Trendlines are a valuable tool to recognize bullish, bearish or sideways trends. Draw a bullish trendline by connecting significant lows in a market that is making higher highs and higher lows.
- Bullish Trend Chart:
- Bearish Trend Chart:
Likewise, trendlines moving downward should be viewed as resistance until broken. Many traders use trendlines as part of their risk-management strategy, placing sell stops below trendline support and buy stops above trendline resistance.
How far above resistance or below support you place your stops may depend on the market’s volume and volatility. Your RJO Futures broker can help you decide on the appropriate distance to place your stops.
Identifying true trend changes can help improve your entry and exit timing. The most important signals include:
• Close above the resistance trendline or below the support trendline.
• Close below the most recent low or a close above the most recent high.
• Increase in volume as a trendline is broken.
• Moving average changes direction or the lines cross over each other.
The number of contracts changing hands in the market is useful information about the trend. When trendline support or resistance levels hold and are accompanied by high volume, that indicates the trendline is signiﬁcant.
The simple moving average, which averages the closing price over a set number of periods, can signal a change in trend when it turns or crosses over.
The most common set of moving averages include the 9-, 21-, 50-, 200 -day periods. However, you can use moving averages on any chart from short-term intraday charts to longer-term monthly charts. Sometimes, of course, the market fakes you out.
To help determine if the change in trend is real, experienced traders use these common rules of thumb. On long-term trends, they wait for price to move 3% in the new direction. On shorter-term trends, they look for at least a 1% price move or for the breakthrough to hold for two trading days.
Channels are simply a pair of trendlines moving in the same direction that identify both support and resistance. Channels are commonly used nby more aggressive traders who want to capture near-term or countertrend market swings.
However, they also are commonly used as a warning to an approaching trend change because as a trend has run its course, the market struggles to reach the channel lines.
- Channels Chart:
Probabilities are higher that a market trend will continue in the same direction upon completing a continuation pattern, which can look like a flag, pennant, triangle or wedge. Traders often use these patterns to project the distance of the price move that follows the breakout.
Flags and pennants are created as a result of a sharp, high-volume market move and the need for the market to take a breather. Both formations usually last one to three weeks before the longer-term trend resumes, and may be on the shorter end in bear markets. Once the ﬂag and pennant formations have completed, the market typically resumes the original trend with higher volume.The ﬂag is a parallelogram that countertrends the longer-term trend. The pennant resembles a symmetrical triangle, with a much larger rally or sell-off than the flag upon breakout.
- Bullish Flag Chart:
- Bear Flag Chart:
- Pennant Chart:
Traders like to see prices form symmetrical, ascending or descending triangles on the chart because they reveal clues about when and which way the market will make it’s next move. The longer the market trades in the triangle, the greater the odds a breakout is approaching because it should occur before prices reach the triangle’s apex.As prices break out of a triangle pattern, volume typically increases.
- Symmetrical Triangle Chart:
Traders expect the market to break out of the symmetrical triangle in the direction of the longer-term trend. Once price breaks out of the triangle, look for a market movement equal to the distance between the widest points of the triangle.
- ]Ascending triangles:
- Descending Triangle Chart:
Rectangles are similar to the symmetrical triangle except that the upper and lower trendlines are parallel (like a short-term sideways market.) Rectangles are considered a continuation pattern because the market often breaks out in the direction of the longerterm trend.
- Rectangle Chart:
Volume is key to predicting which way the market will likely breakout. If volume is higher on the up-trending swings vs. the down-trending swings, the market will likely break to the upside and vice versa.
- Wedge Chart:
is considered bearish. It is not uncommon for prices to break out of a wedge much closer to the apex than in other triangles. Like other triangles, expect relatively low volume as the pattern forms and an increase upon breakout. Wedges are most commonly seen as a continuation pattern of the longer-term trend. However, they are found occasionally in trend reversal situations.
Everyone who trades wants to know when the market is going to change course. Although there is no crystal ball, some patterns provide hints that a reversal is in the making.
This pattern gets its name from the picture it makes on the chart—that of a head between two shoulders. Technicians measure the distance from the top of the head to the neckline as an indication of the minimum amount the market will move once it breaks out of the formation, often on high volume and with a gap in prices.
- Head-and-Shoulders Top Chart:
- Head-and-Shoulders Bottom Chart:
- Double Top Chart:
- Double Bottom Chart:
- Island Top Chart:
- Island Bottom Chart:
When analyzing the markets it is also important to address how far a market will move in order to identify proﬁt objectives and manage risk. Often the minimum objective of each move is based on its pattern, for example the distance of the channel, the widest point of the triangle or the distance between the head and neckline in the head-and-shoulder formation. In addition, Fibonacci retracements are commonly used to establish target points for reversals or corrections.
They are named for the Italian mathematician who identified the price series in which each number added to the one before it creates a new one related by a ratio of 61.8%, e.g., 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, etc.
Thus, traders commonly look for markets to retrace 38.2% (the inverse of 61.8%), 50%, 61.8% or 100%. Traders look for stronger trends to correct just 38.2% and weaker trends to correct at 61.8%.
- Fibonacci Retacement Chart: