non-Japanese labels. I will be using the Japanese names. I believe it is essential that you learn to use the Japanese titles for these five components.
The first component of the Ichimoku Kinko system is the Tenkan-Sen. The Tenkan-Sen is the fastest and weakest line of the Ichimoku system. It is a 9-period moving average that is plotted by adding the highest high and lowest low of the last 9-periods and then dividing that number by two.
Key Points
Price should not be very far away from the Tenkan-Sen.
If price and the Tenkan-Sen are both moving close together (up or down), then this means there is little volatility, and the move may be very persistent. Do not trade against an instrument that is displaying this behavior.
Kijun-Sen (Base Line)
Kijun-Sen
The second component of the Ichimoku Kinko Hyo system is the Kijun-Sen. The Kijun-Sen represents medium-term movement and equilibrium. It is a 26-period moving average that is plotted by adding the highest high and lowest low of the last 26-periods and then dividing that number by two.
Key Points
Many entry and exit signals are derived from the Kijun-Sen (Peliolle).
Price should not be very far away from the Kijun-Sen
Use an ATR x2 to gauge how far is ‘too far.’ (Patel)
Ichimoku trader Jon Morgan suggests identifying what calls ‘max mean.’ This is done by recording the last 17 major highs and lows away from the Kijun-Sen, adding those values together, and then divide by 17. If price gets close to that number of pips/ticks/points away from the Kijun-Sen, it will more than likely snap back to the Kijun-Sen or range until the averages catch up. (Morgan)
The T-K Cross and the relationship of the Tenkan-Sen with the Kijun-Sen
The Tenkan-Sen and Kijun-Sen represent the market’s pulse. The Tenkan-Sen indicates price volatility and the strength of a given movement through its slope. The Kijun-Sen establishes levels upon which equilibrium occurs, calling back prices when a state of disequilibrium can no longer sustain itself. (Peliolle)
Key Points
Crosses of the Tenkan-Sen and Kijun-Sen are not a signal.
In Forex markets, Morgan suggests that crosses may be an essential signal but only on daily and higher charts (3-day, Weekly, Monthly, etc.). This is especially true if there has been a significant amount of time since the last T-K Cross occurred. It can be an early warning sign of an impending corrective move or trend change. (Morgan)
TKCross
The chart above is the hourly chart for GBPJPY. The black vertical lines delineate a test period that records when the Tenkan-Sen crosses the Kijun-Sen. You can see how many whipsaws and trades you would have taken (136 to be exact). Compare that to the daily chart below and how important T-K crosses are when there is a significant gap between the last cross.
Daily TK Cross
You can see that the difference in time between these two crosses is significant. From the Tenkan-Sen crossing below the Kijun-Sen on March 27th, 2019, it took 162 calendar days before the Tenkan-Sen crossed above the Kijun-Sen on September 6th, 2019.
The Kumo (Cloud) – Senkou Span A and Senkou Span B
The Cloud – Senkou Span A and Senkou Span B
The Kumo (Cloud) is made up of the third and fourth components of the Ichimoku Kinko Hyo system, Senkou Span A and Senkou Span B. The ‘Cloud’ is the most distinguishing feature of the Ichimoku system. This ‘blob’ of color on the screen is perhaps one of the most ingenious applications of technical analysis theory in all of Technical Analysis. I say this because it is one of the very few forms of Technical Analysis that actively projects non-trend line-based data into the future – essentially turning lagging analysis into leading analysis. The Cloud is nothing more than the space between the two averages of Senkou Span A and Senkou Span B. Most software will then shade the area between these zones to correlate to the position of Senkou Span A to Senkou Span B. If Senkou Span A is above Senkou Span B, space is shaded green. If Senkou Span A is below Senkou Span B, the area is shaded red. The Cloud’s construction and interpretation is one that can cause significant confusion for someone new to this system, so I am going to break it down for each level.
Senkou Span A is the ‘faster’ line and is a measure of market balance and past volatility. (Peliolle) Senkou Span A is plotted by taking the average of the Tenkan-Sen and Kijun-Sen (Tenkan-Sen + Kijun-Sen) and dividing that number by two. It is then projected forward 26 periods.
Senkou Span B is the most powerful support and resistance level in the Ichimoku Kinko Hyo system. Senkou Span B is plotted by taking adding the highest high and lowest low of the last 52-periods, dividing that number by two, and then projecting it forward 26 periods.
Key Points
A flat Senkou Span B represents strength.
Thick Clouds equal strength. Thick Clouds also represent consolidation. (Linton)
Thick Clouds tell us when not to trade. If you see price inside the Cloud, move on to another chart! (Morgan)
Kumo Twists (Senkou Span A crossing Senkou Span B) are indicative of likely changes. Sometimes a Kumo Twist is the most immediately visible sign of a trend change. (Linton)
The Cloud represents volatility.
The First Question You Should Ask Yourself
Price inside the Cloud
When using the Ichimoku Kinko Hyo system, the first question you should ask yourself is this: Is price inside the Cloud? If the answer is yes, then ignore that chart. Leave it alone. Find something else to do, find another chart to look at. That chart is dead to you if the price is inside the Cloud.
The Chikou Span (Lagging Span)
The fifth and final component of the Ichimoku Kinko Hyo system is the Chikou Span. I believe that this is the secret weapon of the entire system. If you have taken any classes or watched videos of the Ichimoku system anywhere else, the author or presenter may have removed the Chikou Span. I’ve read and observed a shocking number of people disregard the Chikou Span and treat it like it’s some pointless component that is not needed. People treat like it’s the gallbladder and just cut it out and think everything’s going to be just fine. That is a horrible idea.
This is my favorite tool in the entire system. It is very, very simple, and requires no averaging. It is merely the current price action shifted back 26 periods. It’s like a mirror image of the current price action. Even though it is simple to understand, visualizing this line can be hard. Look at the image below.
Chikou Span
The image above shows the Chikou Span on a Japanese Candlestick chart. If you are new to this trading system, you still may have a hard time ‘visualizing’ what the Chikou Span looks like. I think the easiest way for people to finally get it and experience the ‘ah-ha’ moment is to change the chart from a candlestick chart to a line chart. See below.
Candlesticks to Line Chart
When we change from a candlestick chart to a line chart, it is much easier to grasp and visualize what the Chikou Span is – because it is straightforward. The Chikou Span is just our current price shifted back 26 periods.
The Chikou Span represents the market’s memory. (Peliolle) It represents momentum. (Patel) David Linton identified what I consider one of the most crucial signals that can be generated on an Ichimoku chart. He wrote: When the Chikou Span crosses above or below the Cloud, it is THE confirmation signal in Ichimoku Analysis. (Linton)
Key Points
Look for when the Chikou Span is in ‘Open Space.’ Manesh Patel identified Open Space as a condition when the Chikou Span won’t intercept any candlesticks over the next 5 to 10 periods. This indicates a much easier move for the price with almost no supportive/resistive structure to stop price.
If the Chikou Span is trading ‘inside’ the candlesticks, the market is beginning to consolidate.
The Chikou Span responds to the same support and resistance levels as the price does. (Peliolle)
Why 9, 26, and 52?
One of the biggest questions people will ask is, why does the Ichimoku system utilize the periods of 9, 26, and 52? Much of this has to do with history and Japan’s normal trading week. A trading week in Japan was six days, so 9 is 1.5 weeks. (Elliot). There are roughly 26 trading sessions in a month. (Elliot) 52 is approximately two full trading months. Do not change these values.
Let me repeat that.
Do. Not. Change. Those. Values.
You can change your timeframes all you want but never change the base Ichimoku settings. You will read people give reasons why you should do it for this market and that market. You will read reasons why using Western values is useful for Western traders. You will hear a myriad of reasons why you should change the base values. Don’t. The Ichimoku Kinko Hyo system is a time tested, proven profitable, and robust trading system. Don’t muck it up by introducing variables that are not a part of the system.
The following articles in the Ichimoku series will detail advanced Ichimoku concepts such as Hidenobu Sasaki’s Three Principles as well as trading strategies utilizing the Ichimoku system.
Sources: Péloille Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
Ichimoku is not an indicator (many platforms incorrectly label it an indicator) – it is a trading system. Ichimoku Kinko Hyo is, in my opinion, the
Ichimoku Kinko Hyo
Ichimoku is not an indicator (many platforms incorrectly label it an indicator) – it is a trading system. Ichimoku Kinko Hyo is, in my opinion, the
Ichimoku Kinko Hyo
Ichimoku is not an indicator (many platforms incorrectly label it an indicator) – it is a trading system. Ichimoku Kinko Hyo is, in my opinion, the most effective trading system to use with Japanese Candlesticks.
The reasons for this require a deep dive into the fundamentals behind the differences of Japanese VS Western analysis – but that is for another article. The Ichimoku system – and it is a system, not an indicator – is perhaps the most complimentary system that you could ever use with Japanese candlesticks. The reasons for this are rooted in history.
History of Japan: Edo, Meiji, and Candlesticks
One of the most important and famous economists in history, Milton Freidman, often used a specific point in Japan’s history to show how powerful free markets are. This period was known as the Meiji Restoration. If you are unaware of this period of history, you should do a little reading. It’s an astounding story. The period we are most interested in is the period after the end of the Tokugawa Shogunate (Edo Period) and the beginning of the Meiji Period.
It’s important to understand that before the Restoration, Japan was militantly xenophobic. For over a quarter of millennia, no foreigners were allowed in Japan, and no Japanese were allowed to leave. This policy ended almost literally overnight when the Emperor opened the doors of Japan to foreign capital, industry, and ideas. In just a couple of decades, the Japanese went from mostly medieval technology to fast-forwarding their technology ahead almost 350 years. I mean, think about it. In 80 years, the people went from medieval plowshares to aircraft carriers. It’s truly fascinating. But the major transition wasn’t just the technological leap; it was the capital and market-based leap as well.
Believe it or not, Japan created the first futures exchange. The Dojima Rice Exchange was created in 1697 by samurai. Samurai were not just masterful warriors, but they had various duties throughout their existence – one of which was collecting taxes. Rice was the de facto currency in Japan for centuries – it’s how people paid taxes. Rice coupons were issued and used as the first futures contracts.
Fast forward to the end part of the Edo period; we have the first instance of what we now know as Japanese Candlesticks coming to use. Munehisa Homma (nicknamed Sakata) is credited with creating Japanese Candlesticks. It is important to note that Japanese Candlesticks (the mid-1700s) were used well before the invention of American Bar Charts (1880s). More on the history of Japanese Candlesticks and Mr. Homma’s invention will be discussed in another article.
Ichimoku Kinko Hyo History
The man who created Ichimoku is Goichi Hosada. David Linton’s book, Cloud Charts – Trading Success with the Ichimoku Technique and Nicole Elliot’s book, Ichimoku Charts –An Introduction to Ichimoku Kinko Clouds provide an excellent history of both Japanese candlesticks and Goichi Hosada’s time spent creating Ichimoku. Both of those books should be on your shelves!
The translation for Ichimoku Kinko Hyo is this: At a glance (Ichimoku), Balance (Kinko), and Bar Chart (Hyo). The most important word here, Kinko, for balance. Experienced traders in Japanese theory and pedagogy will know that one of the most important characteristics in Japanese technical analysis is the focus of balance and equilibrium. This trait is constant in the Ichimoku system. The focus of equilibrium and balance is constant in various Japanese chart forms as well (Heiken-Ashi and Renko). The concept of balance will make more sense when you learn the Ichimoku system in the next article.
Sources: Péloille Karen. (2017). Trading with Ichimoku: a practical guide to low-risk Ichimoku strategies. Petersfield, Hampshire: Harriman House Ltd.
Patel, M. (2010). Trading with Ichimoku clouds: the essential guide to Ichimoku Kinko Hyo technical analysis. Hoboken, NJ: John Wiley & Sons.
Linton, D. (2010). Cloud charts: trading success with the Ichimoku technique. London: Updata.
Elliot, N. (2012). Ichimoku charts: an introduction to Ichimoku Kinko Clouds. Petersfield, Hampshire: Harriman House Ltd.
Harmonic Pattern Example: Bearish 5-0 Harmonic Pattern
The 5-0 Harmonic Pattern
Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney
Harmonic Pattern Example: Bearish 5-0 Harmonic Pattern
The 5-0 Harmonic Pattern
Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney
Like the Shark Pattern, the 5-0 pattern is a relatively new pattern discovered by the great Scott Carney. Carney revealed this pattern in his second book in his harmonic series, Harmonic Trading: Volume Two.
The 5-0 pattern is easily one of the wonkiest looking patterns. Depending on where you are at with your knowledge of harmonic patterns, the 5-0 will look foreign. And this is primarily because the 5-0 Pattern starts a 0. If you are used to seeing XABCD, then 0XABCD will undoubtedly look odd.
5-0 Elements
The pattern begins (begins with 0) at the beginning of an extended price move (direct quote from Carney’s work).
After 0 has been established, an impulse reversal at X, A, and B must possess a 113 – 161.8% extension.
The projection off of AB has a 161.8% extension requirement to C. C can move beyond the 161.8% extension but not beyond 224%.
D is the 50% retracement of BC and is equal to AB (a Reciprocal AB=CD Pattern).
The reciprocal AB=CD is required.
One of the best ways to interpret this pattern is to view it from an exasperated trader’s point of view. If we take the Bullish 5-0 Pattern as an example, then we can see why. The AB leg ends with B below X, creating a lower low. We then get an extended move in time where the BC leg is the most prolonged move with C ending above A. The movement from B to C may take on the appearance of a bear flag or bearish pennant. C to D shows intense shorting pressure and a belief among bears that new lows are going to be found. Instead, we get to D – the 50% retracement of BC. Instead of new lower lows, we get a confirmation swing creating a higher low. That move will more than likely generate a brand new trend reversal or significant corrective move.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Harmonic Pattern Example: Bearish Deep Crab
The Deep Crab Pattern
The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still
Harmonic Pattern Example: Bearish Deep Crab
The Deep Crab Pattern
The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still
Harmonic Pattern Example: Bearish Deep Crab
The Deep Crab Pattern
The Deep Crab is a variant of the regular Crab pattern. It is still a 5-point extension, and it still has the endpoint (D) at the 161.8% extension of XA, but the AB=CD importance is a little different.
The most distinguishing component of this pattern is the importance of the specific 88.6% retracement point of B. Along with the Crab Pattern, the Deep Crab Pattern presents an especially extended and long move towards D.
Carney stressed that the Crab and Deep Crab represent significant overbought and oversold conditions, and reaction after completion is often sharp and quick. It is the opinion of many traders and analysts that the Crab Pattern and Deep Crab represent some of the fastest and profitable patterns out of all harmonic patterns.
Deep Crab differences from the Crab
BC leg projection is not as extreme as the Crab.
B must be at least an 88.6% retracement. Common to move more than 88.6% retracement level not above/below X (not above X in a Bearish Deep Crab and not below X in a Bullish Deep Crab).
AB=CD pattern variations are more important in the Deep Crab Pattern.
The BC leg is a minimum of 224% but can extend to 361.8%.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Harmonic Pattern Example: Bearish Shark
The Shark Pattern
The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in
Harmonic Pattern Example: Bearish Shark
The Shark Pattern
The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in
Harmonic Pattern Example: Bearish Shark
The Shark Pattern
The Shark Pattern is the newest harmonic pattern from Carney’s work (2016). He revealed this pattern in his third book in his Harmonic Trading series, Harmonic Trading: Volume Three.
To gain a further understanding of the terminology used in this article, I would strongly encourage everyone to pick up all three of Carney’s books.
The Shark Pattern shares some of the more peculiar conditions that exist on some of the most extreme patterns. For example, both the 5-0 and the Shark Pattern are not typical M-shaped or W-shaped patterns. The Shark Pattern shows up before the 5-0 Pattern. It also shares a specific and precise Fibonacci level that the Deep Crab shares: The 88.6% retracement.
One behavior that might sound abnormal to all other harmonic patterns is that the reaction to the completion of this pattern is very short-lived. I think this is one of the most potent harmonic setups in Carney’s entire work because I am an intraday trader, and this pattern is very much for active traders.
Shark Pattern Elements
AB extension of 0X must be at least 113% but not exceed 161.8%.
BC extends beyond 0 by 113% of X0.
BC extension of AX must be at least 161.8% but not exceed 224%.
Because the Shark precedes the 5-0 Pattern, the profit target should be limited to the critical 5-0 Fibonacci level of 50%.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
The Cypher Pattern
The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by
The Cypher Pattern
The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by
The Cypher Pattern
The Cypher Pattern is another type of Harmonic Pattern – except it isn’t – but it is. This is one of the few patterns not identified by Scott Carney. Darren Oglesbee discovered this particular pattern.
This pattern is very similar to the Butterfly in both it’s construction and where it typically will occur (near the end of trends). However, the Cypher Pattern is a rare pattern and not one that shows up with a high amount of frequency. Don’t confuse rarity with being more powerful or profitable. I do not know enough about this pattern, nor have I had the opportunity to trade it enough to gauge it’s ‘power’ versus its peers. All I do know is that in the times I have traded it, its positive expectancy rate is high, no different than a Bat or Alternative Bat in my experience. The same goes for the Crab and Deep Crab, for that matter. Just like all of the other Harmonic Patterns that you will have learned about, the Cypher has specific rules and conditions that must be met for it to be a specified Cypher pattern.
Cypher Confirmation Conditions
B must retrace to an expansive range between 38.2% and 61.8% of XA. At least 38.2% but not exceeding 61.8%
C is an extension leg and moves beyond A – but must move to at least 127.2%, but it is normal for it to go as far as the 113% – 141.4%. It is considered invalid if it moves beyond the 141.4%
CD leg should break the 78.6% level of XC.
The PRZ (Potential Reversal Zone) of D is a wide range where the price must get to. Price can move anywhere between 38.2% to 61.8%.
I’ve created a simplified approach to how to ‘see’ this pattern.
Simplified Approach (Bullish Cypher)
C must be higher than A.
D must be less than B but greater than X.
We should see a higher high (C > A) and a higher low (D > X).
Simplified Approach (Bearish Cypher)
C must be less than A.
D must be more than B but less than X.
The same approach as above, reverse: lower high (D < X) and a lower low (C < A).
This pattern can be confusing (all harmonic patterns can be complicated), but in a nutshell, what we see happening with the Cypher pattern is the first pullback/throwback of a trend (B). After B, the small pullback/throwback of B occurs with the C leg. From a bullish perspective, when we see prices making lower highs and lower lows, but there is no follow-through shorting pressure, we should be on the lookout for some powerful and influential moves to occur in a very short period of time. It is not uncommon to see a bullish candle engulf several days of consolidation with this pattern.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the
The Crab Pattern
The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the
The Crab Pattern
The crab pattern is another of Carney’s harmonic patterns and one of the first that he discovered. The essential condition of this pattern is the extremely tight and resistance endpoint of 161.8% of the XA leg.
Like almost all harmonic patterns, the potential reversal in price action after this pattern has been complete is generally fast, violent and powerful. However, Carney gives special attention to this pattern and reports that it is usually the most extreme of all harmonic patterns.
The pattern is not as frequent as others due to its five-point extension structure. It is desirable to utilize an oscillator to filter entries of this pattern according to any divergence between price and your selected oscillator.
The BC projection can be quite extensive, generally 261.8%, 314%, or 3618%.
An AB=CD 161.8% or an Alternate AB=CD 127% is required for the formation of this pattern.
The extension of 161.8% of XA is the end limit of the pattern.
C has an expansive range between 38.2% and 88.6%.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Harmonic Pattern Example: Alternate Bat Bullish
The Alternate Bat Pattern
The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in
Harmonic Pattern Example: Alternate Bat Bullish
The Alternate Bat Pattern
The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in
Harmonic Pattern Example: Alternate Bat Bullish
The Alternate Bat Pattern
The Alternate Bat Pattern is another pattern by Scott M. Carney. This pattern comes from his second Volume Two in his Harmonic Trading series of books. He discovered this pattern roughly two years after (2003) his discovery of the Bat Pattern (2001). Carney wrote that ‘the origin of the alternate Bat pattern resulted from many frustrated and failed trades of the standard framework. The standard Bat pattern is defined by the B point that is less than a 0.618 retracement of the XA Leg.’ Essentially, with the Alternate Bat Pattern we observe an extension beyond the 88.6% level at D, where D moves slightly below X (in a bullish Bat) or above X (in a bearish Bat). I view Alternate Bats as classic and powerful bear traps and bull traps. And they are just plain nasty if you find yourself thinking that a new low means further downside movement and a continuation lower – but instead to you get whipsawed by a massive reversal.
Alternate Bat Elements
Whereas the 88.6% retracement is nearly singular to the Bat Pattern, the Alternate Bat Pattern utilizes the 113% retracement of XA to determine the endpoint.
B must be a 38.2% or less retracement of XA.
Minimum projection of 200%
The AB=CD pattern must be an extended AB=CD and often is a 161.8% level.
The pattern is potent when using a form of divergence detection, such as the Composite Index, to confirm the pattern.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
Harmonic Pattern Example: Bearish Bat
The Bat Pattern
The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney –
Harmonic Pattern Example: Bearish Bat
The Bat Pattern
The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney –
Harmonic Pattern Example: Bearish Bat
The Bat Pattern
The Bat Pattern is another harmonic pattern that was not identified by Gartley, but instead by the great Scott M. Carney – found in Volume One of his Harmonic Trading series (I believe that Mr. Carney’s work is essential in your trading library).
I am particularly grateful to Carney’s work because it was his work that introduced me to a very powerful Fibonacci retracement level: 88.6%. Previously, I have followed Connie Brown’s suggestions in her various books utilizing only the 23.6%, 50%, and 61.8% Fibonacci levels – the 88.6% is now a near-constant in my own analysis and trading. That particular level, the 88.6% level, is the primary level to reach with the Bat pattern.
One of the key characteristics of this pattern is the strength, power, and speed of the reversals that occur after a confirmed and completed pattern is verified. As a Gann based trader, this is the pattern I personally look for to identify the ‘confirmation’ swing in a new trend (the first higher low in a reversing downtrend and the first lower high in a reversing uptrend).
Bat Pattern Elements
B wave must be less than the 61.8% retracement of XA – ideally the 38.2% or 50%.
BC projection must be at least 1.618.
The AB=CD pattern is required and is often extended.
C has an expansive range between 38.2% and 88.6%.
The 88.6% Fibonacci retracement is a defining and particular level to the Bat Pattern.
The 88.% D retracement is the defining and exact limit of the end of this pattern.
C should be inside the 50% and 61.8% retracement range.
Ideal Bearish Bat Conditions
B wave must be less than the 61.8% retracement of XA – ideally the 38.2% or 50%.
BC projection must be at least 88.6%.
BC projection minimum of 161.8% with the max extensions between 200% to 261.8%.
AB=CD is required, but the Alternate 127% AB=CD is ideal.
C wave retracement can vary between the 38.2% to 88.6% retracement levels.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
The Butterfly pattern is a harmonic pattern discovered by Bryce Gilmore. Gilmore is the author of Geometry or Markets (now in its 4th Edition, initially published in 1987)– a must-read for those interested in harmonics patterns. He is the creator of his proprietary software called WaveTrader. The Butterfly is one of the most potent harmonic patterns because of the nature of where it shows up. Both Carney and Pesavento stress that this pattern typically shows the significant highs and significant lows of a trend. In fact, in utilizing multiple time frame analysis, it is not uncommon to see several Butterfly patterns show up in various timeframes all at the end of a trend (example: the end of a bull trend can show a bearish butterfly on a daily chart with a 4-hour and 1-hour chart showing a bearish butterfly ending at the same time). This pattern is an example of an extension pattern and is generally formed when a Gartley pattern (the Gartley Harmonic pattern) is invalidated by the CD wave moving beyond X. From a price action perspective, this is the kind of move where one would ‘assume’ a new high or low should be established, but extreme fear or greed takes over and causes prices to accelerate in both volume and price to end a trend.
Failure, Symmetry, and Thrust
Pesavento identified three crucial characteristics of the Butterfly pattern.
Thrust – C should be observed as an indicator of whether a Gartley or Butterfly pattern will form. He indicated specific Fibonacci levels that are important for gaps – but that is important for equity markets that are rife with gaps. That is not important for us in Forex markets (gaps in Forex are rare intra-week and typically form only on the Chicago Sunday open, Forex also has an extremely high degree of gaps filling). He noted that thrusts out of the CD wave point to a high probability of new 161.8% extensions rather than a 127.2% extension.
Symmetry – The slope of the AB and CD wave in the AB=CD should be observed strictly. Depending on how steep the angle is on the CD wave, this could indicate a Butterfly pattern is going to be formed. Pesavento also noted that the number of bars should be equal (10 bars in AB should also be 10 bars in CD). Regarding the steepness of the CD wave, this is where Gann can become instrumental. In my trading, and depending on the instrument and market, I utilize Gann’s various Squares (Square of 144, Square of 90, Square of 52, etc.). If you use a chart that is properly squared in price and time, there is very little ambiguity involved in identifying the speed of the slope of a CD wave.
Failure Signs – Very merely put, Pesavento called for close attention to any move that extends beyond the 161.8% XA expansion. And this is an excellent point because one of the most dangerous things we can do as traders is an attempt to put to much weight on a specific style of analysis. It’s easy to think, ‘well, the Butterfly pattern is strong, so if it completes that must be the high or low.’ That is a very foolish and dangerous assumption to make. When markets, even Forex, make new highs or lows in their respective trends, that is generally a sign of strength. So while the Butterfly pattern does indicate the end of a trend – common sense confirmation is still required. The Butterfly pattern should help confirm the end of a trend, not define it.
The Five Negations
Continuing on with the great work of Pesavento and Jouflas, they identified five conditions that would invalidate a Butterfly pattern:
No AB=CD in the AD wave.
A move beyond the 261.8% extension.
B above X (sell) or B below X (buy).
C above A or C Below A, respectively.
D must extend beyond X.
Ideal Butterfly Pattern Conditions
Carney identified six ideal conditions for a Butterfly pattern. You will note that the combination of Pesavento and Jouflas’s work greatly compliments Carney’s.
Precise 78.6% retracement of B from the XA wave. The 78.6% B retracement is required.
BC must be at least 161.8%.
AB=CD is required – the Alternate 127% AB=CD is the most common.
127% projection is the most critical number in the PRZ (Potential Reversal Zone).
No 161.8% projection.
C should be within its 38.2% to 88.6% Fibonacci retracement.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall. Gilmore, B. T. (2000). Geometry of markets. Greenville, SC: Traders Press. Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley.
The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability
Harmonic Pattern: Bearish Gartley
The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability
Harmonic Pattern: Bearish Gartley
The Gartley is probably the most well-known pattern in Gartley Harmonics. Gartley himself said that this pattern represents one of the best trading opportunities. Its profitability remains exceptionally resilient. This is especially true when we consider how old the pattern is and how it has remained profitable in these contemporary trading environments. Pesavento reported (at least I think he was the one who wrote this statistic) that it is profitable seven out of ten times and has remained that way for over 80 years. It is important to remember that all harmonic patterns have stringent ruleset. There is no room for interpretation in the construction of any pattern, and the Gartley pattern is no different.
Rules
D cannot exceed X.
C cannot exceed A.
B cannot exceed X.
Characteristics
X is the high or low of a swing.
It is impossible to project or determine A.
Main Fibonacci levels are 38.2%, 50%, 61.8% and 78.6%.
Precise 61.7% retracement XA for B.
BC projections have two specific Fibs: 127% or 161.8%.
The BC projection must not exceed 161.8%.
Symmetrical AB=CD patterns are frequent.
C retracement has a wide range between 38.2% and 88.6%.
An exact D retracement is 78.6% of the XA move.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley
The AB=CD Harmonic Pattern is the most basic and common pattern in harmonic geometry. It is the building block of all other patterns. It is the ‘bread and butter’ pattern. Pesavento and Carney recommended that this pattern should be learned first – and reading this article does not qualify for having learned this pattern. Like any form of analysis, you will need to regularly and consistently train your brain and eyes to find this pattern. You won’t be able to get very far in the study of harmonic patterns until you can see this pattern just by glancing at a chart.
CD is an extension of AB, generally from the Fibonacci ratio of 1.27% to 2.00%.
CD’s slope is steep or longer/wider than AB.
BC often corrects to the Fibonacci ratios of 38.2%, 50%, 61.8%, or 78.6%.
AB=CD Pattern Reciprocal Ratios
Point C Retracement
BC Projection
38.2%
24% or 261.8%
50%
200%
61.8%
161.8%
70.7%
141%
78.6%
127%
88.6%
113%
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley
Gartley Harmonic Pattern Example: Cipher Pattern
Harmonics – Gartley Geometry
Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method
Gartley Harmonic Pattern Example: Cipher Pattern
Harmonics – Gartley Geometry
Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method
Gartley Harmonic Pattern Example: Cipher Pattern
Harmonics – Gartley Geometry
Out of the myriad of different approaches and methods of Technical Analysis, there seems to be one particular method that draws new traders to it more than Gartley Harmonics. People see these wonky triangles on a chart and automatically assume that because it looks so complicated and esoteric, they should probably learn these patterns right away. If that sounds like yourself, stop reading the remainder of this article and come back once you have learned the fundamentals of technical analysis. And certainly, don’t implement a new and complicated form of technical analysis like that harmonic geometry you’re your trading until you can look at a chart and tell what patterns exist just by glancing at it. Folks – I need to repeat this: Harmonic Geometry takes time to learn – this isn’t like learning about support and resistance. It’s not a topic that you can read about, understand, grasp, and learn in one weekend and then implement into your trading. The best way I could explain the time it takes to learn Carney’s harmonic structures is comparing it to the time it takes for a person to be able to look at a chart using the Ichimoku Kinko Hyo system and know, just by looking, if a trade can be taken and what the market is doing. That’s the best comparison I can find. Until you can look at a chart and within 10-20 seconds identify an important harmonic pattern on that chart – without having to draw it – then you should not use this in your trading. You need to become an expert in the analysis part before you start to trade with it.
I believe we should be calling these patterns Carney Harmonics or Gilmore Harmonics because Gartley never gave a name any designs – the genius work Bryce Gilmore and Scott Carney did that in his various Harmonic Trader series books. Scott Carney is the man who discovered and named a great many patterns and shapes that we see today. And Carney’s work is some of the most developed and contemporary work of Gann’s and Gartley’s that exists today. But the understanding and application of Carney’s and Gilmore’s patterns have been woefully implemented by many in the trading community. Any of you reading this section or who were drawn to it because of the words ‘harmonic’ or ‘Gartley’ must do two things before you would ever implement this advanced analysis into any trading plan:
Read Profits in the Stock Market by H.M. Gartley – this is the foundation of learning and identifying harmonic ratios.
Read Scott Carney’s Harmonic Trader series: Harmonic Trading: Volume 1, Harmonic Trading: Volume 2, and Harmonic Trading: Volume 3.
There are a series of other works by expert analysts and traders that address Gartley’s work and are worth reading, such as Pesavento, Bayer, Brown, Garrett, and Bulkowski. Do not consider their work merely supplementary – I find their work necessary to fully grasp the rabbit hole you are attempting to go down. Harmonic Patterns are an extremely in-depth form of analysis that encompasses multiple esoteric and contemporary areas of technical analysis. If you think finding the patterns and being able to draw them is sufficient to make a trading plan, you will lose a lot of money. Additionally, some words of wisdom from the great Larry Pesavento: An understanding of harmonics requires an in-depth knowledge of Fibonacci.
Harmonic Geometry, in a nutshell
In a nutshell, Harmonic Geometry is a study and analysis of how markets move and flow as a measure of proportion from prior price levels. These proportional levels are measured using Fibonacci retracements and extensions. When these patterns (triangles) complete, they create powerful reversal opportunities. Carney calls the end of these patterns PRZs – Potential Reversal Zones. The significant error that many new traders and analysts make when they find a complete pattern is the same problem many new traders make with any new tool, strategy, or method: they don’t confirm. Make no mistake: Harmonic Patterns are powerful. But like any analysis or tool, it is not sufficient to take a trade. Harmonic Pattern analysis is just one tool in your trading toolbox. And like any toolbox, you need multiple tools to tackle the various projects and goals you want to achieve.
Harmonic Trading Ratios
Contrary to popular belief, Gartley did not utilize Fibonacci levels or ratios in his work. Nonetheless, harmonic ratios are based on three classifications of harmonic ratios: Primary Ratios, Primary Derived Ratios and, Complementary Derived Ratios. As you develop a further understanding of the various patterns and their ratios, you will come to appreciate the very defined structure of this type of technical analysis.
Primary Ratios
61.8% = Primary Ratio
161.8% = Primary Projection Ratios
Primary Derived Ratios
78.6% = Square root of 0.618
88.6% = Fourth root of 0.618 or Square root of 0.786
113% = Fourth root of 1.618 or Square root of 1.27
127% = Square root of 1.618
Complementary Derived Ratios
38.2% = (1-0.618) or 0.618 squared
50% = 0.707 squared
70.7% = Square root of 0.50
141% = Square root of 2.0
200% = 1 + 1
224% = Square root of 5
261.8% = 1.618 squared
314% = Pi
361.8% = 1 + 2.618
Elliot Wave and Harmonic Geometry
Ellioticians are very aware of the strong connectedness that Gartley’s and Carney’s work has within Elliot Wave Theory. There are significant elements between the two types of technical analyses that create a mutual symbiosis. However, while they are very similar, it is crucial to understand that there are some significant differences between the two.
Elliot
Gartley
Dynamic, Flexible.
Static, Definite.
Wave counts are more fluidly labeled.
Each move is labeled either XA, AB, BC, or CD.
Many variations and intepretations
No variation permitted.
Wave alignment varied and malleable.
Each price point alignment must be exact.
The combination of Elliot and Gartley is powerful, and Gartley Harmonics can help confirm Elliot Waves. The following articles will describe, in further detail, specific Harmonic Patterns.
Sources: Carney, S. M. (2010). Harmonic trading. Upper Saddle River, NJ: Financial Times/Prentice Hall Gartley, H. M. (2008). Profits in the stock market. Pomeroy, WA: Lambert-Gann Pesavento, L., & Jouflas, L. (2008). Trade what you see: how to profit from pattern recognition. Hoboken: Wiley
Moving Averages
Of all the technical indicators that exist, moving averages are probably the most well known. Moving averages are also one of the only technical indicators ever used by
Moving Averages
Of all the technical indicators that exist, moving averages are probably the most well known. Moving averages are also one of the only technical indicators ever used by
Moving Averages
Of all the technical indicators that exist, moving averages are probably the most well known. Moving averages are also one of the only technical indicators ever used by market news broadcasters. Moving averages are generally one of the first types of indicators that new analysts and traders will learn about because they simple to calculate and simple to interpret. But are moving averages useful for trading? Are they appropriate for trading?
Dangers of Moving Averages
I want to preface any further commentary on moving averages by saying I am strictly opposed to their use. Outside of any singular purpose for their use, I will never advocate for their use of an analytical tool or a trading tool. The reasons for this opinion are my own trading experience, and the experience of teaching students – who have all (myself included) fell into the old trap of moving average crossover systems and the lies that are sold about their usefulness and profitability. That is not to say they are not helpful, useful, or profitable – but the temptation to believe in their positive expectancy and profitability is often too hard to avoid.
Moving Averages: A simple visual representation of data
20-period Simple Moving Average
The orange line on the chart above is a moving average — specifically, a Simple Moving Average (SMA). A Simple Moving Average is a line that is plotted, showing the average close of a defined number of periods. On the chart above, it is a 10-period moving average. Meaning it is taking the last ten candlestick closes, adding them up, dividing that number by ten, and then displaying it as a line. But a Simple Moving Average is just one type of average. There is an enormous amount of various moving averages, each with their specific calculations. The chart below shows only some of those different moving averages, all with a 10-period average.
Various moving averages
From the image above, you can probably say that, depending on the moving average used, some averages are more responsive to price changes than others. Some move a lot; some move just a little. There is a myriad of different reasons why one moving average would be used over another, and there are specific moving averages that to be used only with particular trading systems and methods. Now, after I’ve bashed moving averages, I think it’s essential that I do show some examples of moving averages positively. The first would be using a long period moving average on a higher time frame. For example, a standard method of determining whether a stock is bullish or bearish is to use a 200-period on a daily chart. If a stock is trading above the 200-day average, it is considered bullish; if it is trading below, it is bearish.
200-day Moving Average of S&P500
Another example of a trading system using moving averages effectively would be Goichi Hosada’s Ichimoku Kinko Hyo system. This system will be discussed in much greater detail in another article, but the Ichimoku system is based almost entirely on moving averages. There is a significant difference between Western moving averages and Japanese moving averages. The Tenkan-Sen and Kijun-Sen in the Ichimoku system are calculated using the mid-point of the default periods. The utilization of the mid-point is particular not to just the Ichimoku system but is indicative of a large amount of Japanese analysis, which focuses on ‘balance’ and ‘equilibrium.’ So while I do rail against the use of Western moving averages, the use of the Ichimoku system’s moving averages is undoubtedly a significant exception due to it being a full trading system and one of the few trading systems that are a proven and profitable system.
Trading with Divergences
Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading
Trading with Divergences
Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading
Trading with Divergences
Almost all forms of technical analysis involve the use of lagging indicators – or lagging analysis. There are very few indicators that use any type of leading analysis. That is because we don’t know what will happen. All we can do is interpret what kind of future behavior may occur based on past events – this is the basis of all psychology and significant portions of medicine: we can only predict future behavior by analyzing past behavior. Now, just because most of the tools and theories used in technical analysis are lagging in nature – it doesn’t mean that there is no method of leading analysis.
Divergences are one method of turning lagging analysis into leading analysis – it’s not 100% accurate, but divergences can detect anomalies and differences in normal price behavior. Divergences are useful in identifying when a significant trend may be ending or when a pullback may continue in the prior trend direction. Let’s review some of those now.
Divergences are easily one of the most complex components to learn in technical analysis. First, they are challenging to identify when you are starting. Second, it can be confusing trying to remember which divergence is which and if you compare highs or lows. It is essential to know those divergences themselves are not sufficient to decide whether or not to take a trade – they help confirm trades.
When we look for divergences, we are looking for discrepancies between the directions of highs and lows in price against another indicator/oscillator. The RSI is the oscillator used for this lesson. We are going to review the four main types of divergences:
Bullish Divergence
Bearish Divergence
Hidden Bullish Divergence
Hidden Bearish Divergence
Bullish divergence
Bullish Divergence
A bullish divergence occurs, generally, at the end of a downtrend. In all forms of bullish divergences, we compare swing lows in price and the oscillator. For a bullish divergence to happen, we should observe price making new lower lows and the oscillator making new higher lows. When bullish divergence occurs, prices will usually rally or consolidate.
Bearish divergence
Bearish Divergence
A bearish divergence is the inverse of a bullish divergence. A bearish divergence occurs near the end of an uptrend and gives a warning that the trend may change. In all forms of bearish divergence, we compare swing highs in price and the oscillator. For a bearish divergence to happen, we should observe price making new higher highs and the oscillator making new lower highs.
Hidden divergences
The last two divergences are known as hidden divergences. Hidden does not mean that it is difficult to see or hard to find – rather, it shows where a short term change in direction is actually a continuation move. Think of it as a pullback or a throwback in a larger uptrend or downtrend. Hidden divergences tell you of a probable continuation of a trend, not a broad trend change. If you combine these with common pullback and throwback patterns such as flags and pennants, then the identification and strength of a hidden divergence can yield extremely positive results.
Hidden Bullish Divergence
Hidden Bullish Divergence
A hidden bullish divergence can appear in uptrends and downtrends but is only valid if there is an existing uptrend. It’s easier to think of hidden bullish divergences as pullbacks or continuation patterns. For hidden bullish divergences, we should observe price making new higher lows and the oscillator making new lower lows. The expected price behavior is a continuation of higher prices.
Hidden Bearish Divergence
Hidden Bearish Divergence
Our final divergence is hidden bearish divergence. Just like hidden bullish divergence, hidden bearish divergence can appear in both uptrends and downtrends but is only valid in an existing downtrend. Hidden bearish divergence is identified when price makes lower highs, and the oscillator makes new higher highs. We should observe a resumption in the prior downtrend when hidden bearish divergence is identified.
Key Points
Regular Bullish Divergence
End of a downtrend.
Often the second swing low.
Price makes new Lower Lows, but the oscillator makes Higher Lows.
Price makes Higher Highs, but the oscillator makes Lower Highs.
Trend changes to the downside.
Hidden Bullish Divergence
Valid only during an uptrend.
Price makes Higher Lows, but the oscillator makes a Lower Low.
The trend should continue to the upside.
Hidden Bearish Divergence
Valid only during a downtrend.
Price makes Lower Highs, but the oscillator makes Higher Highs.
The trend should continue to the downside.
Final words
It may be confusing trying to remember which divergence is which and you’ll find yourself asking questions such as, “do I use highs on this divergence or lows?” It’s easier to think about measuring divergences like this:
All Bullish divergences are going to compare lows to lows – lows in price and lows in an oscillator.
All Bearish divergences are going to compare highs to highs – highs in price and highs in an oscillator.
Support and Resistance
One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced
Support and Resistance
One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced
Support and Resistance
One of the fundamentals of Technical Analysis is the theory and methodology of support and resistance. In a odd turn of events, some of the most advanced methods of identifying support and resistance are not only relatively unknown, but they are some of the original Technical Analysis theories. Some of those methods include identifying support and resistance according to naturally squared numbers, numbers related to an angular nature in Gann’s tools, harmonic ratios, pivots, Fibonacci levels, and other more esoteric methods. For this article, though, the focus is on identifying support and resistance based on prior traded price levels and ranges**.
What are Support and Resistance?
When you hear the word’s support and resistance, the definitions of those words may be the first thing that comes to your mind. Support indicates that something will assist or strengthen while resistance indicates rejection. In Technical Analysis, support means a level that is below the price, and resistance is above price.
The image above shows resistance as a red band and support as a green band. It’s important to understand that support and resistance on a candlestick chart should never be viewed as a static and exact price level. With a chart style that has such dynamic time and price levels, like Japanese candlesticks, support and resistance are an area or range of value. Determining the support and resistance levels requires a ‘zoomed’ out view of the chart. When you get a broader view of the past price action, you can see price levels where price has moved lower and then reversed higher (support) as well as price levels where price move higher and then reversed lower (resistance). The most important levels are those that show past resistance becoming support and vice-a-versa.
Prior Support turned into Future Resistance
Use another chart style to find support and resistance
Renko Chart
While it may seem simple to find support and resistance on a candlestick chart, there are some alternatives. The length of the wicks and body of candlesticks can vary and can add to the confusion. Using a Renko (above) chart simplifies the process of finding support and resistance by reducing the noise on the chart and providing less ambiguity when looking for highs and lows. Take note of how these resistance and support levels are drawn on a price-action-only chart. With a price action only chart, I don’t draw a value area like I would on a candlestick chart. But if you are not comfortable using a price-action-only chart and want to stick to a candlestick chart, then another trick that might help is to remove the wicks from the candlesticks. Look at the side by side comparison below.
Wicks VS No Wicks
Both charts display a weekly chart of the CADCHF pair. On the left, we have a regular candlestick chart with wicks – wicks that are all over the place. The chart on the right is the same as on the left, but with no wicks displayed. You can see how much more clear the tops and bottoms are on the right. This can make it a little easier to spot support and resistance levels.
** It is the view of this author that past support and resistance levels are inefficient for today’s markets. However, the method discussed in this article is part of a foundation of learning that can be applied to future price level analysis.
Bollinger Bands
Bollinger Bands are a type of volatility oscillator created by the great technical analyst John Bollinger. If this is your first time seeing this indicator, it probably looks
Bollinger Bands
Bollinger Bands are a type of volatility oscillator created by the great technical analyst John Bollinger. If this is your first time seeing this indicator, it probably looks
Bollinger Bands
Bollinger Bands are a type of volatility oscillator created by the great technical analyst John Bollinger. If this is your first time seeing this indicator, it probably looks both daunting, confusing, and somewhat silly. But it is a powerful tool for trading and identifying when prices are contracting and then when they finally breakout. There are some critical components of Bollinger Bands.
The middle line is just a moving average, by default, a 20 SMA.
The lines above and below the middle line are the volatility bands, observe how the ‘bubble’ gets expands as price moves up or down in a significant fashion.
Most important is what is called the ‘Squeeze’ or a ‘Bollinger Squeeze.’ The Squeeze signifies decreased volatility and is evident when the bubble gets smaller, and the lines become very close. Squeezes are extremely important to watch.
Let’s look at a chart and see these concepts.
Notice the bands contracting, ‘squeezing’ into each other.
Notice the release, price is continuously pushing higher against the bands, and the bubble is expanding.
Again, notice how price begins to consolidate and form another squeeze.
The release after the squeeze.
Top touches do not mean “sell”, and bottom touches do not mean “buy”
Too often, new traders view indicators and oscillators with certain upper and lower boundaries as conditions to trade to the contrary. Bollinger Bands are no exception. People often assume, incorrectly, that when prices touch the upper band, then the price is somehow ‘oversold,’ and then a short trade should be taken. The inverse is true with bottom band touches.
In reality, prices will often ‘walk’ the bands. You should look at any instrument and see how often prices will trend higher by piercing and riding the bands higher or lower. This frequently occurs after both the upper and lower bands converge closer together, and the space between them constricts. This pattern is known as ‘The Squeeze.’
The Squeeze
Mr. Bollinger himself wrote that The Squeeze was a condition that created more questions than any other component in his Bollinger Band system. At the beginning of this article, I mentioned that Bollinger Bands are a volatility indicator – that is precisely what the upper and lower bands represent. When volatility increases, the bands expand and move farther away from one another. When volatility decreases, that is when we see the bands constrict, forming The Squeeze. Squeezes always precede increased volatility, and squeezes always occur after a period of significant volatility – a classic chicken or the egg problem. Regardless of which happens first, The Squeeze should be recognized as an opportunity to identify when a future explosive move may occur.
One should observe the direction of the breakout almost with suspicion. You will often find many false breakouts occur where price begins to trade in one direction at the beginning of a squeeze, only to reverse and start trending in the opposite direction. There are many ways to filter and interpret which breakouts are genuine and which are false – but that is for a lesson for another time.
Key Points
Bollinger Bands are a measure of volatility.
Price touching the upper or lower bands does not mean an automatic inverse trading move.
Volume
Historically, and this is especially true in traditional equity markets, volume is often the most important indicator out there. Some people argue that volume is not overly reliable in
Volume
Historically, and this is especially true in traditional equity markets, volume is often the most important indicator out there. Some people argue that volume is not overly reliable in
Volume
Historically, and this is especially true in traditional equity markets, volume is often the most important indicator out there. Some people argue that volume is not overly reliable in forex markets. There is a significant debate on whether volume should be considered as important in forex markets as it is in equity markets due to the drastic differences in the amount of volume from one broker to another. Others believe that it is already (we can see volume from many of the exchanges). For the stock market and futures and almost any traded instrument, volume tells you what people are doing. And what they are not doing.
Volume helps you spot reversals and can tell you if the reversal candlestick is a ‘true’ candlestick. For example, in the image below, the hammer candlestick forms at or near the end of a downtrend. However, this candlestick (and those before it) should have increased and above-average volume. A hammer candlestick on high volume in a downtrend can be a great signal when you accompany it with another indicator, like the RSI.
Look at number one. The arrow is pointing to a very large hammer candlestick; the volume column is massive and definitely above the average volume (orange line average volume). If we look at the RSI, it is oversold. Those can be great conditions for going long!
Candlestick Principles with Volume
Volume is an extremely important component of any candlestick. A candlestick tells us what happened to move price in that period, but volume tells us how hard people fought for that movement and how much conviction was in that move. Here are some principles about candlesticks to keep in mind.
The length of any wick, either the top or the bottom, is ALWAYS the first point of focus because it instantly reveals strength, weakness, indecision, and (more importantly) market sentiment.
If no wick, then that signals strong market sentiment in the direction of the closing price.
A narrow-body indicates weak sentiment. A wide-body represents strong sentiment.
A candle of the same type will have a completely different meaning depending on where it appears in a price trend.
Volume often validates price – Any candlestick that closes at or near an important high or low should be watched very closely for how much volume was involved.
High volume near highs and lows
Volume can give a clear, early warning that a current trend (long term or short term) may be coming to an end. If you observe price moving lower, but volume starts to increase and become greater than a 20 to 30-period average, then you may be looking at the bottom of a move. In other words, the market may reverse and become bullish. Observe the chart below:
Price is declining as the price is dropping. That is a clear sign that no one is interested in buying or supporting higher prices.
As prices have continued to make new lows, notice how the volume begins to spike higher – well above the most recent candlesticks volume.
This increase in volume indicates more participation and is generally a combination of new entrants going long (buying), and those current traders who are short, have to cover and convert to long. That volume becomes a powerful variable that reverses the price action.
Key Points
Look to see if the current chart is showing new and important highs or lows.
If new highs or lows are present, observe the volume indicator. If it is rising, then that can mean the current price action may reverse.
Fig 1- Chart with MACD. Click on it to enlarge
The Moving Average Convergence Divergence (MACD) is probably one of the most popular and well-known oscillator indicators in
The MACD
Fig 1- Chart with MACD. Click on it to enlarge
The Moving Average Convergence Divergence (MACD) is probably one of the most popular and well-known oscillator indicators in
The MACD
Fig 1- Chart with MACD. Click on it to enlarge
The Moving Average Convergence Divergence (MACD) is probably one of the most popular and well-known oscillator indicators in any market. It is one of our ‘modern’ indicators; created by Gerald Appel in the late 70s. It is essentially a two-part tool that traders can utilize.
Provides a quick look to see the direction and trend of your market using two lines/moving averages: the MACD line and a signal line.
It provides a divergence detection tool using a zero line and histogram.
The MACD line and the Signal Line
The first of these parts of the MACD is probably the one used most often, the MACD line and the signal line. General strategies related to the MACD is that you should consider taking a buy when the MACD line crosses above the signal line and sell when the MACD crosses below the signal line. Additionally, some strategies suggest more conservative entries based on when the MACD crosses the middle line (0-line).
The Histogram
The second part of the MACD, and perhaps the one that confuses many new traders, is the histogram with the 0-line. The histogram shows the difference between the MACD line and the signal line, basically, is showing the ‘gap’ between the two lines, as they grow and diverge away from one another, the histogram expands. However, the real strength of this is the ability to see divergences.
Pros and Cons
The downsides to the MACD indicator is that it is very notorious for causing whipsaws in traders. Whipsaws can be avoided by not using the MACD as your sole indicator of trade signals. The MACD is an excellent tool to help confirm your trades in a trending market, but it is not suitable for a ranging market. If you are a new trader, the MACD is a fantastic tool to help you train and learn about how indicators work. Spend some time watching markets live on smaller time frames and look at how the MACD works and moves with that market. You will notice things you like (i.e., identifying the trend and strength of that trend) and the things you don’t like (i.e., too many signals/crosses on short time frames).
A word of caution
I would caution against using the MACD in your trading. The MACD is an old indicator, and it is most useful as a tool for analysis on daily timeframes or weekly time frames. Because it is so well known and used so much by new traders, it is used against new traders. It is one of those indicators use to entice new traders into using – like bait. Just like moving averages, the MACD has several strategies that involve a crossover. A crossover strategy is simple to understand and easy to learn the strategy and so many new traders try to use this as one of their first strategies – but it doesn’t work. It may seem like it works, but it doesn’t. Again, the MACD is an indicator that is entirely lagging in nature. It is showing what has already happened, not what will happen. It’s most effective use will be a tool for detecting divergences – but even then, there are better indicators and oscillators out there for detecting divergences.
