Technical Analysis
A Guide To Technical Analysis
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Rounded Tops Bottoms

The formation of a rounded top on a chart is a good indication that the market will look to test Lower ground soon and thus giving us a Sell signal. Rounded Bottom has the same characteristics as a rounded top only this time it works in the opposite way and creates a BUY signal. Rounded bottoms are sometimes called Saucers or the Accumulation Period. Rounded top can also be called a saucer or distribution curve and is seen at the end of an upward trend. It shows the market is running out of steam and cannot achieve new highs. Volumes will start to reduce as the price reaches its peak and increase as the price starts to fall. Most experienced Traders would note this and exit their position.

All of these patterns indicate that the downward trend is running out of steam and the market is looking to test higher ground once again. Most experienced traders would be looking to position themselves in this accumulation period, it is called the accumulation stage as that is exactly what is happening, traders are accumulating shares. A further extension of the rounded top/bottom is a formation called a Cup. It is basically a completed rounded top/bottom with a smaller rounded top/bottom formed on the right/left hand side thus giving the appearance of a handle for the cup. Volume should be on the increase as the top/bottom starts to climb upward/ fall downward.There should be even larger volumes again during the Handle stage. The Handle is maybe our last chance to take a position before the market tests higher/lower ground.

DIAMOND

This is also considered as a reversal formation, where the market reverses from its direction after forming a diamond.

Triangles

Triangles are probably the most frequently occurring pattern to form on the charts and can give a possible early indication of a trend reversal.As they occur so frequently they are not as reliable as some patterns previously discussed but are still a very useful indicator for the Technical Trader. Drawing Triangles onto charts is basically just drawing BOTH support and resistance lines at the same time.They can be found nearly anywhere on a chart. Sometimes an entire up trend or downtrend may be made up of lots of little triangles.The two main types of triangles that can be found are Symmetrical Triangles and Right Angled Triangles:

Symmetrical Triangles

These occur when the price is locked into a reducing trading range. Both support and resistance lines meet in a point The lines are said to be in Convergence. Volumes slowly reduce as the price nears the point of the triangle and then on breakout surge considerably As Traders we are looking for this breakout and would either buy or sell according to the direction of the breakout.

Please remember that false signals are common with this type of pattern

Right Angled Triangles

Are similar to symmetrical triangle but instead one of the lines drawn will either have a flat top or flat bottom and is drawn near perfectly horizontal These triangles are probably more accurate than all others and may also indicate which way the price could break.

Again extreme caution is needed when using triangles as they DO generate false signals.

RECTANGLE

Wide range of movements ranging 80 – 100 pips forming big congestion and breaking out any direction, we can find rectangles.

Flags Pennants Wedges

Flags, pennants and wedges occur on both up and down trends and indicate the market is reassessing the share price or more simply taking a breather. They are more often than not formed at the halfway stage of a trend. They are drawn onto charts by drawing both support and resistance lines simultaneously Once drawn, they should take on the appearance as their names imply i.e., A Flag looks like a Flag

A basic rule to follow is ' If a Flag, Pennant or Wedge forms in an up or down trend, the trend USUALLY continues on the same path'i.e.,An up trend continues Up.

If holding a stock and one of these patterns forms on the chart it is a signal for caution and a breach of either the support or resistance should be acted upon.

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