CHART PATTERNS
This Tool Travels The Charts
Trading The Forex Wave
by Raghee Horner
Chart patterns are powerful tools and it is important to identify them by finding their building blocks. Here's how.Only after I embraced market cycles did I truly begin to understand what to do with all the lines and levels I had learned to draw on my charts. Early on, as I began teaching myself to trade in the late 1980s to early 1990s, there were few books available about technical analysis. I found myself gravitating toward price (instead of news) because my mother was a bit of a market timer (although not trained nor aware that she was indeed using market timing).
CHARTS, CHARTS, CHARTS
Price and price action made sense to me, and so I ventured into charting armed with my father's old engineering graph paper, drawing my own charts based on the closing price I would get from my commodity futures broker. It was also during this time I went to college and discovered the books that ended up shaping my view of the markets. Books by chartists Richard Schabacker and Richard Wyckoff were like the light I was searching for in my quest to become a trader. What is interesting about those books was that they were written in the early 1900s but are still as true and applicable today as anything current on my bookshelf.
The other pivotal moment in my trading was the introduction of market cycles to my chart analysis. My bread and butter trades are momentum trades. My definition of this is an entry style based on entering a market as it breaks out or breaks down from a sideways market. Sideways markets are cycles of congestion or consolidation. Congestion is typically a wider-ranging sideways market with higher volatility and a little more erratic support and resistance levels as compared to consolidation. Consolidation is a narrower sideways market with firm support and resistance levels, in that the levels have little variance between the highs that make up resistance and the lows that make up support.
It is during these sideways markets that two of my favorite patterns for momentum trading develop: triangles and rectangles. Both patterns were born of the fact that they were initially referring to the stock market, where there is a buyside bias. So consolidation is that low-volume, quiet channel where a stock is typically bought with little notice. Congestion typically follows an uptrend and is an interesting mix of selling muddled with latecomers to the uptrend who are buying. Since there is not enough interest and money chasing the market higher, however, the market levels off into a wider range, compared to the accumulation cycle. When talking about markets such as commodity futures and foreign exchange, this is not as apparent, especially in the forex market, where the buyside bias is not as prevalent.
...Continued in the September issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the September 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
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