As January comes to a close, the main stock indices plod on, Bitcoin starts to correct, and we start seeing extreme action on some lesser-known counters.
We also conducted a market poll to see what our readers think.
About 2/3 of those polled are bullish on the stock market, expecting the S&P 500 to make new highs.
In a similar vein, about 1/2 of those polled think that Bitcoin will make new highs.
Historically, the crowd is usually wrong, so let’s see how these predictions turn out! ?
Let’s take a look at the general market trends:
The stock indices (NASUSD, SPXUSD, R2000USD) and the Pound (GBP) are all very bullish, whereas the Euro (EUR) and US dollar (USD) are very bearish.
Profit-taking on Bitcoin
In last week’s blog post, I warned people that the parabolic move of Bitcoin to $40,000 was not sustainable, and a correction was due.
Bitcoin has corrected about 30% from its recent highs, and now remains rangebound.
I will monitor for an opportune moment to enter.
GameStop (GME) Saga – What Exactly Happened?
As a business, GameStop, which primarily sells video games and gaming consoles, has been on a slow decline for some time.
That is why many large funds have huge short positions on this stock, giving it one of the highest short interest.
The r/WallStreetBets community on Reddit, which has more than 2 million subscribers, decided to come together to buy up the stock and push up its price.
As the price of the stock increased, this caused more funds to close their short positions (by buying the stock), thus further pushing up prices.
This is called a short squeeze, and it can cause prices to spike up.
Here is the daily chart:
And here is the 15-minute chart:
The GameStop stock jumped more than 60% after hours as Elon Musk tweets out the Reddit board that’s the hyping stock.
All of a sudden, I’m seeing the word Bitcoin everywhere I go.
It is all over the news.
Bloggers are talking about it.
Everyone is calling a buy for it, even those who have no idea what cryptocurrency is.
So the big question is, is Bitcoin still a good buy at its current price?
Here is some background on Bitcoin:
Before answering that, it’s amusing how everyone is getting excited about Bitcoin now, when just a few months ago most people were saying it it’s a scam, or that it is going to crash to zero, that it is worthless, etc.
Seems like it is human nature to jump on the hype train.
On the weekly chart, we haven’t seen any correction in months, which shows that the trend and momentum is strong in the long-term, but it also shows that the trend is not moving at a stable sustainable pace.
A stable trend is marked by ups and downs, not just a parabolic one-way move.
If you think in terms of numbers, the potential percentage upside gain is much less compared to the start of the trend, which is why I prefer to get in early on a new trend rather than chase a late-stage trend.
If I am going to add more positions or enter, I will wait for a larger correction first, such as a pullback to the EMAs on the weekly chart.
https://synapsetrading.com/wp-content/uploads/2021/01/bitcoin-signals-6-150121.png3721149Spencer Lihttps://synapsetrading.com/wp-content/uploads/2019/10/logo.jpgSpencer Li2021-01-16 01:59:292022-03-07 13:09:17Is it Too Late to Buy Bitcoin Now?
I think enough has been said about how life-changing 2020 was, because of how it forced us to take a break from routine, and allowed us to step out of our comfort zones.
Change is a good catalyst for growth, and gives us new perspectives on what is really important in life.
Before diving into 2021, let just do a brief review of 2020.
Review of 2020
Markets were a wild ride, but provided great opportunities to ride strong trends, such as Tesla, Bitcoin, etc. This gave us one of the best years of returns.
https://synapsetrading.com/wp-content/uploads/2021/01/2020-09-21-14.57.51-1.jpg10801440Spencer Lihttps://synapsetrading.com/wp-content/uploads/2019/10/logo.jpgSpencer Li2021-01-11 12:22:062022-12-16 16:32:38What Do You Want to Achieve in 2021?
The triangle price pattern is a type of continuation price pattern, where prices get compressed and converge over time, until price breaks out in either direction.
There are 3 different types of triangle patterns – the symmetrical triangle, the ascending triangle, and the descending triangle, each with different trading strategies.
In this post, I will show you how to take advantage of the triangle pattern to trade breakouts, how to avoid false breakouts, and the best trading strategies for this price pattern.
Table of Contents
What are Triangle Price Patterns?
A triangle pattern, as its name suggests, is a triangular consolidation range in which prices moves about.
The triangle pattern generally represents a medium-term consolidation of prices, and is usually found in the mid/late stages of a trend.
Since it is a medium-term pattern, the triangle pattern usually consists of 50-100 bars, and most of the time results in prices breaking out in either direction as prices get compressed.
As prices get squeezed towards the tip of the triangle, prices will be forced to break out of the pattern, and the direction is takes will depend on the type of triangle.
There are 3 main varieties of triangles – namely the ascending triangle, the descending triangle, and the symmetrical triangle, and we will be going through each one in more detail later on.
Triangle Pattern Psychology
In the triangle pattern, bulls (buyers) & bears (sellers) are fighting and both sides are trying to gain control. Bulls want higher highs and higher lows, while bears want lower highs and lower lows.
As the fight intensifies, uncertainty increases and volume decreases, as the range of prices start narrowing, so both bulls and bears choose to wait on the sidelines until the direction becomes clear before jumping in again.
That is why once a breakout occurs, price and volume tends to spike, as all the buyers or sellers waiting on the sidelines start making their move.
How to Tackle Each Type of Triangle Pattern
As we have seen, all triangles consist of 2 sloping lines which converge, but the main difference lies in the gradient for each pairs of lines.
Symmetrical triangle – both lines are sloping inwards (top line slopes down and bottom line slopes up)
Ascending triangle – top line is flat, while bottom lines slopes up
Descending triangle – bottom line is flat, while top line slopes down
The slope of these lines have a great significance, which I will cover in greater detail by going through each triangle pattern.
a) Symmetrical Triangle Price Pattern
The symmetrical triangle with its converging lines show that both sides (buyers and sellers) are equally matched, which makes it hard to predict which side the breakout is going to happen.
Since it is a continuation pattern, the odds will tend to favour direction of the existing trend, but it is still much harder to trade compared to the next 2 triangle patterns.
b) Ascending Triangle Price Pattern
The ascending triangle, with its bottom line sloping up, shows a bullish bias, as this indicates a series of higher lows.
Recap: A series of higher lows and higher highs is an uptrend.
The flat line on top, which now serves as resistance, becomes a clear level for price to attack and break, and if it succeeds, will lead to higher highs.
Hence, there is a higher probability of an upside breakout for the ascending triangle, especially if it forms in the middle of an existing long-term uptrend.
c) Descending Triangle Price Pattern
The descending triangle, with its top line sloping down, shows a bearish bias, as this indicates a series of lower highs.
Recap: A series of lower highs and lower lows is a downtrend.
The flat line at the bottom, which now serves as support, becomes a clear level for price to attack and break, and if it succeeds, will lead to lower lows.
Hence, there is a higher probability of a downside breakout for the descending triangle, especially if it forms in the middle of an existing long-term downtrend.
Triangle Pattern Trading Strategies
There are 2 main strategies, which focus on the directional triangles (ascending triangle and descending triangle), and the difference lies in how early to enter the breakout when it happens.
Breakout Entry: Enter immediately
Pullback Entry: Wait for a pullback after the breakout
Something to take note of, breakouts usually occur when prices are around 2/3 to 3/4 of the pattern length, and if prices go past the 3/4 mark, there is a possibility that prices may just continue to meander sideways without breaking out. This would mean a failed pattern.
Now, let’s go through each strategy in greater detail.
Trading Strategy #1: Breakout Entry
Our first strategy for the triangle price pattern is to enter on the breakout of an ascending triangle or descending triangle pattern.
As mentioned previously, a triangle is a compression of prices while buyers and sellers wait on the sidelines for a breakout. For this setup, we will be looking to enter just as the breakout happens.
In the example above, we see a prior uptrend, so we know the odds for an upside breakout are higher.
As the ascending triangle forms, we see a series of higher lows (and similar highs) forming, showing a gradual build-up of bullish pressure. We also see prices pushing against the resistance level formed by the similar highs.
Finally, the resistance gives way, and prices through.
For trading, we would look to enter near the point of breakout, keeping an eye for strong price action and volume to support the breakout. We can also use the breakout bar(s) to place a stoploss.
Note that this strategy works just as well with a descending triangle, you’ll just have to flip the pattern around for a downside breakout.
This strategy works best if the prior trend (before forming the triangle pattern) is strong, and has a higher chance of success if the triangle is smaller, in terms of height and duration.
Trading Strategy #2: Pullback Entry
Our next strategy for the triangle price pattern is to enter on a pullback after the initial breakout.
As covered in the previous setup, one of the ways to trade an ascending triangle or descending triangle is to enter the moment price breaks out of pattern.
However, sometimes the odds of a successful breakout might be lower, for example if the triangle pattern is large (more uncertainty), or the pattern goes against the prior trend (bullish ascending triangle in a downtrend, or bearish descending triangle in an uptrend).
In the example above, we see a prior uptrend, followed by a bearish descending triangle. This sets up up a little contradiction, which suggests that the breakout might not be as strong or as clear-cut.
Therefore, when the breakout happens, instead of entering the trade immediately, we wait to see if there is a pullback to test the support-turned-resistance level (which was the flat line of the descending triangle).
For trading, we would look to enter once the pullback is completed, and prices start to head back down. The end of the pullback would also be a good place to put your stoploss.
Note that this strategy works just as well with an ascending triangle, you’ll just have to flip the pattern around for an upside breakout.
Which Triangle Pattern to Avoid?
You might have noticed that I left out the symmetrical triangle in both the strategies mentioned earlier.
The reason is that I find the symmetrical triangle the least reliable pattern of the 3 triangle patterns.
This is because it is hard to confirm a successful breakout of this pattern, and even harder to determine a good entry point.
In the example above, prices have broken out to the upside of the symmetrical triangle pattern.
However, because of the nature of the pattern, there will still be another high (or low, if it broke to the downside) which prices have to surpass, and it becomes a resistance level.
As a result, even after the breakout, we are not sure if prices have starting trending, or whether prices are still within a wider range.
We can only be sure after prices have broken the new resistance level and continues climbing, in which case the original symmetrical triangle breakout did not really have much significance or trading opportunity.
Hence, I would prefer to focus on those patterns which have a more predictable outcome.
Profit Target for the Triangle Pattern
Once a triangle pattern is completed, one of the most useful things about it is its ability to provide a price projection, which can be used to estimate a minimum profit target for your trade.
This can be done by taking the maximum height of the triangle, and projecting that distance from the breakout point.
In the chart above, the maximum height of the triangle is indicated by the blue rectangular box, which is then used as a price projection at the breakout point.
The black horizontal arrow indicates the price level which serves as the minimum profit target for the triangle pattern breakout.
This price projection technique can be used in conjunction with other methods, such as support and resistance levels, and if there is any confluence, gives an added layer of confirmation.
Tips from the Trading Desk
Trade with the larger trend, as breakouts are more likely to happen in the same direction as the prior trend
Watch out for triangles that are themselves a part of a larger price pattern
Look out for major support and resistance levels
As you can see from the chart above, this is an example of trend trading using the triangle pattern, because the triangle formed is actually a consolidation pattern within the major trend, so this whole triangle is actually a pullback opportunity to enter the underlying trend.
Although we generally do not like trading symmetrical triangles, the odds in this case are better than 50-50 because there us a higher chance of an upside breakout due to the context (triangle pattern pullback in major uptrend).
Besides strong trends, triangle patterns can also form near the edges of support or resistance levels, when prices are trying to push through that price level, so you might see them near the necklines of other patterns, such as the double top/bottom, or head and shoulders pattern.
In a sense, the triangle pattern becomes part of these larger patterns depending on the context.
Now that I have shared all about the triangle pattern, what is your favourite triangle pattern strategy for trading?
The head and shoulders and inverse head and shoulders are a type of common reversal pattern found at the end of major trends.
The bearish version is called the head and shoulders pattern, while the bullish version is called the inverse head and shoulders pattern.
In this post, I will show you how to take advantage of the head and shoulders pattern to identify major market reversals, and the best trading strategies for this price pattern.
Table of Contents
What is a Head and Shoulders Pattern?
The head and shoulders and inverse head and shoulders are another type of common reversal patterns found at the end of major trends.
When prices are unable to surpass the prior swing high (the head) and forms a lower high (the shoulder) instead, this forms the bearish head and shoulders reversal pattern.
When prices are unable to surpass the prior swing low (the head) and forms a higher low (the shoulder) instead, this forms the bullish inverse head and shoulders reversal pattern.
Head and Shoulders Pattern Psychology
Here is a quick recap of the 2 types of patterns:
Head and shoulders pattern – bearish reversal
Inverse head and shoulders pattern – bullish reversal
Head and Shoulders Pattern Psychology (Bearish Reversal)
In the head and shoulders pattern, bulls (buyers) are originally in control of the market, and the market is in an uptrend.
At some point in time, bears (sellers) try to take control, pushing down prices, which creates the “left shoulder” of the pattern.
Bulls resume control and push prices to new highs, which forms the “head” of the pattern.
Bears try to fight for control again, pushing prices back down to the level of its first push.
Bulls try one last time to resume control by pushing prices up, but it is unable to make new highs. This forms the “right shoulder” of the pattern.
Finally, bears take full control and push prices further down.
Bears are now in control of the market, and the market is in a downtrend.
Inverse Head and Shoulders Pattern Psychology (Bullish Reversal)
In the inverse head and shoulders pattern, bears (sellers) are originally in control of the market, and the market is in a downtrend.
At some point in time, bulls (buyers) try to take control, pushing up prices, which creates the “left shoulder” of the pattern.
Bears resume control and push prices to new lows, which forms the “head” of the pattern.
Bulls try to fight for control again, pushing prices back up to the level of its first push.
Bears try one last time to resume control by pushing prices down, but it is unable to make new lows. This forms the “right shoulder” of the pattern.
Finally, bulls take full control and push prices further up.
Bulls are now in control of the market, and the market is in an uptrend.
Head and Shoulders Pattern Trading Strategies
There are 3 main strategies, which focus on the taking advantage of the change in trend, and the difference lies in how early to enter the reversal when it happens.
Early Entry: Enter immediately
Pre-Breakout Entry: Enter immediately
Pullback Entry: Wait for a pullback after the breakout
Since the head and shoulders is a reversal pattern, we can expect to see its swing counts change as the pattern unfolds.
For the bearish reversal of the head and shoulders pattern, we see the swing counts change from a series of higher highs and higher lows, to one of lower highs and lower lows.
For the bullish reversal of the inverse head and shoulders pattern, we see the swing counts change from a series of lower highs and lower lows, to one of higher highs and higher lows.
For all 3 strategies, they involve entering a position at various stages during this transition of swing counts.
Now, let’s go through each strategy in greater detail.
Trading Strategy #1: Early Entry
Our first strategy for the head and shoulders price pattern is to enter early as the 2nd shoulder (right shoulder) is forming, by using the 1st shoulder (left shoulder) as a guide.
As mentioned previously, the head and shoulders pattern is a reversal pattern, and we can expect to see swing counts change as the pattern unfolds.
The early entry takes advantage of this by shorting on the first LH (bearish H&S reversal), or going long on the first HL (bullish inverse H&S reversal). You can scroll up to the previous infographic (entries in head & shoulders pattern) to observe where the colour changes.
In the examples above, we see a prior trend, followed by the head and shoulders pattern which attempts to change the direction of the trend.
The first sign of the change of trend comes from the 2nd shoulder (right shoulder), because it is not able to reach the same level or exceed the head, which shows that the existing trend is weakening.
Most of the time, the 2nd shoulder (right shoulder) will form at roughly the same level as the 1st shoulder (left shoulder). This means that we can pre-empt the potential turning point of prices, and use that for our early entry.
For trading, we would look to enter near the point of the 2nd shoulder, keeping an eye for reversal candlestick bars/price action and volume which signals that momentum is weakening and it cannot go past the shoulder level.
We can then look to place our stoploss (SL) somewhere between the shoulder and the head levels.
This strategy works best if the price movement to resume the current trend is weak, and looks to be struggling just to touch the shoulder level, which suggests that it will most likely not be able to go past.
Trading Strategy #2: Breakout Entry
Our second strategy for the head and shoulders price pattern is to enter on the breakout/breakdown of the neckline.
As mentioned previously, the head and shoulders pattern is a reversal pattern, and we can expect to see swing counts change as the pattern unfolds, meaning a LH & LL if we want to short, and a HL & HH if we want to go long.
In the previous strategy (early entry), the entry was given on the first LH (shorting a bearish H&S reversal), or the first HL (going long on a bullish inverse H&S reversal).
In this strategy (breakout entry), the entry is given on the LL (shorting a bearish H&S reversal), or the HH (going long on a bullish inverse H&S reversal). Breaking the neckline automatically gives rise to a LL and HH respectively.
In the examples above, we can see the neckline (blue horizontal line) which denotes this crucial price level. Sometimes, if there is no clear neckline, this might result in a zone, or multiple necklines.
For trading, we would look to enter just as the breakout occurs at the neckline, keeping an eye for strong price action and volume which signals conviction in the breakout.
We can then look to place our stoploss (SL) somewhere between the neckline and the 2nd shoulder (right shoulder).
This strategy works best if there is a clear neckline which price is trying to break, followed by strong price momentum on the breakout.
If the price action is choppy/volatile, or if the neckline is not clear, then it would be better to wait for a pullback and use Strategy #3 (pullback entry) instead.
Trading Strategy #3: Pullback Entry
Our third strategy for the head and shoulders price pattern is to wait for the break of the neckline to occur (Strategy #2), then enter on the 1st pullback after that happens.
As mentioned previously, the head and shoulders pattern is a reversal pattern, and we can expect to see swing counts change as the pattern unfolds.
In the previous strategies, we shorted on a LH (Strategy #1) and LL (Strategy #2); or went long on a HL (Strategy #1) and HH (Strategy #2).
In Strategy #3, we will be shorting on the next LH (LH > LL > LH), or going long on the next HL (HL > HH > HL).
Therefore, since the new trend is slightly more established, the chance of success is higher, but the reward-to-risk ratio (RRR) will not be as good as the prior strategies. As we mentioned many times before, every trade is a trade-off between the hit rate and the RRR.
In the examples above, we can see where the 1st pullback occurs (yellow highlight), depending on which neckline you treat as the breakout.
Most of the time, the pullback will retrace to touch the neckline, but if the breakout momentum is strong, the pullback may not come all the way back to the neckline.
For trading, we would look to enter near the point of the pullback (usually near the neckline), keeping an eye for reversal candlestick bars/price action and volume which signals that momentum is weakening and it cannot go past the neckline.
We can then look to place our stoploss (SL) somewhere between the neckline and the 2nd shoulder (right shoulder).
If you have already entered a position during the breakout, this strategy can be an opportunity for you to add on more positions.
Profit Target for the Head and Shoulders Pattern
Once a head and shoulders pattern is completed, one of the most useful things about it is its ability to provide a price projection, which can be used to estimate a minimum profit target for your trade.
This can be done by taking the maximum height of the pattern (distance from the head to the neckline), and projecting that distance from the breakout point.
If the neckline is not clear or there are multiple necklines, it is advisable to go with the most conservative option, and use a smaller projection.
In the chart above, the maximum height of the head and shoulders pattern is indicated by the blue rectangular box, which is then used as a price projection at the breakout point.
The horizontal arrow indicates the price level which serves as the minimum profit target for the head and shoulders pattern breakout.
This price projection technique can be used in conjunction with other methods, such as support and resistance levels, and if there is any confluence, gives an added layer of confirmation.
Tips from the Trading Desk
Make sure the trend is in the late stage – the longer the trend has been running, the more exhausted it is likely to be.
Use the completed pattern for price projection – shoulders tend to be roughly the same height.
The size of the pattern should be proportional to the trend it is trying to reverse.
As you can see from the chart above, this is an example of a strong trending market (3 green rectangle boxes), which ended in a head and shoulders bearish reversal (1 red rectangular box).
This means that for the whole move up, if we only measure the vertical distance (height), the trend accounts for 75%, and the reversal pattern accounts for 25%. This is within the healthy range, meaning the pattern size is proportional to the whole trend.
Typically, a reversal pattern works best when its height is about 25% to 33% (1/4 to 1/3) of the whole move.
If the pattern size is less than 25%, the pattern is too small to reverse the trend, which means that it might likely lead to a consolidation before the trend resumes, or the reversal pattern is still in the midst of forming, and might evolve to something bigger.
If the pattern is large than 33%, the pattern is too large to be classified as a head and shoulders pattern, and it could just be large swings within a wide range.
I have not come across any authors talk about price pattern proportionality in any books, but I see a lot of new traders making this mistake when trying to identify price patterns. And this applies to other price patterns as well.
Now that I have shared the various trading strategies for the head and shoulders price pattern, which is your favourite strategy?
