Kevin van der Ham - Kevin graduated from University in 2009 and shortly thereafter began his career working in an advertising agency, before leaving South Africa and travelling Europe.

Since living in London Kevin has worked as a freelance writing, penning articles for both music and film websites.

In early 2012 Kevin began an internship at a fashion brand in Los Angeles, broadening his marketing skills. 

Now back in London, Kevin has joined MahiFX as a marketing intern.
Kevin van der Ham
Kevin graduated from University in 2009 and shortly thereafter began his career working in an advertising agency, before leaving South Africa and travelling Europe. Since living in London Kevin has worked as a freelance writing, penning articles for both music and film websites. In early 2012 Kevin began an internship at a fashion brand in Los Angeles, broadening his marketing skills. Now back in London, Kevin has joined MahiFX as a marketing intern.
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An Intern Learns – Making Use of Charting Patterns

Thank you for coming to read another of the intern learns series. I’ve recently finished a discussion on making your own trading system and highlighted how important it is for a trader to have this. Trading systems help take the guesswork out of making trades, and by being more systematic about our actions, it also helps to eliminate the errors we could make due to emotional decisions. I’ve been looking at my charts and have been struggling to choose charts to make trades on. I’ve been looking for trends but haven’t been finding any! Well I’m sure they’re out there and so I decided to do a bit of research into finding patterns. Chart Patterns was the answer I needed and I’m going to outline what I’ve learnt in today’s blog.

The basic concept behind the chart patterns is that, apparently, around 70% of time the markets don’t actually trend – but are rather in a ‘consolidation’ period. In this no-trend-zone it’s generally recommended that you don’t make trades but rather hang back and wait for the price to go either way. You could, however, do range trading as I’ve discussed before, but it wouldn’t be a bad idea (especially for a newbie trader) to hang back and wait for a real trend.

Chart patterns aim to point out these moments of ranging, so that you can predict when the range is going to end and take advantage of the breakout. As you may recall, a breakout refers to the price spiking up above or below the range. Charts patterns are great for the more technically oriented traders. This is due to the fact that by using chart patterns you are only basing your decisions on the information available in the charts, and this is the essence of technical trading!

One of the most common types of chart patterns is the triangle pattern. A symmetrical triangle chart pattern is defined as the pattern created by the slope of the price’s highs and the slope of the prices lows converging together to a point so it represents a triangle. The way you would go about identifying a triangle is to start by looking for support and resistance levels, and ones that aren’t perfectly parallel. Start by drawing in the top ceiling line and then the floor; if these two lines meet at a point then you have yourself a triangle! These patterns are best identified in larger time frames, such as around 1 day. You will notice that the triangle’s tip will always point to the right. You must not trade while the price is still within the triangle – you need to be patient and wait for the breakout. You can see an example below in the exotic trade between the Australian Dollar and the Mexican Peso. The yellow lines start at the widest point between high and low, and converge together as the price band narrows. After that you can see the bears won this tug-of-war and the price broke out into a downtrend. You will also notice the green vertical lines I’ve drawn in; these are to indicate where to put your Take Profit. A break out from a symmetrical triangle will typically last around the same amount of pips as the widest point of the triangle. Your Stop Loss should be inserted at the tip near the tip of the triangle just above your entry point. In this way, a chart pattern such as this can take a lot of work out of your trading system set up as it shows you where to put your stop loss and take profit.

Another chart pattern we can use is the Flag. Here’s what to look out for to spot this pattern. Look for a strong trend and follow it from when it starts, typically at the start of reversal – however don’t buy/sell at this point but rather wait to see if the market pulls back. As you can see in the picture below, also from the AUD/MXN pair, the price went up, pulled back and then spiked again. Where it spiked again is where we want to enter. If we draw a line along the trend line and then two parallel lines along the range we get a flag shaped pattern. Your entry point is the point where the price breaks through the upper parallel line. As you can see on the right of the flag I’ve drawn in on the chart, the price then continues to rise higher than it was at the start of the flag. By entering at the point after the flag you will be able to ride a much longer rise than you would have earlier. Remember this doesn’t only have to happen on uptrends, this flag can happen on a downtrend too. Just look out for the opposite kind of conditions: a down trending marketing, then a ranging retracement, and then a breakthrough continuing on the downtrend. Bear in mind that this kind of trading requires patience and you’ll need to watch the prices over a longer period of time. With this in mind it is generally not suitable for scalpers. Also, remember you can use other indicators too to help spot a trend or breakout, especially RSI that indicates a pair that is overbought or oversold. If a pair are oversold or overbought, this will often be a prelude to a reversal.

Another chart pattern we can use is the Flag. Here’s what to look out for to spot this pattern. Look for a strong trend and follow it from when it starts, typically at the start of reversal – however don’t buy/sell at this point but rather wait to see if the market pulls back. As you can see in the picture below, also from the AUD/MXN pair, the price went up, pulled back and then spiked again. Where it spiked again is where we want to enter. If we draw a line along the trend line and then two parallel lines along the range we get a flag shaped pattern. Your entry point is the point where the price breaks through the upper parallel line. As you can see on the right of the flag I’ve drawn in on the chart, the price then continues to rise higher than it was at the start of the flag. By entering at the point after the flag you will be able to ride a much longer rise than you would have earlier. Remember this doesn’t only have to happen on uptrends, this flag can happen on a downtrend too. Just look out for the opposite kind of conditions: a down trending marketing, then a ranging retracement, and then a breakthrough continuing on the downtrend. Bear in mind that this kind of trading requires patience and you’ll need to watch the prices over a longer period of time. With this in mind it is generally not suitable for scalpers. Also, remember you can use other indicators too to help spot a trend or breakout, especially RSI that indicates a pair that is overbought or oversold. If a pair are oversold or overbought, this will often be a prelude to a reversal.

Image: By Martin Pettitt from Bury St Edmunds, UK

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