How to Read Stock Charts For Beginners (2021)

What is a Stock Chart?

A stock chart is a visual representation of the current and historical stock prices

displayed on an X & Y axis graph. Stock charts allow you to see the past and recent

price performance of a company’s shares. Significant to stock charts are volume and

price indicators and the ability to see historical price patterns and trends to predict

future price movement

1) Understanding Stock Charts

To understand stock charts, you need to know how supply and demand work in a

marketplace. That is why the volume indicator and the stock price movement are the

critical elements in effectively interpreting stock charts. For example, when the price

rises on increased trading volume, you can expect the price to continue higher.

How to Read Stock Charts * All of this will be covered in the section on
volume and supply and demand.
Reading Stock Charts
You can read stock charts using Stock Charting Software that performs the data

collection and calculations for you. You need to understand stock prices, timeframes,

supply and demand, chart patterns, volumes, and how stock chart indicators are

calculated. We cover the eight different stock chart types, indicators & patterns in

this guide.

This section is all about understanding a basic stock chart. Known as Technical

Analysis or stock chart analysis, chart reading enables us to visualize a stock not

through numbers but patterns. It allows us to get to see the stock, see its history,

learn its personality and make a value judgment on its future.

2. Review the Process of Reading a Stock Chart

Here is a simple process to reading a stock chart:

1. Choose the chart type you want to use

2. Choose the timeframe, days for short-term trading, weeks for long-term

investing

3. Add relevant indicators, e.g., RSI, OBV, MACD

4. Add the Volume indicator

5. Draw trendines linking price highs & price lows

6. Compare volume and price direction to assess the future direction

Volume – Supply & Demand

There are some important characteristics of volume and price in the marketplace. It

is all about the direction of price movement compared to the increases or decreases

in volume. In short, it is about Buyers and Sellers.

Price Up–Volume Up Stock Price moves higher on increased volume. This is bullish

as it shows us that more participants are interested in selling the stock at higher

prices and that, most importantly, more people are interested in buying the stock at

those higher prices. In an uptrend, this signals the trend will continue; in a

downtrend, this signals a possible correction or change in the trend’s short-term

direction to upwards.

Price Up-Volume Down in an uptrend is very bearish as it suggests that although

prices are rising, there are fewer participants suggesting people are backing away
from the higher prices. This also infers that the trend is weakening. In a downtrend, it

suggests a continuance of the downtrend.

Price Down–Volume Up in a downtrend may signal that a change in trend is likely;

as we saw with the “Blow off bottom,” there might be a huge selling climax, then the

trend adjusts from down to sideways or down to up. This may indicate a crisis, panic

selling, or simply when a stock is going out of favour in an uptrend. The pressure is

on the sell-side, and to sell, they have to accept lower prices. A strong negative

signal!

Price Down–Volume Down in a downtrend can suggest that the retreat is slowing

or beginning to end as fewer people are interested in buying or selling the stock at

these prices. In an uptrend, this may indicate the stock is stopping for breath or due

a pullback before continuing on its upward trajectory. Volume tends to trend in the

same direction as the price trend, so PDVD also suggests a continuation of the main

downtrend, or a pullback and possible continuation of an uptrend.

So you see not only the price but the direction of both price and volume is important.

This is where the Price Volume Indicators play an important role.

Defining Patterns
• A pattern is bounded by at least two trend lines (straight or curved)

• All patterns have a combination of entry and exit points

• Patterns can be continuation patterns or reversal patterns

• Patterns are fractal, meaning that they can be seen in any charting period (weekly,
daily, minute, etc.)

• A pattern is not complete or activated until an actual breakout occurs

Types of chat patterns

Chat patterns fall broadly into three categories: continuation patterns, reversal

patterns and bilateral patterns.

 A continuation signals that an ongoing trend will continue

 Reversal chat patterns indicate that a trend may be about to change direction

 Bilateral chat patterns let traders know that the price could move either way –
meaning the market is highly volatile

Techniques for Trading Patterns

• Breakouts

• Entry Stops

• Protective Stops

• Retracements

Breakouts

Violation of Trend Line, Support or Resistance, or previous reversal point

It signifies that a change in buyer and seller behaviour and signals the beginning or
end of a trend.

Resistance Breakout
 Price
Confirmation Filters
Apply a confirmation filter to determine whether a
breakout has taken place.

Types of Filters

• Intrabar

• Multiple closes

• Time

• Percentage or point

• Money

Multi-Bar Patterns

10
Horizontal Congestion
• Double and Triple
Tops/Bottoms
• Rectangles
Triangles
• Symmetrical
• Ascending and Descending
• Wedges
Other
• Head and Shoulders
• Cup and Handle
Candlestick Patterns

• Doji
• Harami
• Hanging Man/Hammer
• Shooting Star/Inverted Hammer
• Engulfing
• Dark Cloud/Piercing

Short-Term Patterns

• Pennant/Flag
• Gaps
• Pipe Bottom
• Narrow Range

Horizontal Congestion: Double Top

Characteristics:
• Two successive peaks separated by an opposite
reversal point

• Either rounded or pointed peaks that are usually at

roughly the same price (resistance level)

• Price must break out of middle reversal point

Calculate target price: (from below images)

Taking the height from the highest peak to the trough and then subtracting

the amount from the breakout price to the downside.

 Double Top (Breakout Down)

Entry Pullback

Support Line
Breakout

 A double top is another pattern that traders use to

highlight trend reversals. Typically, an asset’s price
will experience a peak, before retracing back to a level
of support. It will then climb up once more before
reversing back more permanently against the
prevailing trend.
 Double Top The double-top pattern is found at the peaks of an upward trend

and is a clear signal that the preceding upward trend is weakening and that

buyers are losing interest. Upon completion of this pattern, the trend is

considered to be reversed and the security is expected to move lower. The

first stage of this pattern is the creation of a new high during the upward trend,

which, after peaking, faces resistance and sells off to a level of support. The

next stage of this pattern will see the price start to move back towards the

level of resistance found in the previous run-up, which again sells off back to

the support level. The pattern is completed when the security falls below (or

breaks down) the support level that had backstopped each move the security

made, thus marking the beginnings of a downward trend.

 Figure 1: Double-top pattern

It's important to note that the price does not need to touch the level of resistance but

should be close to the prior peak. Also, when using this chart pattern one should wait

for the price to break below the key level of support before entering. Trading before

the signal is formed can yield disastrous results, as the pattern is only setting up the

possibility for the trend reversal and could trade within this banded range for some

time without falling through. This pattern is a clear illustration of a battle between

buyers and sellers. The buyers are attempting to push the security but are facing

resistance, which prevents the continuation of the upward trend. After this goes on a

couple of times, the buyers in the market start to give up or dry up, and the sellers

start to take a stranglehold of the security, sending it down into a new downtrend.

Again, volume should be an important focus as one should look for an increase in

volume when the security falls below the support level. Also, as in other chart
patterns, do not be alarmed if there is a return to the previous support level that has

now become a resistance level in the newly established trend.

Breakout

Horizontal Congestion: Double Bottom

Characteristics:
• Two successive troughs separated by a peak

• Either rounded or pointed troughs that are usually at roughly the

same price (support level)

• Price must break out of middle peak

Double Bottom (Breakout Up)

Breakout

Resistance line

Entry
Throwback
Calculate target price:
Taking the distance from the troughs to the peak and then

adding that amount from the breakout price to the upside.

Breakout

Horizontal Congestion: Tripple Top

Characteristics:

• Three distinct peaks at roughly the same price

level separated by two intermittent troughs

• Breakout occurs when price exceeds the extreme of

the intermittent trough or a trend line connecting
those points

Resistance line

PULL
 Entry Breakout

Calculate target price:

Take the height from the highest peak to the lowest trough in the
pattern. Then subtract that amount from the lowest trough in the
pattern to generate a price target.

Horizontal Congestion: Tripple Bottom

Characteristics:

• Three distinct troughs at roughly the same price level separated by two
intermittent peaks at any level

• Breakout occurs when price exceeds the extreme of the intermittent peaks or
a trend line connecting those points

• Best performance may be after a sustained decline*

• An average performance, but watch for failures

Entry Breakout

Resistance line

Throwback
Support line

Calculate target price:

Take the height from the highest peak to the lowest trough in the pattern.

Then add that amount to the highest peak in the pattern to generate a price

target.
Ascending Triangle:
 The ascending triangle is a bullish ‘continuation’ chart pattern that signifies a
breakout is likely where the triangle lines converge. To draw this pattern, you
need to place a horizontal line (the resistance line) on the resistance points
and draw an ascending line (the uptrend line) along the support points.

 The ascending triangle is the bullish variant of the two triangle patterns. It only

forms during up-tends or up-swings and is always seen as being a signal the

current move is going to continue. The straight edge of the ascending triangle is

a support level, and this level stops the market from moving lower during the time

the pattern is forming.

Here's what an ascending triangle pattern looks like on a chart.

 The ascending triangle is a bullish continuation pattern which signifies the

continuation of an uptrend. Ascending triangles can be drawn onto chats

by placing a horizontal line along the swing highs – the resistance – and

then drawing an ascending trend line along the swing lows – the support.

Ascending triangles often have two or more identical peak highs which

allow for the horizontal line to be drawn. The trend line signifies the overall

uptrend of the pattern, while the horizontal line indicates the historic level

of resistance for that particular asset.

 The ascending triangle is a bullish pattern, which gives an indication that the

price of the security is headed higher upon completion. The pattern is formed

by two trendlines: a flat trendline being a point of resistance and an ascending

trendline acting as a price support. The price of the security moves between

these trendlines until it eventually breaks out to the upside. This pattern will

typically be preceded by an upward trend, which makes it a continuation

pattern; however, it can be found during a downtrend.

 Figure 2: Ascending triangle

As seen above, the price moves to a high that faces resistance leading to a sell-off to

a low. This follows another move higher, which tests the previous level of resistance.

Upon failing to move past this level of resistance, the security again sells off - but to

a higher low. This continues until the price moves above the level of resistance or

the pattern fails. The most telling part of this pattern is the ascending support line,

which gives an indication that sellers are starting to leave the security. After the

sellers are knocked out of the market, the buyers can take the price past the

resistance level and resume the upward trend. The pattern is complete upon

breakout above the resistance level, but it can fall below the support line (thus

breaking the pattern), so be careful when entering prior to breakout.

From Tradingview.com

Ascending triangles are classified as continuation Patterns. Here are

the key elements that make up an ascending triangle:

1. Bottom Trend Line (Support)– An ascending triangle is characterized by

a bottom trend line that is formed as the price continues to set higher lows.

The more touch points on the trend line , the more reliable it will be.

2. Horizontal Resistance Line – An ascending triangle also contains a flat

horizontal resistance line that is formed as the stock continues to reject its

previous highs (for a given period). Once again, the more touch points on the

resistance line, the more reliable the pattern will be.

You must be wondering how the chart pattern get to be formed?

What happens during the formation of an ascending triangle is that there is a

certain level that the buyers cannot seem to break (red resistance line).

However, as evidenced by the higher lows (green uptrend support line),

buyers will gradually push the price up, hence we end up with an uptrend of

higher lows.

As buyers and sellers keep putting pressure, a breakout will become

inevitable.

Though a price breakout is inevitable, the big question is, “Who will break

the price, buyers or sellers? Will the buyers be able to break

that resistance level , or will the resistance be too strong?”

Well, the answer is, most of the times the price will break the resistance

area and go up.

However, it is not always the case, sometimes, the resistance is too strong

for buyers to break.

Now let’s look at its inverse, the DESCENDING TRIANGLE CHAT PATTERN

In a descending triangle chart pattern, as can be seen on the BTCUSD chart

above, there is a string of lower highs which forms the upper line (red

resistance line). The lower line is a support area (green horizontal line) in

which the price seems to be failing to break.

Just as with ascending triangles, most of the times, the price will break the

horizontal support line, and continue with the move lower.

Follow me closely as we will now ‘investigate’ the PSYCHOLOGY behind

ascending triangles:

To make the analysis easier, let’s think of the ascending triangle pattern as a

visualization of an ongoing battle between the bulls (buyers) and the bears

(sellers).

The bulls keep pushing the stock up in price until they get overpowered by

the bears/sellers at the horizontal resistance level .

It is at that resistance level that bears/sellers attempt to push the price down.

Though sellers are somehow successful in pushing the price down, they are

however unable to push the price to the previous low levels, as bulls/buyers

are persistent, and the price sets a higher low (bottom trend line ).

This pattern continues until the price action becomes confined to

the vertex of the triangle, representing a pivotal moment in this battle. At

this point, either the bears will win, and the BTC will break the bottom trend

line , or the bulls will win and break the horizontal resistance line.

If history is anything to go by, this pattern favors the bulls, and if the

horizontal resistance line is broken, the bulls will be able to push the price up,

triggering a breakout.
How do you trade the Ascending and Descending Triangle?

That's the question, right?

For me, a very simple general rule is this:

You look for an Ascending Triangle in an uptrend.

And you look for a Descending Triangle in a downtrend.

Basically, you long ascending triangle in an uptrend, and you short descending

triangle in a downtrend.

Let me share with you with a few examples:

So, can you imagine the thought process of a trader who is

unaware of reading price action?

They may think:

“Oh! Price is at resistance, I should be short!”

And so, they go short, and where would they put their stop loss?

Well, the textbook says, just above the high.

With enough traders shorting the market, there is a cluster of

stop-loss built up over the area of resistance.

And this is a sign of strength as you see lower highs coming into

resistance!

This tells you that buyers are willing to buy at these higher prices!

On top of that, you have those momentum traders piling into the

trade going long on a breakout.

And then, the market breaks up higher.

Now…

Imagine if the order flow that is in your favor:

 Stop loss getting triggered. This becomes a buy order

because if your stop loss gets hit when you are short, your

stop loss is basically a buy order to get you out of the

market.

 Traders want to break out. When they see the market

breaking above the highs, they will also go long, which

creates a huge demand for higher prices.

Now, I'm going to walk you through how you can go about setting

your stop loss, entries, and exits.

There are a few ways to do it…

Entries

You can either look to go long on the break of the highs, or you

can look to get long when the market breaks and close above the

resistance level.

There's really no right or wrong to this.

Here’s what I mean:

Stop Loss
As for stop loss...

I typically recommend looking at the nearest structure low and

give it some buffer below it.

You can use an indicator like the Average True Rage and set it 1

ATR below it.

Why do you want to give some buffer?

It's because you don't want a market to come down, spike you up,

and then continue trading higher.

So, give it some buffer, and give your stops more room to

breathe.
But when the market breaks and closes below the nearest

structure low, chances are this pattern is invalidated, and you

don't want to stay in this trade any longer.

This is how you can go about with your entries and your stop loss.

Take Profit
Again, there are two ways you can go about it.

For taking profits, the first thing that you can do if you want to have a fixed target is

that you can actually measure the move from the swing high to the low.

Here’s an example:

An alternative approach that you can do if you want to trail your stops, is by using a

moving average.

For example, you can use a 20-period moving average.

You can trail your trade as the market trades higher and you only exit if it closes

below it.

Here’s an example:

Whether you only use 20, or 50-period moving average, there's

no right or wrong.

20 MA would keep you in with the short-term trend.

The 50 MA would keep you in with the medium-term trend.

It really depends on how long or how short of a trend that you

want to ride.

Here's another example:

Can you spot the ascending triangle pattern?

You can see higher lows coming into this resistance and you can

see that this is pretty much a losing trade.

It basically got you into the trade, you long the breakout, and

collapses under which you got stopped out.

Nothing that I share on my YouTube, my blog, website, or

anything, is 100%.

It's all dealing with probabilities.

So, always manage your expectations that there will be winners

and there will be losers.

And finally, another example I want to share is the opposite:

It is descending triangle in a downtrend.
You can see lower highs coming into support.

So again, how could you have traded this pattern?

You can look to place a sell stop order just below the lows or wait

for the market to break in close below this support before you get

short.

For the stop loss, you want to reference from the nearest swing

high.

Because if the market can break in close above this

downward trend line, chances are this pattern is invalidated and

you don't want to stay in the trade any longer.

Where do you set your target?

Again, I mentioned that there are two ways:

1. Take the distance from the high to the low. So, if the distance

from the high to the low is 500 pips, your projected target is 500

pips.

2. Trail your stop loss. Use a moving average, like the 20 or the

50 depending on the type of trend that you want to capture.

If you let your winners run, there will be small winners and small

losses.

But there will be a few times, possibly one in ten trades where

you catch a big move and the market just keeps on trending over

a long period of time.

Let’s do a quick recap…

Recap
 An Ascending Triangle is basically higher lows into

resistance, and the Descending Triangle is lower highs into

support.

 The reason why this pattern work is because there is order

flow at the other end of the market structure.

 If you want to trade with this pattern, trade with the trend for

better odds, right? After all, the trend is your friend.

  You can either look to long on the break of the highs, or you

can wait for a close after the market breaks out of

resistance.

 For stop loss, I typically reference from the nearest swing low

and give it some buffer.

 When is this pattern invalidated? It's when this upward trend

line, gets broken, so the pattern is invalidated.

 As for Exits, you can use a price projection or calculate that

distance from the highs to the lows, and this is where you
could consider taking your profits.

What is Ascending Triangle Pattern

The ascending triangle formation is a continuation pattern and as the name suggests

it has the shape of a triangle. The ascending triangle is also known as the bullish

triangle because it leads to a bullish breakout.

The triangle chart pattern is generally considered a bullish pattern.

Note*: the reverse of an ascending triangle is the descending triangle also known as the

bearish triangle.

How the ascending triangle looks like:

The first element of this price pattern is an upward sloping trendline followed by a flat

top.

This shows that the market has tried multiple times to break the resistance top but it

couldn’t. Hence, we have developed a resistance line.

 The second element of the ascending triangle is a slanting or a rising

trendline moving upwards. This is what makes the pattern bullish.

See the chart below:

Remember that all continuation patterns like the bullish flag, rectangle pattern, and

many others that you can find through our Trading Strategy Guides website, need to

have a context of a trend.

Ascending Triangle Pattern in

Downtrend
So far we have seen how to trade ascending triangle within an uptrend but when the

ascending triangle pattern develops within a downtrend we have two possible trade

scenarios:

1. A continuation of the downtrend

2. Or, it can signal an imminent market reversal

If the flat resistance line is broken, the ascending triangle pattern can signal an

upcoming trend reversal. In this case, we can expect a change in the trend, from

bearish to bullish.

Here is an example:

Unlike in an uptrend, when the ascending triangle pattern develops within a

downtrend it’s more likely to signal a reversal than a continuation.

In this case, we apply the same trading rules (entry and exit) as we would with the

ascending triangle pattern within an uptrend.

Now…

There is also the possibility for the ascending triangle to play out as a continuation

pattern.

Let me explain:
The top of the ascending triangle pattern can actually hold because the prevailing

trend is downward. So, in a downtrend, the resistance level has a bigger chance to

hold while the support level gets broken.

To act as a continuation pattern within a downtrend, the upward sloping trendline of

the ascending triangle must be broken.

A short trade is triggered once we break below the upward sloping trendline.

See an example below:

One advantage of this type of continuation play is that you’ve got to use a very tight

stop loss. Naturally, the stop loss goes above the flat resistance line.

Next, we’ll jump to a simple breakout trading strategy that will teach you how to

identify and trade the ascending triangle formation.

How to trade Ascending Triangle Pattern

Now, let's go through some stuff that will make the triangle pattern easier to be

understood.
You really need to think in terms of what’s going on behind the scene. We don’t like

just to look at the price, but also at what the market participants are doing.

When the price is moving up, it starts to develop the classical higher lows. For

whatever the reasons may be buyers become a little bit more aggressive with each

new successive higher low. Or, we can say that the sellers aren’t too aggressive

when the market turns down inside the ascending triangle chart pattern.

Whichever side of the coin it is, that is what it’s causing the triangle price formation to

develop.

When we reach the climax point of the triangle where the price has nowhere to go,

that’s the moment when we should anticipate a breakout.

Once the triangle breakout happens we need to see a pick up in volume that will

result in a nice long trade.

The location of the pattern is also important!

If the triangle pattern is inside of a big trading range, then the solid resistance level

might not be that significant. However, if the ascending triangle price formation

develops in the middle of a bullish trend, that would add more weight to the pattern.
 Ascending Triangle Trading Strategy
The ascending triangle trading strategy is an easy method to capture breakouts inside a trend. In
order to confirm the breakout, we’re going to use the RSI tool which is a momentum-based
indicator.
Since the price usually contracts inside the ascending triangle pattern, at one point either the
bulls or the bears must win. With the RSI indicator in our trading arsenal, we can determine in
advance who is going to win this battle.
How does it work?
Let’s get it step-by-step:
Step #1: The Ascending Triangle must Have a Flat Resistance and a Rising Support Trendline
The two elements of a good ascending triangle pattern are:
 A flat resistance that it’s hit multiple times. The more a resistance line is tested, the more likely it
will eventually fail to hold as the resistance level.
 The second element is a rising support trendline that connects the successive higher lows inside
the ascending triangle formation.
See the ascending triangle chart below:
Now, before buying the breakout we need to check one more thing.

See below:

Step #3: Check if prior to the Ascending Triangle we have a bullish trend

As a continuation pattern, naturally we need a preceding trend. In the case of the

ascending triangle, which is a bullish pattern, we need to have a prior uptrend.

If we have a prior uptrend, it suggests that the breakout has a higher probability to

happen on the upside.

See the ascending triangle chart below:

The last step is to define our entry trigger point and to measure our profit targets.

See below:

Step #4: Buy as soon as we break above the flat resistance level

With continuation patterns, the best strategy is to buy straight away with the

breakout. If we wait too much we end up leaving some of the available profits on the

table.

We already have so many confluence factors that confirm the breakout that it’s

useless to wait for more confirmation. After all, we want to anticipate the breakout

and be ahead of the crowd.

For the take profit strategy, we’re going to use our favourite measuring technique.

This is a dynamic strategy that it’s based on the actual price rather than a random

number.

To find the profit target, simply take the high and the low of the ascending triangle

formation and add that measurement to the breakout level. This will give you the

ideal target for this continuation pattern.

FAQ - Ascending Triangle Pattern
Is ascending triangle bullish?

Yes, the ascending triangle is a bullish chart pattern that develops during an uptrend

and signals an upside breakout. The bullishness of this pattern comes from the

squeeze between the ascending trendline and horizontal resistance line which

ultimately will force the break out of the pattern.

Is ascending triangle good?

The ascending triangle is a good chart pattern as long as it develops within an

uptrend. As a continuation pattern, you have the advantage of trading in the direction

of the prevailing trend. Additional benefits include a clear entry point and profit target.

What does an ascending triangle indicate?

The ascending triangle indicates a period of consolidation where the supply and

demand forces are apparently at equilibrium. As price gets squeezed towards the flat

upper resistance, the bulls get stronger.

Can ascending triangle be bearish?

Yes, in some instances a breakout of the ascending trendline can produce a bearish

signal. However, generally, the ascending triangle is a bullish price formation that

occurs within an uptrend. If it develops within a downtrend it can be considered a

bearish continuation pattern.

When should I buy ascending triangle?

You should buy the breakout of the horizontal resistance trendline. For a more

conservative entry, you can also wait for a break and close above the resistance

before you enter the market. This will protect you in case of a false breakout.
Conclusion – Ascending Triangle Formation

The ascending triangle formation is a very powerful chart pattern that exploits the

supply and demand imbalances in the market. You can time your trades with this

simple pattern and ride the trend if you missed the start of the trend.

Many technical analysts trade the breakout without first taking the time to understand

what goes behind the scene. With the ascending triangle, we can have a perfect

head start, and see the trading opportunity before it happens. So, being able to

recognize the ascending triangle pattern can be a valuable tool that you can use to

identify profitable trades.

Example of ASCENDING TRIANGLE CHART PATTERN

2. Descending Triangle

Unlike ascending triangles, the descending triangle represents a bearish

market downtrend. The support line is horizontal, and the resistance line
is descending, signifying the possibility of the downward breakout.
In contrast, a descending triangle signifies a bearish continuation of a downtrend.

Typically, a trader will enter a shot position during a descending triangle – possibly

with CFDs – in an attempt to profit from a falling market.

Descending triangles can be identified from a horizontal line of support

and a downward-sloping line of resistance. Eventually, the trend will break

through the support and the downtrend will continue.

The descending triangle is the bearish version of the triangle pattern and it's

formation is a sign the current down-move/downtrend is likely going to continue.

The only difference it has with the ascending triangle is that it's straight edge is a

resistance level which stops prices from rising higher during the formation of the

pattern in the market.

In this image you can see a descending triangle pattern which formed on the1hour
chart of AUD/USD.
Note: The ascending and descending triangle patterns are

good to know but not that great for trading, due to the way

a few false breakouts will usually take place before the real

breakout occurs and causes the market to move in the

direction it was moving in prior to the pattern forming in the

market.

The descending triangle is the opposite of the ascending triangle in that it gives a

bearish signal to chartists, suggesting that the price will trend downward upon

completion of the pattern. The descending triangle is constructed with a flat support

line and a downward-sloping resistance line. Similar to the ascending triangle, this
pattern is generally considered to be a continuation pattern, as it is preceded by a

downward trendline. But again, it can be found in an uptrend.

Figure 3: Descending triangle

The first part of this pattern is the fall to a low that then finds a level of support, which

sends the price to a high. The next move is a second test of the previous support

level, which again sends the stock higher - but this time to a lower level than the

previous move higher. This is repeated until the price is unable to hold the support

level and falls below, resuming the downtrend. This pattern indicates that buyers are

trying to take the security higher, but continue to face resistance. After several

attempts to push the stock higher, the buyers fade and the sellers overpower them,

which sends the price lower.

Example of some DESCENDING TRIANGLR PATTERN
Symmetrical triangle
For symmetrical triangles, two trend lines start to meet which signifies a

breakout in either direction. The support line is drawn with an upward trend,

and the resistance line is drawn with a downward trend. Even though the

breakout can happen in either direction, it often follows the general trend of

the market.
Head and shoulders

The first price action reversal pattern we're going to look at

is the head and shoulders pattern. Without doubt one of

the most popular and well known price action patterns in

the market, the head and shoulders formation is one which

all price action traders need to memorize and understand if

they want to become good at spotting reversals using price

action. As you've probably already guessed, the head and

shoulders pattern is a reversal pattern which has a swing

structure very similar to that of person's head and

shoulders.
Here's an image of a bearish head and shoulders pattern which
formed on the 1hour chart of EUR/USD.

You can see from the image the structure of the pattern does bear a striking

resemblance to somebody standing up with their head straight and their shoulders

level with one another. Most head and shoulders patterns are supposed to look like

the one you can see in the image above, but a large percentage of them will actually

have features which are a little different from one another. For example, you might

see a pattern form with one of the shoulders being a little bit higher than the other, or

the distance of two shoulders from the head will be smaller or bigger than what you

can see in the pattern above.

These small differences do not alter the pattern in any meaningful way. So long as

the head is always found in the middle and the two shoulders are found to be either

side, it's a head and shoulder pattern. If the high of the right shoulder is found to be

below the swing low of the move up which created the head, then it's
not a head and shoulders pattern and should not be treated as such.

The pattern itself comes in two variations. The one we just looked at in the image

above is referred to as being a bearish head and shoulders pattern, which is a signal

the market may reverse to the downside, whilst the one seen in the image below is a

bullish head and shoulders pattern, but is often referred to as being an inverse head

and shoulders pattern due to the way the pattern is basically an upside down version

of the bearish pattern.

Here's what an inverted head and shoulders pattern looks like on a

chart.

You can see that all the features of the pattern are the same as the
bearish version, only the opposite way around. Instead of the head
pointing upwards like it does with the bearish pattern it points down,
as do the left and right shoulders. The only real difference between
the two patterns is in what needs to happen in order for the pattern
to become invalidated.

With the bullish head and shoulders pattern if the right shoulder
forms below the swing low of the move up which created the head,
the pattern is not a head and shoulders and is instead some other
formation. The bearish head and shoulders follows the same rule,
only the right shoulder cannot form above the swing high of the
move down which created the head, if it does it's not a bearish head
and shoulders pattern.

All in all the head and shoulders formation is usually quite a reliable
signal the current movement is going to reverse. If you want to learn
the best way to trade the head and shoulders pattern and get a
more in-depth look at the way it should form on your charts, check
out the article I've left below.
Head and shoulders is a chat pattern in which a large peak has a slightly

smaller peak on either side of it. Traders look at head and shoulders

patterns to predict a bullish-to-bearish reversal.

Typically, the first and third peak will be smaller than the second, but they will all fall

back to the same level of support, otherwise known as the ‘neckline’. Once the third

peak has fallen back to the level of support, it is likely that it will breakout into a

bearish downtrend.
MACD Stock Chart Indicator

MACD or Moving Average Convergence Divergence is a great way to assess a stock

price direction.

What is MACD?
Gerald Appel developed MACD to easily show the Moving Averages of a stock in a

way that could show the strength of the difference of the Moving Averages. For

example, if the 10 & 20 day moving averages for a stock move away from each other

as the stock is going up, this means the stock is gaining strength.

MACD Usage

Short = the shorter Moving Average, e.g., 10

Long = the longer moving average, e.g., 20 or 30

Period = the Moving average of the difference of the Short and Long above.

Use short MACD configuration for shorter-term trading 5-35-5, or longer

configurations for longer-term trading 12-26-9 is popular, also 10-30-5.

Experiment and also view charts on different timeframes to test if the indicator is true

from different angles.

This could go on and on; however, I will suggest now we move to the more practical

use of MACD viewing it in real life on a real stock.

Please be aware that sometimes MACD does not tell you anything about a stock, but

it does in many cases. As always, if the indicators tell you nothing, there is probably

nothing to be told; move on and look for other stocks.

How to Use MACD

Take a look at the Netflix (NFLX) Learning Chart below.

Here we have a MACD configured of 10, 30, 5 Simple, and this is a 2 Day (per bar)

Chart.

Step 1 – Price Growing

The stock price is in growth mode, almost doubling in the first quarter.

Step 2 – Negative Divergence

The trick with MACD is to look at the trend; it is a powerful indicator when comparing

the direction of the MACD Mountains with the Price Movement.

Point 2 illustrates that although the price doubled in 2008, we saw the MACD make

lower lows “negative divergence.”

We see a change in the MACD from positive to negative, and the large mountain

(below the Zero Line) forms. MACD is an oscillating indicator and, as such, is always

tied to the Zero line in the middle.

Step 3 – Price declining

Here we see a strong decline in price for the rest of 2008 until November. Using a

trendline to show this helps us visualize the direction easier

Step 4 – Positive Divergence

Simultaneously, the price is declining; we actually see a longer-term Positive

Divergence occurring from June to December. This essentially means that the “Gas

in the tank of the sellers is slowly reducing.”

However, we should not have waited until December to buy the stock. That would

have been way too late. Instead, we would look to Point 5.

Step 5 – Buy Signal

MACD broke through the resistance line: here, we see the MACD breaking strongly

past its previous high. I plotted a trendline in orange to show this clearly.

If you had used MACD as your BUY SIGNAL, you would have netted 56% in 4

months.

Please do not think I searched through hundreds of charts to find a good example to

demonstrate here. I did not; this was a stock in my watch list and indeed bought
based on this lesson. As you can see, the dates are up to the end of January 2009 in

this historical example.

Ascending triangles are classified as continuation Patterns. Here are

the key elements that make up an ascending triangle:

1. Bottom Trend Line (Support)– An ascending triangle is characterized by

a bottom trend line that is formed as the price continues to set higher lows.

The more touch points on the trend line , the more reliable it will be.

2. Horizontal Resistance Line – An ascending triangle also contains a flat

horizontal resistance line that is formed as the stock continues to reject its

previous highs (for a given period). Once again, the more touch points on the

resistance line, the more reliable the pattern will be.

You must be wondering how the chart pattern get to be formed?

What happens during the formation of an ascending triangle is that there is a

certain level that the buyers cannot seem to break (red resistance line).

However, as evidenced by the higher lows (green uptrend support line),

buyers will gradually push the price up, hence we end up with an uptrend of

higher lows.

As buyers and sellers keep putting pressure, a breakout will become

inevitable.
Though a price breakout is inevitable, the big question is, “Who will break

the price, buyers or sellers? Will the buyers be able to break

that resistance level , or will the resistance be too strong?”

Well, the answer is, most of the times the price will break the resistance

area and go up.

However, it is not always the case, sometimes, the resistance is too strong

for buyers to break.

Now let’s look at its inverse, the DESCENDING TRIANGLE CHAT PATTERN

In a descending triangle chart pattern, as can be seen on the BTCUSD chart

above, there is a string of lower highs which forms the upper line (red

resistance line). The lower line is a support area (green horizontal line) in

which the price seems to be failing to break.

Just as with ascending triangles, most of the times, the price will break the

horizontal support line, and continue with the move lower.

Follow me closely as we will now ‘investigate’ the PSYCHOLOGY behind

ascending triangles:

To make the analysis easier, let’s think of the ascending triangle pattern as a

visualization of an ongoing battle between the bulls (buyers) and the bears

(sellers).

The bulls keep pushing the stock up in price until they get overpowered by

the bears/sellers at the horizontal resistance level .

It is at that resistance level that bears/sellers attempt to push the price down.

Though sellers are somehow successful in pushing the price down, they are

however unable to push the price to the previous low levels, as bulls/buyers

are persistent, and the price sets a higher low (bottom trend line ).

This pattern continues until the price action becomes confined to

the vertex of the triangle, representing a pivotal moment in this battle. At

this point, either the bears will win, and the BTC will break the bottom trend

line , or the bulls will win and break the horizontal resistance line.

If history is anything to go by, this pattern favors the bulls, and if the

horizontal resistance line is broken, the bulls will be able to push the price up,

triggering a breakout.