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Reading Chart Patterns Part 3

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This is part 3 of my series in how to read a forex chart and recognise chart patterns. Included here are moving averages, continuation patterns, reversal patterns and MACD.

This is part 3 of my series in how to read a forex chart and recognise chart patterns. Included here are moving averages, continuation patterns, reversal patterns and MACD.

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  • To be on screen during arrival of potential delegate
  • SMA average closing price for the last “n” periods Exp gives more weight to more recent periods and hence is more responsive Make sure templates/MAs installed
  • Explain 10 day EMA and why 240 periods for hour, 60 for 4 hr The smoother the line the slower to react to price changes
  • Mention MA crossover systems don’t work because place no emphasis on prevailing market conditions And are always after the event. I like 5 WMA for first change of direction. Esp 60 min chart.
  • 10 Day EMA acts as R and then S later Lot to see on this chart In general if going long you need all (but in particular the shorter) MA below you. Above is also Key Level. Bit of clustering with both MAs In general if going short you need all (but in particular the shorter) MA above you
  • This kind of thing happens a lot and is a key indicator and a “tool in your box”. You could draw S trendline but why bother You would not trade on it alone but along with other key indicators.
  • Explain KISS. Don’t overcomplicate. Hitch on the back of the major traders by following the trend. Millions of traders will see the obvious patterns hence self-fulfilling prophecy in a way. Market gives signs and signals about what it may do next to those who take the trouble to study them. For those that do it could be a license to print money. Pros look for simple and obvious patterns whilst novices complicate things Complication breeds confusion
  • Usually. - Nothing is certain Triangles, flags, penants
  • Ideally flag should slope against the trend Straight line move called a “flagpole”. After pause Both patterns take less time to develop in a downtrend
  • Ideally flag should slope against the trend Straight line move called a “flagpole”. After pause Both patterns take less time to develop in a downtrend
  • Remember to point out length of first flagpole is usually around the length of the second one. Good for exits!
  • Sideways channel Also channel at top right of screen Exercise: Find flags in your charts on at least 2 different currency pairs.
  • When you see a potential reversal unfolding in a larger timeframe, scale down to a lower one to time your trade entry Can be riskier but it may just be a short term trend reversal. Not to be ignored because could be change of trend
  • Go back one slide to see double top.
  • Price reaches a high and falls away. After a while buyers come back and try to push the price through the old peak. They fail. The price drops again and eventually cuts through the level from which the previous rally had developed. If it cuts through mid-point of the M then it could fall quite a bit. Can trade bounce off DT or wait for other confirmation like break of neckline, candle pattern.
  • Look for key level at double top or other confirmation Here we have 10 day EMA acting as Res and candle reversal pattern. Also look for S and R, pivots and MACD divergence
  • In the chart above you can see that two peaks or “tops” were formed after a strong move up.  Notice how the 2nd top was not able to break the high of the 1st top.  This is a strong sign that a reversal is going to occur because it is telling us that the buying pressure is just about finished. The buyers don’t have enough support to push through to new high.
  • Note the “W” at the bottom of the downtrend Sellers have driven the price down to a level which attracts some buyers and the price rallies. Price falls back again but only to the recent low. Those who bought there last time saw good profits and so may buy again. Those who failed to buy last time don’t want to miss out this time. The price bounces again more people buy, less sell and the price rises. Once it breaks the mid-point it could move a lot higher Sellers fail to push it past earlier low.
  • Note 200 SMA acts as Res
  • Higher timeframes better
  • Explain divergence means moving in opposite directions
  • Explain divergence means moving in opposite directions
  • Cluster of indicators
  • 50% Fibo and double top and MACD divergence
  • Come back to this when they have more knowledge and ask them what they see.
  • To be on screen during arrival of potential delegate

Reading Chart Patterns Part 3 Reading Chart Patterns Part 3 Presentation Transcript

  • Copyright © 2007 Stephen Margison www.sm-forex.com “ IT’S TIME TO GET MORE OUT OF LIFE” www.sm-forex.com Reading Charts 3
  • The Forex Codes Moving Averages
      • Shows the trend in a smoothed fashion
      • Used as moving levels of S upport and R esistance
      • No good in sideways, tight-ranging markets
      • It is a “lagging” indicator. It follows price action
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Moving Averages Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Moving Averages
    • On all our charts we use:
    • 10 DAY EMA
    • 200 period EMA/SMA
    • 5 WMA
    • One or more other EMAs depending upon timeframe used
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Moving Averages Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Moving Averages Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes – Chart Pattern
    • Chart Pattern is one KEY to trading success
    • It is a Market “Fingerprint” or “CODE”
    • Use only the most basic and obvious chart patterns just like the Pros do!
    • Others will have spotted them hence more probability of success
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Continuation Patterns
    • These occur when the prevailing trend pauses
    • The next move usually in the same direction as the Trend
    • Higher the timeframe the more powerful the pattern
    • There are always exceptions
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Flags and Pennants
    • Very powerful patterns to trade. Very reliable.
    • Brief pauses in a dynamic market move
    • Must be preceded with a sharp and almost straight line move
    • After the pause the trend resumes on a burst of trading activity
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Flags and Pennants Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Flags and Pennants Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Flags and Pennants Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns
    • Higher the timeframe the more powerful the pattern
    • Can be more risky because you are going against the trend
    • Must have a prior trend
    • It may only be a short-term reversal of trend
    • First sign may be the breaking of an important trendline
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns - Double Tops
    • Very frequent and easily recognised
    • Top is often referred to as an “M”
    • Ideal DT has two prominent peaks at about the same price level
    • It is a bearish pattern at the top of an uptrend
    • Good for bounce trading off a high
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns - Double Tops Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns - Double Tops Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns - Double Tops Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns - Double Bottoms
    • Very frequent and easily recognised
    • Top is often referred to as an “W”
    • Ideal DB has two prominent troughs at about the same price level
    • It is a bullish pattern
    • Good for bounce trading off a low
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns - Double Bottoms Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns - Double Bottoms Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns – Where Could a Reversal Occur
    • At a Key “Cluster” Level
    • At a Pivot Level
    • At a break of solid Trendline
    • At a Fibonacci level
    • At strong Support or Resistance
    • With MACD Divergence
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns – MACD
    • MACD is a simple momentum indicator
    • Can help us spot trend reversals
    • I use it for spotting “Divergence” only
    • Must be used in combination with other tools and never on its own
    Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns – MACD Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns – MACD Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns – MACD Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Reversal Patterns – MACD Copyright © 2007 Stephen Margison www.sm-forex.com
  • The Forex Codes Copyright © 2007 Stephen Margison www.sm-forex.com
  • Copyright © 2007 Stephen Margison www.sm-forex.com “ IT’S TIME TO GET MORE OUT OF LIFE” www.sm-forex.com Reading Charts 3