Lesson 13: Key graphic figures useful for forex trader

There are dozens of graphic figures, but one always comes back to studying the highest and lowest via the Dow theory, and concluding accordingly either to a bullish notice, a bearish opinion, or a neutral opinion .

Since the principle of "decoding" graphic figures remains the same for all figures, we propose here to focus on the main graphic figures and their interpretation.

The Triangles

The triangle represents an undecided configuration of the price, it is assimilated to a phase of psychological consolidation by investors.

There are mainly three types of triangles:

* Ascending triangles 
* Triangles descending 
* Symmetric triangles

Generally, an ascending triangle appears following a bullish movement and vice versa for the descending triangle. As for the symmetrical triangle, it can appear in any type of configuration. One of the common points of these three triangles is that the oscillation of the course decreases between the two terminals of the figure.

The ascending Triangle:

The ascending triangle is represented by an upward trend line linking the previous low points of the price upwards, this line acts as dynamic support.

The upper bound of the triangle is represented by a resistor connecting the high points of the same level. This figure is considered to be a consolidation phase within a bullish movement, so the pressure remains bullish within this figure since the pair succeeds in aligning a succession of low points upwards.

The Downward Triangle:

The downward triangle is represented by a downward trend line connecting the previous high points of the price to the downside, this line acting as dynamic resistance.

The lower bound of the triangle is a support linking the previous lower points of the course to the same level.

This triangle is considered as a consolidation phase within a bearish movement, so the pressure remains bearish as the price aligns a succession of high points to the downside.

The Symmetrical Triangle:

The symmetric triangle is also a figure of consolidation and indecision however it is difficult to establish the psychological bias of the investors within the figure given that the price aligns a succession of high points downward and a succession of low points On the rise.

It is nevertheless considered that the price is more likely to leave this triangle in the sense that it has entered it.

In other words, if the movement was bearish before the formation of this triangle, the course will be more likely to come out of this figure from the bottom.

How to trade Triangles?

The first thing to remember is that the most timely trading is to position yourself in the direction of the trend as part of a sound and directional setup.

The theory of dow consists in evaluating the "credibility" of a trend at time T.

If the price aligns a succession of high and low points on the rise, the trend is bullish and "healthy" according to the theory of dow. 
If the price aligns a succession of high and low points to the downside, the trend is bearish and "healthy" according to the theory of dow.

With reference to this theory, we note that no configuration is "healthy" according to the theory of dow in the case of a triangle since the course does not align the high and low points in the same direction.

The least risky situation is therefore to wait for the exit of the triangle to position itself in the direction of the exit. It is important to know that the output of a triangle often creates volatility and it is therefore appropriate to position itself in this case.

The expectation of your takeprofit on this type of scenario can reach the amplitude noted between the high and low points furthest from the triangle.

After having detected a triangle output, it is also advisable to anticipate a correction in return on the previous high or low triangle terminal in order to plan a pullback / throwback potential on this resistance which has become a support or on this support which has become a resistance.

The Shoulder-Head-Shoulder (ETE)

The Shoulder-Head-Shoulder is a well known chartist figure, it is very often a trend reversal.

This figure will be different according to the configuration of the trend, in case of upward trend we will evoke the 'Shoulder-Head-Shoulder' classic (ETE) whereas in a bearish trend we will speak of Shoulder- "Inverted" shoulder (ETEI).

"Classic" Shoulder-Head-Shoulder (ETE):

"Inverted" Shoulder-Head-Shoulder (ETEI):

The ETE is a chartist figure that is mostly formed at the end of the trend, it then offers a high probability of reversing the trend that preceded its formation.

Caution

Nevertheless, it is still possible to find an ETA within a bearish movement as it is also possible to see an ETEI within a bullish movement.

These cases are really very rare but it is important to know this because the meaning is quite different. In these two cases the figure will be interpreted as a continuation of trend and not turning.

The ETE consists of three successive summits.

The second vertex is called the "Head" and it must always be higher than the other two vertices corresponding to the "Shoulders".

The "Shoulders" of the figure must ideally reach the same level, however, if the second shoulder (the right one) is lower than the first, the figure remains valid.

Conversely, if the second shoulder has an amplitude greater than the first, it is desirable to take its precautions.

Indeed, let us assume that we are raising an ETA in a bullish configuration, if the height of the right shoulder is equal to or less than that of the left shoulder, this means that the traders are having difficulty continuing their purchases at the current price and This reinforces the credibility of the figure.

How to trade an ETE or an ETEI?

In the case of an ETE, the low points reached between the vertices make it possible to materialize a horizontal support called "Neck line".

The break of this "neck line" will serve as a sales alert, the goal is determined by transferring the head height from the neck line.

Note that breaks and crossings are quite frequent (Pullback for ETEI and Throwback for ETEI). The investor can take advantage of this to strengthen his position.

The target completion time is typically half the training time of the figure.

The Double Top / Triple Top

The double top is a graphic trend reversal that occurs at the end of a bullish movement.

This graphic configuration illustrates an invalidation of the upward trend since the course now aligns its previous high points to the same level over a resistance zone.

Psychologically this figure shows that the bias is reversed since the bulls are no longer able to continue their purchases at the level of the last peak reached.

The inability of the price to pass the last high point reflects a general weakness of buyers and this indicates a potential downturn in the future.

The Double Top is represented by 2 almost identical vertices in terms of duration and amplitude. It is worth noting that the 2nd peak may be slightly lower than the first. This nuance reinforces the credibility of the figure given that the second summit reveals an additional clue about the weakness of the buyers at the current price.

The low point reached between the "2 tops" makes it possible to represent a support zone called "Neckline". The break of this Neckline will reveal the formation of this figure and the "Pullback" on this Neckline will confirm the trend reversal.

The study of the volume in the figure:

The volume generally decreases over the whole figure. Declines are often supported by a larger volume than periods of rise. 
The vertices of the figure are often represented by "volume peaks" and the second vertex is usually less supported by volumes than the first. 
The breaking of the neck line is often accompanied by a large volume.

The variant: The Triple Top

The Triple Top is more rare, this figure is a derivative of the double top with an extra top. His psychological and graphic interpretation is exactly the same as the double-top. Volume analysis is also similar to Double-Top.

Trading Application & Double-Top Charts 

Method:

1 / Wait for the break of the neck line of figure 
2 / Anticipate a Pullback on this neck line 
3 / Position for sale after Pullback 
4 / Adjust its stoploss above the last high point
5 / Adjust your Takeprofit using the "swing" method by counting the gap in pips between the vertices and the neckline.

The V-Top

The "V" top is a graphic representation that one sees at the end of a bullish movement on a vertex. This configuration reflects an acceleration of the upward trend leading investors to ultimately pursue purchases on levels that are no longer justified.

Traders were caught up in the infatuation of the rise and the "sheep effect" allows the market to reach significant levels that it will hasten to correct.

The formation of this figure is thus the result of the greed of the interveners which translates into a buying frenzy on the market.

Volumes are generally rising sharply during this configuration, it may be wise to monitor them to confirm the formation of this figure.

Graphic Representation :

How to trade V-Top? 

The most cautious position is to await the formation of the pullback to confirm the figure.

The entry into position is therefore on the rebound, the trader will use the method of the "swing" to determine its purpose.

It will therefore be necessary to count the number of pips between the neck line and the top and then position your takeprofit according to this figure.

The stoploss can be placed slightly above the neck line, this opportunity will often offer you an interesting "risk / reward" ratio.