| Last week we saw how technicals are helpful in identifying profitable opportunities and some simplistic rules were listed. This week, it’s time for you to upgrade skills and know about a few common patterns which are reliable indicators in making price forecasts.
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| If a market player is to keep these patterns in mind, one’s profitability can simply be multiplied by a factor of 3 overnight!
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| Trendlines: These are the simplest indicators and a trader’s best friend. As the name itself suggests, these are lines that are derived from connecting tops ( to forecast resistance levels ) and bottoms ( to forecast support levels ). The most important thing to remember about trendlines is their duration.
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| The longer the duration of a trendline without it being violated, the more is it’s validity. For example, a trendline drawn on daily charts and spanning a fortnight is not as affective as a trendline drawn on a weekly chart and spans 8 weeks!
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| Once a trendline is drawn, it has room for modification as the markets are not perfect and a proper trendline is the one which covers as many tops / bottoms as possible. A trader should stick to his long / short position as long as a trendline is not violated.
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| Channels: These are simple formations where two parallel lines can be drawn and within which the scrip moves. As with a trendline, the longer the duration, the more significant is it’s validity.
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| A breakout above / below a channel with high volumes signals a breakout / breakdown in the direction of the underlying security. A channel is useful for traders and investors alike.
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| Traders can buy at the lower trendline and sell near the upper trend, short at the higher end and go long again at the lower trendline. Investors can buy once a breakout / breakdown as the case maybe.
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| The longer the duration of the channel, the higher will be the price swing in the security.
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| Flags : These are formations which are called “measuring moves”. A flag is formed when a scrip rallies and then pauses / corrects in a fall. It makes lower bottoms & tops and appears like a sloping flag furling on a mast. It is important to note that in this formation, the flag must be made in the opposite direction of the mast.
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| Also to be noted is the fact that this pattern is confirmed only after a breakout is achieved from the flag formation - that too with higher volumes. This move is simple yet effective - it gives tremendous measuring powers to a trader as it is historically noted that flags are made at half time in an upmove or downmove.
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| Triangles: Sometimes we notice that a stock is trading in a narrow trading range and seems to get more and more restrained in it’s fluctuation. In effect, the movement is narrowing down.
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| This narrowing convergence of the price-line can be plotted with trendlines that join to resemble a triangle. The outlook of the triangle depends on it’s hypotenuse. If it is upward sloping, the triangle is bullish and vice versa.
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| A triangle is a breakout pattern and signals a direction seeking move of a scrip. Again a breakout with volumes will determine the completion of the pattern. A buy or sell decision on breakout will yield superior profits.
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| Now that you have mastered some of these rudimentary yet effective techniques, discipline and dedication is needed in avoiding temptations to pre-empt the pattern and act only after the pattern is confirmed by a breakout / breakdown is achieved.
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| Many a profitable trade has turned into a disaster because the trader succumbed to the temptation of taking a short cut to profits. Then again the wisdom of keeping stop losses cannot be emphasized enough.
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| Till then, have a profitable day! |
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