Debate has raged for years as to whether or not technical analysis is actually a useful tool in helping to generate long run profits in the markets.
For some, technical analysis is no more than hocus pocus. An approach that is based on faith rather than legitimate science. For others, technical analysis is the foundation of profitable trading and those that dismiss technical analysis are usually not ‘real’ traders. Read more »
With the fear and uncertainty of a possible Brexit, GBP/USD has been one of the worst performing currency pairs this year, falling as low as 1.38 in late February.
However, recent weeks has seen the currency stage a comeback, taking the market back to the important 1.4600 level as traders bet the pessimism was overdone. Read more »
Technical analysis refers to the study of past price action to predict future market moves. It makes use of charts, trading volume, and other statistical or mathematical indicators to gauge how the market might behave, based on the concept that the fundamentals of an asset are reflected in its historical price action. Read more »
Last Friday the S&P 500 formed a shooting star candlestick pattern on the daily chart. This is a Japanese candlestick formation that is normally a bearish reversal signal. Sure enough, the S&P 500 moved lower the next day, dropping around 15 points. We saw this happen last September too. But how often does this bearish pattern really play out? Read more »
In this article I explain the RSI technical analysis indicator. I then test the indicator on historical stock market data in order to analyse its effectiveness.
Read more »
Technical traders have hundreds of different indicators and setups at their disposal. Triangle patterns are just one form of technical analysis that traders rely on but they are probably more accurate than most other indicators.
On the whole, there is much debate around technical analysis. There are many in the academic world who claim technical analysis to be nonsense and trading on the basis of MACDs and resistance lines is a road to nowhere.
On the other hand, there are many profitable traders who swear by technical analysis and there are also many trading systems that are completely technical based. I have also read a number of academic papers that suggest technical analysis does work, particularly in the forex market.
My own opinion is that technical analysis is a tool to be used in conjunction with fundamental analysis. Some traders may be able to profit from technical indicators alone, however, I find fundamentals should also be considered first. In this way, fundamentals provide the main trading idea and technicals provide the timing.
In addition, I believe you need to have a solid understanding of trading psychology in order to utilise technical analysis to it’s full potential. In other words, you need to have enough confidence in your ability to follow your technical signals and hold them into profit.
Here are some of the best triangle patterns used by technical analysis traders:
Best triangle patterns for technical analysis
The ascending triangle pattern typically occurs in bull markets that have stalled and pulled back. As a security moves higher it forms an uptrend with higher lows. (At this point the security is still far away from it’s recent high and is likely also showing a multiple top.)
An upward trend line forms connecting the higher lows and this converges on a horizontal upper resistance, forming a triangle pattern.
The key point about all triangle patterns is that as they converge on the price, they form an apex and the price has nowhere to go. It can either break out to the upside and likely enter a strong upward trend. Or, it can break down through the upward trend line in a strong bearish move.
The ascending triangle pattern can be seen clearly in the chart for $KIE. As the triangle pattern converges, the price finally breaks out to the upside and enters a strong up trend.
Unsurprisingly, descending triangles are the exact opposite to ascending ones.
In $RPRX, the descending triangle pattern converges on the support line that has formed as a result of a number of multiple bottoms. As the price nears the apex, it moves higher than the descending down trend line and breaks out to the upside.
This pattern is usually a good indication that a security is bottoming. A similar pattern is occurring in gold right now (June 2014).
The wedge up is similar to the ascending triangle but instead of a having a horizontal resistance line, the resistance line moves up with the trend. The wedge up therefore always occurs in an up trend and can be used in two ways.
Firstly the wedge up is used as a channel. When the price move to the bottom of the channel it’s a good time to buy and when it moves to the top it’s time to sell.
Secondly, when the price breaks out of a channel it’s a sign that the pattern has changed and time to trade in the new direction.
The wedge down works exactly like the wedge up but in reverse. When the price moves to the top of the channel it’s a time to sell and when it moves to the bottom it’s time to buy. Additionally, if you’re holding a short in the down trend, a break out past the upward trend line signals time to close out the short.
Normal wedges occur during choppy price action where an upward and downward sloping trend line both converge to an apex point. This usually happens when a market is consolidating and is recovering from a volatile phase. Eventually, the two trend lines converge and the market has nowhere to go. It will usually break out to the upside or break down into a new down trend. They can also be used to trade the channel, selling at the top and buying at the bottom.
Want a quick way to find technical triangle patterns?
Simply head over to the Finviz home page and you can screen stocks for a number of different patterns: