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  1. #11
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    While triangle is considered as a continuation pattern, it is highly recommended
    one should not jump the gun and wait for the breakout to take place before
    entering the market because occasionally the triangle may initially appear as a
    continuation pattern but ended up being a reversal pattern just like the chart
    shown below.




    Other continuation patterns include flags, pennants and rectangles, which can be
    commonly found along a trending move. Flags and pennants are basically
    considered short-term pattern, as a brief pause or small consolidation before the
    previous trend resumes. These patterns are mostly preceded by a sharp rise or
    decline and usually happen at the middle of the trend.

    No matter how these patterns resemble, they all share a common characteristic,
    a near term counter trendline (slope against the trend) appears in the pattern
    which serves as the signal line or trigger line. The break of the signal line
    confirms the end of the continuation pattern and price should resume.

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  2. #12
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    Reversal patterns

    A reversal pattern is a chart formation that indicates a market top or a market
    bottom, the pattern usually goes through a sideways period and upon breakout
    of the pattern there will be a change in direction or a turnaround in the current
    trend.

    Among all the reversal patterns, the Head and Shoulders / Inverse Head and
    Shoulders is probably the best known and most reliable one. The following
    diagram shows how the Head and Shoulders top pattern is formed (same
    principle applies to the Inverse Head and Shoulders pattern).




    As you can see three consecutive peaks are formed and are named according to
    the appearance (resemble a head and two shoulders). This reversal pattern must
    go through several steps before completion, they are:

    A break of a major trendline.

    Price held above a previous support and rebounded, formed the neckline as a
    signal line.

    Another reaction high was formed but price stayed below previous high (peak).
    Break of the neckline confirms the top formation.
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  3. #13
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    Occasionally price test back the neckline (now should act as resistance line),
    known as return move and this line should hold, bring the subsequent selloff.

    Volume should play an important role in confirming the pattern, highest level of
    volume shall appear at the left shoulder, then volume dropped at the peak (Head)
    and the right shoulder have lowest volume. However, volume would pick up on
    the final decline after the break of the neckline.

    However, as it is quite difficult to justify the volume level in forex market, one
    can use technical indicators or oscillators to help confirming the pattern. In most
    cases, the top should be accompanied by bearish divergences, as illustrate at the
    following chart:



    It is important to remember that it occurs after a trending move and usually
    indicates a major trend reversal upon completion. In a more deal situation, the
    left and right shoulders should be symmetrical but it is not a necessary condition.
    The identification of neckline support is essential and it is preferably to be a
    more horizontal than a steeper slope line.

    Other common reversal patterns include Double Top / Bottom, Round Top /
    Bottom, Spike Top / Bottom, Falling Wedge and Rising Wedge, most of them
    have a common characteristic is that, there should be a signal line (similar to the
    neckline in Head and Shoulders) for confirmation of the top or bottom formation
    and upon the penetration of this line, which signals the start of a new trend
    pointing to the opposite direction.
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  4. #14
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    1.2d) Measuring Techniques

    A very important and useful feature in chart patterns analysis is the measuring
    techniques, which could provide price objectives or targets after the break-out of
    the signal line.

    The measuring technique in a Triangle pattern is that to measure the height of
    the triangle at the widest point (far left) of the pattern and project that vertical
    distance from the break-out point.



    To measure the price objective of a Head and Shoulders Top/Bottom formation,
    one should measure the vertical distance from the top/bottom to the neckline
    and then project the length downward (top) or upward (bottom) from the breakout
    point. As this should mark the major change in market direction, so this
    equality or 100% projection of the height from the top to the neckline should be
    considered as the minimum upside or downside target.




    Measuring technique on Double or Triple Top/Bottom is similar to Head and
    Shoulders, also measuring the vertical distance from the top to the neckline, then
    project the height from the point where the neckline is broken.
    Having said that, any of these price projection targets, for both continuation and
    reversal patterns, should serve as a general guide and one should take into
    consideration of other factors, such as previous chart support and resistance,
    plus the indicators’ readings (whether the market is an overbought / oversold
    condition or is there any divergences in price and oscillators).
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  5. #15
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    CHAPTER 2

    Fibonacci retracements & projections

    2.1 Retracement

    Even in a trending market, either up or down, price does not move in a straight
    line, there will be numbers of short-term countertrend price movement known
    as pullbacks and corrections in different magnitude before the prevailing trend
    resumes.

    Experienced traders know that in order to enhance profitability and make a
    trade less risky, the best way is to enter a position at the end of the correction.

    Therefore, technique in predicting the retracement level becomes extremely
    useful in formulating a trading strategy and technical analysts consider the
    Fibonacci percentages are very effective ways to locate the possible retracement
    level especially when the actual chart support and resistance levels are too far
    away.

    Leonardo Fibonacci was an Italian mathematician who first observed certain
    ratios of a number series which can describe the natural proportions of things in
    the universe. The Fibonacci numbers are the following sequence of numbers: 0, 1,
    1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987 ……

    The first two Fibonacci numbers are 0 and 1, then the Fibonacci sequence is
    formed by getting the sum of the two previous numbers to obtain the next
    number.

    The number sequence generates some mathematical relationship and the most
    well known and widely used is the ratio of any number to its next higher number
    which approaches a constant value of 0.618 (e.g. 13/21 is 0.619, 55/89 is 0.6179,
    377/610 is 0.61803 and the higher pair of number you get, you will have a result
    closer to 0.618). Another percentage is the ratios of alternate numbers which
    approaches a constant value of 0.382 (e.g. 13/34 is 0.3823, 55/144 is 0.3819,
    377/987 is 0.382, again the higher pair of number you use, you will get a result
    closer to 0.382). In addition, 0.382 is also the inverse of 0.618 (1-0.618=0.382).
    Finally is the ratio of 0.5, which only occurs between the relation of the 2
    numbers 1 and 2, nevertheless, this ratio is also considered as one of the very
    important Fibonacci ratio especially in technical analysis.

    These Fibonacci percentages / ratios, 0.382, 0.5 and 0.618 can be very useful
    especially for swing traders in order to identify the pivot points on the chart. In
    an uptrend, whenever a pullback takes place, which should be treated as golden
    opportunity to enter long position and these percentages can be applied to
    predict the retracement level (i.e. where you can set your entry point) or identify
    Fibonacci support level which should contain the correction (i.e. where you can
    put your stop-loss). The following diagram explains the retracement patterns of
    3 major Fibonacci percentages and same principle also applies to downtrend.



    In a rising market, after meeting certain resistance level, point (A), when
    correction unfolds, it is quite common for price to find support at these three
    Fibonacci retracement levels. In a fast market, pullback tends to be shallow and
    normally only reaches 38.2% of the nearest upmove before turning north again.
    Some people consider this as the first line of defense, once this level is
    penetrated, this implies a deeper correction of the underlying trend has
    commenced.

    Another well known percentage is the 50 percent retracement, no matter is a
    primary, secondary or intermediate trend, correction against a major uptrend
    often retraces approximately 50% of the prior uptrend as it is quite common for
    half of the participants to take profit after certain temporary top is formed.

    Last but surely not least, is the famous 61.8% Fibonacci percentage, in a weak
    trend, it is not uncommon to see this percentage of correction, this point is also
    considered as the maximum retracement level which is allowed if the prior trend
    is going to resume. Once this level is broken, a break of 61.8% retracement, it
    usually warns of a reversal rather than a retracement is taking place.

    Whilst there are no fixed rules in applying Fibonacci retracement, we do have
    some useful guidelines which should help enhancing the accuracy in predicting
    the pullback or correction levels.
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  6. #16
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    Guideline 1: To identify the High and Low first

    Before you could start calculating Fibonacci retracements, you must first identify
    the market high and low prices. Generally many people consider using the longer
    term historical high and low may help identifying significant support and
    resistance levels. However, for short term trading, using the major high and low
    might not have too much help as even you take the smallest percentage (e.g.
    23.6% or 38.2%) could still be too far to reach, so it is not practical to use it as an
    entry point.

    In an uptrend, when ever pullback takes place, there is only one temporary top
    (high) but there are numbers of reaction low, therefore, picking the appropriate
    intermediate low would greatly improve the chance to predict the pivot point. It
    is more like an art than science in choosing this so-called appropriate
    intermediate low, we believe the Elliott Wave Theory can do the job pretty well
    (we will discuss this in details in our next E-book).

    Guideline 2: Plotting the Fibonacci retracement levels

    After selecting the relative high and low points, this is the time to draw the
    Fibonacci percentage retracement levels on the chart. In a rising market, the
    measurement should be started from the low point (i.e. 0%) to the high point (i.e.
    100%), then draw 38.2%, 50% and 61.8% and 38.2% retracement should be the
    first line of correction target, and vice versa for a falling market.



    The above chart is the correct way of drawing Fibonacci retracement levels (from
    point A to point B) on the chart, however, we have come across some people who
    draw these retracement lines as the follow chart which we do not recommend.

  7. #17
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    This is not the proper way as it will make the chart messy, therefore, try to keep
    those lines in untouched area, usually in the far right of the chart.

    Guideline 3: Take reference of Historical Behavior

    In addition to normal Fibonacci percentage expectation, e.g. 38.2% for fast
    market, one should also observe what had happened before and take it into
    consideration. If all along the uptrend, most previous pullback took place
    reached 50% before finding renewed buying interest, then one shall reasonably
    adjust the pivot point prediction accordingly.

    Guideline 4: Always have a Plan B

    Once a temporary top is formed, we normally expect 38.2% retracement before
    upmove resumes, however, one should also set a percentage (e.g. 50%) which
    would abort this scenario and suggest either a deeper correction is going to take
    place or a reversal is in progress, then at which point would signal price is
    heading another direction.

  8. #18
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    2.2 Projection

    Once the retracement is over and price is starting to resume previous direction,
    this is the time to apply projection technique in order to predict the next upside
    or downside target. Fibonacci projection (extension) takes into account three
    points, in an uptrend, they are the starting low point (A), the swing high (B),
    then the reaction low (C), measures the vertical distance from (A) to (B) and get
    the Fibonacci percentage (e.g. 50% or 61.8%), then project it from point (C).

    The following chart displays an actual example in NZD/USD daily chart of the
    application of Fibonacci retracement and projection.



    On the left hand side of the chart, after forming a temporary high (H1), kiwi
    retreated almost 50% (of L to H1) and renewed buying interest emerged at L1,
    then started to move higher from there, then one can use these 3 points L, H1
    and L1 to projection upside target and the currency pair rose to as high as H2,
    slightly exceeded 100% of L-H1 measuring from L1. This kind of process
    continues and after forming another temporary top at H2, one can calculate the
    Fibonacci retracement level by using L1 and H2 and get the three percentage
    (38.2%, 50% and 61.8%) levels ready. Price reached 38.2% retracement level and
    headed north again from there, as the retracement was shallow (only 38.2%),
    initial upside target should be 61.8% of L1 to H2 measuring from L2 and when
    this level is exceeded, get 100% projection level ready for the next upside
    objective.

    In general, the simplest way in picking which ratio to use is if previous move has
    retraced between 0.236-0.382, then apply 50% projection, and if correction was
    near 50%, use 61.8%. When retracements exceeded 61.8%, use 100%, 123.6% or
    161.8%.

  9. #19
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    CHAPTER 3


    Use of Candlestick charts

    Candlestick chart was developed in 1700s in Japan by a man named Munehisa
    Homma, originally designed to trade rice futures in the 17th century, he invented
    a method to analyze the price with an overview of the open, high, low and close
    prices of each trading day over a certain period of time.

    A line, known as shadow, was drawn to show the day’s price range and a broader
    part of the candlestick represents the area between the session’s opening price
    and the closing price, known as real body. If the opening price is lower than the
    closing price (i.e. a rising day), then the body is white; if the opening price is
    higher than the closing price (i.e. a falling day), then the body is black.

    As the style of charting is relatively easier to read and understand, it became very
    popular and analysts relate the chart patterns to various bullish or bearish
    signals, which were considered quite reliable in predicting future market
    directions.



    The colour (white or black) and the length of the real body exhibit the market
    forces, whether bulls / demand or bears / supply are winning. Generally

    speaking, the longer body indicates the more intense in buying or selling
    pressure (e.g. long white candlesticks reveal strong buying interest, i.e. buyers
    are very aggressive) whilst shorter real body normally suggests indecisive market
    situation and further sideways consolidation would take place. According to
    different combinations of candlesticks, various bullish and bearish patterns were
    found and we are going to discuss some of those major patterns here.

  10. #20
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    3.1 – Major Bullish Patterns

    Hammer

    This is a single candlestick reversal pattern made up of a small real body, ideally
    to be white but could be black, with a long lower shadow but a very short or even
    non-existent upper shadow. This candlestick should be formed after a decline,
    the bottom of the shadow marks a new low and then followed by white
    candlesticks. Therefore this is grouped under bullish reversal patterns.





    Doji

    Another single candlestick reversal pattern which could be either bullish or
    bearish, depending on the combinations of the preceding and the subsequent
    candlesticks formations. A doji star is formed when the opening price and the
    closing price are virtually the same level (the word doji is actually a Japanese
    words ‘同市’ which means same price level) which made no real body, the length
    of the upper and lower shadows can vary and the appearance of the candlestick
    resembles a plus sign, a cross or an inverted cross. One doji star alone is only a
    neutral pattern as it indicates a sense of indecision between the bulls and bears,
    whether it is going to be a bullish or bearish sign mainly depends on the prior
    and future price developments.

    Whenever you see a ‘doji’ candlestick after certain trending moves, you can
    consider it as a warning sign or a red flag for a possible reversal and one should
    wait to see if there is candlestick pointing to the other direction after the doji.


    In the above example, once the white candlestick is formed after the doji, this
    should be treated as a confirmation and one can buy the underlying security in
    anticipation of a low formation.



    Morning star

    This is basically a three steps bullish reversal pattern at the bottom of a
    downtrend consisting of three candlesticks, starting with a long real body black
    candlestick after an extended downtrend, a small body candlestick (could be
    white or black but a white body tend to have stronger indication) that gapped
    down on the open and closed below the low price of the previous candlestick
    (which make that candlestick appears isolated from prior bar), finally a long real
    body white candle which gapped up on the open and closed near the bar high or
    at least well above the mid-point of the previous black candle.


    If the star itself is a hammer or doji, this normally suggests a stronger reversal
    signal and the subsequent impact is more likely to be bigger.

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  11. ARIONFORXtarder
 

 
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