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What is the Three Falling Peaks (Bearish) Pattern?
The Three Falling Peaks pattern forms when three minor Highs (1, 3, 5) arrange along a downward-sloping trend line. This pattern often emerges at the end of a rising trend, when a security slowly rolls over. It potentially indicates sellers moving in to replace buyers, which pushes the price lower. If the price breaks out from the bottom pattern boundary, day traders and swing traders should trade with the DOWN trend. Consider selling the security short or buying a put option at the downward breakout price level. To identify an exit, compute the target price by subtracting the pattern’s height (maximum price minus minimum price within the pattern) from the breakout level the lowest low. When trading, wait for the confirmation move, which is when the price moves below the breakout level. Continue reading...
What is the Three Falling Peaks (Bearish) Pattern?
The Three Falling Peaks pattern forms when three minor Highs (1, 3, 5) arrange along a downward-sloping trend line. This pattern often emerges at the end of a rising trend, when a pair slowly rolls over. It potentially indicates sellers moving in to replace buyers, which pushes the price lower. If the price breaks out from the bottom pattern boundary, day traders and swing traders should trade with the DOWN trend. Consider selling the pair short or buying a put option at the downward breakout price level. To identify an exit, compute the target price by subtracting the pattern’s height (maximum price minus minimum price within the pattern) from the breakout level the lowest low. When trading, wait for the confirmation move, which is when the price moves below the breakout level. Continue reading...
What is a stock downtrend?
A downtrend occurs when the successive peaks of a security's price trend downward without recovering from the troughs, with successively lower market peaks each time. Downtrends may happen in a span of minutes or months, depending on the security being discussed. In a downtrend, it may not be advisable to purchase (or “go long” on) a security, since the duration of the trend is unknown. Many traders, however, see it as an opportunity for short selling. Continue reading...
What are Fibonacci Fans?
Fibonacci Fans are a charting technique that combines traditional Fibonacci lines and Fibonacci channels. They use the Fibonacci levels in a radial way, drawing trendlines from a point of primary importance, such as a low or peak, to identify future points of retracement or extension. Some investors believe that, like many naturally occurring systems in nature, market behavior will exhibit some fractal-like forms that can be measured with Fibonacci sequence numbers and the Golden Ratio. Modern computing power has uncovered plentiful examples of the Golden Ratio in nature, from Nautilus shells to musical harmonics, as well as mathematical fractal patterns. Fibonacci numbers are related to the study of chaos theory, which seeks to find order in complex systems. Since the markets have so many variables, but no lack of data, they are an excellent place to search for Fibonacci patterns. Continue reading...
Three Falling Peaks Pattern: Bearish Market Analysis
Delve into the world of stock trading with our in-depth analysis of the Three Falling Peaks (Bearish) Pattern. Uncover how this distinctive pattern forms, signals potential market reversals, and guides effective trading strategies. Gain insights into the psychological underpinnings of pattern trading, from cognitive recognition to managing emotional responses, and master the art of balancing risk and reward. Continue reading...
What is an Uptrend?
An uptrend is a continuous upward movement in a stock's price. An uptrend is an upward movement over a few increments of time (whatever time increment being used), where the successive numbers being compared continue to increase. The parameters being compared might be just peaks, just troughs, closing prices, or averages, but formally it is defined as increased in successive peaks and troughs both. Continue reading...
What are Fibonacci Channels?
Price movement often occurs in a range-bound way, even when an uptrend or downtrend is in effect. Fibonacci channels estimate support and resistance numbers using Fibonacci numbers, which are found throughout the natural world, in order to define possible places where reversals will occur. Fibonacci numbers are related to the study of chaos theory, which seeks to find order in complex systems. Since the markets have so many variables, but no lack of data, they are an excellent place to search for Fibonacci patterns. Continue reading...
Top Stock Chart Patterns
Chart patterns are shapes that sometimes appear in the charts of securities prices. Some of them may prove useful to you. Some frequently discussed chart patterns include Head and Shoulders, Double/Triple Bottom/Top, Cups and Saucers, Flags and Pennants, and others. Generally, it can be useful to compare and connect the troughs to each other and the peaks to each other to see if there is a trend confirmation if the breadth is narrowing, or if a reversal might be imminent. Continue reading...
Is there any merit to the “dow theory?”
The Dow Theory may not always be accurate, but it has been part of the foundation of modern market analysis. The Dow Theory was formulated by the famous economist Charles Dow. What is important is that the Dow Theory concerns itself with the movements of very broad markets, rather than individual stocks. In particular, the Dow Theory, which was named post-mortem and summarized the editorials Dow wrote during his life, focuses on the movement of the Industrials (DJIA) relative to the Transportation index (DJTA) and theorizes that if one moves the other should follow, and if there is discord a reversal is probably coming. Continue reading...
What is the Three Rising Valleys (Bullish) Pattern?
The Three Rising Valleys pattern forms when three minor Lows (1, 3, 5) arranged along an upward sloping trend line. It often appears at the end of a declining trend – an indication that buyers are overtaking sellers, which ultimately pushes the price higher. This type of formation happens when investors shift into buying mode following a consolidation period. Once the price breaks out from the top pattern boundary, day traders and swing traders should trade with an UP trend. Consider buying a security or a call option at the breakout price level. To identify an exit, compute the target price level by adding the pattern’s height (highest price minus the lowest price within the pattern) to the breakout level (the highest high). When trading, wait for the confirmation move, which is when the price rises above the breakout level. Continue reading...
What does “Buying on Weakness” Mean?
Instead of waiting for confirmation of reversal, “buying on weakness” means to go ahead and buy a long position (or cover a short position) while a stock is in the middle of a downtrend, in the hopes that it will reverse soon and the preemptive move will allow you to capture the entire upside. Upswings can happen very quickly, and failure to prepare for them can cost investors a lot of money. Buying on weakness is intended to put the investor in a position for maximum gains, as well as preventing losses on a short position. This is one part of the “buy on weakness / sell on strength” mantra, which is essentially the same thing as “buy low / sell high”. Continue reading...
What is the Falling Flag (Bearish) Pattern?
The Falling Flag (or Bearish Flag) pattern looks like a flag with the mast turned upside down (the mast points up). The pattern forms when falling prices experience a consolidation period, and the price moves within a narrow range defined by the parallel lines through points 2-4 and 3-5. After the consolidation, the previous trend resumes. This type of formation happens when anticipation of a downtrend is high, and when a security’s price consolidates during a broader decline. It may indicate growing investor concern of an impending downtrend. Continue reading...
What is the Falling Pennant (Bearish) Pattern?
The Falling Pennant (or Bearish Pennant) pattern looks like a pennant turned upside down (the mast points up). It forms when falling prices experience a consolidation period, and the price moves within a narrow range defined by the converging lines through points (2, 4) and (3, 5). After the consolidation, the previous trend resumes. This type of formation happens when anticipation of downtrend is high, and when the price of a security consolidates during a declining trend. It may indicate growing investor concern of an impending downtrend. Continue reading...
What is the Falling Wedge (Bearish) Pattern?
The Falling Wedge pattern forms when prices appear to spiral downward, with lower lows (1, 3, 5) and lower highs (2, 4) creating two down-sloping trend lines that intersect to form a triangle. Unlike Descending Triangle patterns, however, both lines need to have a distinct downward slope, with the top line having a steeper decline. This pattern is commonly associated with directionless markets since the contraction (narrowing) of the market range signals that neither bulls nor bears are in control. However, there is a distinct possibility that market participants will either pour in or sell out, and the price can move up or down with big volumes (leading up to the breakout). Continue reading...
What is the Falling Wedge (Bullish) Pattern?
The Falling Wedge pattern forms when the price of a security appears to be spiraling downward, and two down-sloping lines are created with the price hitting lower lows (1, 3, 5) and lower highs (2, 4). The two pattern lines intersect to form a narrow triangle. Unlike Descending Triangle patterns, however, both lines need to have a distinct downward slope, with the top line having a steeper decline. Continue reading...
What is divergence analysis?
The analysis of convergence and divergence between indexes and other data seeks to find leading indicators where there is confirmation or non-confirmation of trends. Dow Theory was one of the first examples of such thinking. Charles Dow would watch the movements of Industrials and the Rail and compare the uptrend or downtrend of each. Where trends do not line up (e.g., one is trending downward with lower troughs and the other has “higher lows”) there is “divergence”, and non-confirmation of what was thought to be a trend in one index. Continue reading...
What is a call option?
A call option is a type of contract that allows the holder of the contract to purchase an underlying stock at a specific price, even if the market price goes higher. A call option contract gives the owner of the contract the right to purchase a particular asset, which is typically a stock, at a strike price designated in the contract during a certain period of time. For example, if the stock of company ABC is trading at $100/share, you might purchase the right to buy it at $90/share for a $12/share premium. Continue reading...
How are option prices computed?
Option prices are decided by the buyers and sellers in the marketplace, but are tied closely to the amount of risk inherent in the agreed upon expiration date and strike price. Option prices change as the market factors in the relevant information. The main factor is the strike price. The closer an option’s strike price is to the actual market price of a security, the higher it’s price will be. Once it’s in-the-money, it has inherent value that makes it essentially the same price as the market security that underlies it. The expiration date of the contract is also a factor because if the expiration date is closing in, and the strike price is not quite close enough to the market price of the underlying asset, there is little chance that the option will be useful. Continue reading...
What is a ratio call spread?
Ratio call spreads are options strategies where the investor combines purchased calls and short calls at the same expiration but with different strike prices. A Ratio Call Spread starts off as a delta-neutral strategy, which means that even if you have two long calls and one short call, the sensitivity of your overall position to move in the underlying is equal whether it moves up or down by small amounts. Continue reading...
What is a bear call spread?
A bear call spread seeks to make money on the sale of call options but does not believe the underlying security will increase. A Bear Call Spread strategy is utilized when one believes that the price of the underlying stock will go down (but not significantly) in the near future. It entails selling a call short at a lower price than you buy a long call, which is done to realize a net credit at the outset. Continue reading...