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Technical Formation Templates

 

 

C
ommon technical formations such as channels, triangles, diamonds, head and shoulders, and double tops and bottoms provide trade en- try possibilities as described in the following templates. Please see

Box 19.1 through Box 19.15, along with each box’s accompanying figures.

 

 


 

 

 
Brief situation description: At the beginning of the day during the Asian session, the market has formed a narrow (20 to 30-pip) comb-like horizontal channel. Then a break on one side occurred.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Basic (conservative).
Trade (entry point) suggestions: Ignore the first break of one of the sides and enter the market on the break of the second side of the channel. The position has to be taken in the direction of the move.
Entry time: Asian or early European sessions.
Entry execution: Entry-stop order.
Stop loss placed: At the other side of the previous intraday range.
Reverse if stops triggered: Recommended automatic entry-stop order.
Target (custom choice): 30 to 40 pips (P1) Average daily range (P2) End of the day (P3)
Potential profit estimation: 30 to 120 pips
Profit probability evaluation: Very high
Risks evaluation: Very low
P/L ratio: Neutral to Positive
Potential advantages in favor of the open position: The position was open in the direction of the current medium-term trend.
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: RW:The position was open against the direction of the current medium-term trend. A:Take profit in accordance with Target 1.
Additional notices, recommendations, and trading tips: N/A
         

 

 


 

 

Ignore the break


Stop


 

 

Sell


 

Average daily range


 

P1 P3

 

 

P2

 

 

Asian session European session NY session

 

21 0 3 6 9 12 15 18 21

GMT

 

FIGURE 19.1a

 

 

P2

 

P1 P3

 

 


Buy


 

Average daily range


 

 


Ignore

the break


 

Stop


 

Asian session European session NY session

 

21 0 3 6 9 12 15 18 21

GMT

 

FIGURE 19.1b


 

 

Brief situation description: At the beginning of the day during the Asian session, the market has formed a narrow (20 to 30-pip) comb-like horizontal channel. It usually can be identified on 5 to 10-min charts.
Currency recommended for a trade: USD/CHF, USD/JPY, Cable, EUR/USD, EUR/JPY and other Euro crosses.
Trade characteristics: Optional (risky).
Trade (entry point) suggestions: Take a position on the first break of either side in the direction of the move.
Entry time: Asian session.
Entry execution: Entry-stop order.
Stop loss placed: At the opposite side of the channel.
Reverse if stops triggered: Recommended (automatic entry-stops order).
Target (NO custom choice): 20 to 30 pips
Potential profit estimation: 20 to 30 pips
Profit probability evaluation: Average
Risks evaluation: Average
P/L ratio: Negative
Potential advantages in favor of the open position: N/A
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: Such a trade requires a very precise execution that can be achieved with a good dealer or broker company. It also can be recommended for experienced traders only.
Additional notices, recommendations, and trading tips: I recommend this particular trade only because the risk taken is very small. Also, a trader usually has enough time to pocket a small profit in this trade. The reverse (if the stops were triggered) most likely will cover the initial loss soon enough. However, in some relatively rare cases, an unexpected and fast move may happen. It can provide a profit that is much bigger than the projected target shown in this table. (Not a good choice for a conservative trader, though.)

 



 

P1 (20-30 pips)

 

 

Buy

 

Stop and reverse

 

 

Asian session European session NY session

 

21 0 3 6 9 12 15 18 21

GMT

 

FIGURE 19.2a

 

Stop and reverse

 

Sell

 

 

P1 (20–30 pips)

 

 

Asian session European session NY session

 

21 0 3 6 9 12 15 18 21

GMT

 

FIGURE 19.2b


 

 

 
Brief situation description: The market has formed a horizontal channel, which can be identified on hourly and daily charts.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Basic (conservative).
Trade (entry point) suggestions: Ignore the first break of one of the sides and enter the market on the break of the second side of the channel. The position has to be taken in the direction of the move.
Entry time: Any time.
Entry execution: Entry-stop order.
Stop loss placed: At the other side of the current day range. 20 to 30 pips below the broken line. Other
Reverse if stops triggered: Recommended automatic entry-stop order in accordance with money management individual requirements and technical market picture.
Target (custom choice): Average daily range (P1) End of the day (P2) Width of the channel (P3) Other
Potential profit estimation: N/A
Profit probability evaluation: Very high
Risks evaluation: Very low
P/L ratio: Positive
Potential advantages in favor of the open position: The position was open in the direction of the current medium-term trend.
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: Such a trade can also be turned into longer-term position with technical targets located outside of one-day trading range.
             

 

 


 

 

Average daily range


P2 P1

P3

 

Buy


 

Stop 2

 

Stop 1

 

Ignore the break

 

 

FIGURE 19.3a

 

 


Ignore the break


 

 

Stop 1


 

Stop 2

 

 


 

Average daily range


Sell

P3

 

P1

 

P2


 

FIGURE 19.3b


 

 

 
Brief situation description: The market has formed a horizontal channel, which can be identified on hourly and daily charts.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Basic (conservative).
Trade (entry point) suggestions: Enter the first break of one of the sides. The position has to be taken in the direction of the move.
Entry time: Any time.
Entry execution: Entry-stop order.
Stop loss placed: At the other side of the previous intraday range.
Reverse if stops triggered: Recommended (automatic entry-stop order).
Target (custom choice): Average daily range (P1) End of the day (P2) Width of the channel (P3) Other
Potential profit estimation: N/A
Profit probability evaluation: High
Risks evaluation: Low
P/L ratio: Positive
Potential advantages in favor of the open position: The position was open in the direction of the current medium-term trend.
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: RW:The position was open against the direction of the current medium-term trend. A:Accept the risk.
Additional notices, recommendations, and trading tips: Such a trade can also be turned into a longer-term position with technical targets located outside of a one-day trading range.
           

 

P3

 

 

P1 P2

 

Buy


 

Stop


 

Average daily range


 

 

FIGURE 19.4a

 

 


 

Sell


Stop


 

 

Average daily range


 

 

P1 P2

 

 

P3

 

FIGURE 19.4b


 

 

 
Brief situation description: The market has formed a horizontal channel, which can be identified on hourly and daily charts. There were at least three touches on one side of a channel and two on the opposite.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Trade of opportunity.
Trade (entry point) suggestions: Enter the market on the third approach to the side. The position has to be taken in the direction towards the opposite side of a channel.
Entry time: Any time.
Entry execution: Limit order or market order.
Stop loss placed: Right behind the closest border of the channel (15 to 25 pips).
Reverse if stops triggered: Recommended (automatic entry-stop order).
Target (custom choice): Average daily range (P1) End of the day (P2) The opposite side of the channel (P3) Other technical level inside the channel
Potential profit estimation: N/A
Profit probability evaluation: Above average
Risks evaluation: Below average
P/L ratio: Positive
Potential advantages in favor of the open position: The position was open in the direction of the current medium-term trend.
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: RW:The position was open against the direction of the current medium-term trend. A:Accept the risk.
Additional notices, recommendations, and trading tips: Such a trade can also be turned into a longer-term position with technical targets located outside of a one-day trading range. Especially if the position is open in the direction of a current longer-term trend and, in this case, a trader can wait and see if the other side of the channel will be broken or not. (A break usually follows soon after the fourthtouch of a line.)
           

 

 

Average daily range

 

P3

P1

 

 

P2

 

Buy

 

Stop

 

 

FIGURE 19.5a

 


Average daily range


 

 

Stop


 

Sell

 

P1 P2

 

P3

 

 

FIGURE 19.5b


 

 

 
Brief situation description: The market has formed an inclined channel, which can be identified on hourly and daily charts.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Basic (conservative).
Trade (entry point) suggestions: Enter the market at the lowerborder of an ascendingchannel or at the upperborder of a descendingone. The position is taken in the direction towards the opposite side of a channel.
Entry time: Any time.
Entry execution: Limit order or market order.
Stop loss placed: Right behind the closest border of the channel (10 to 20 pips).
Reverse if stops triggered: Recommended (automatic entry-stop order).
Target (custom choice): Average daily range (P1) End of the day (P2) The opposite side of the channel (P3) Other technical level inside the channel
Potential profit estimation: N/A
Profit probability evaluation: Above average
Risks evaluation: Below average
P/L ratio: Positive
Potential advantages in favor of the open position: N/A
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: Such a trade can also be turned into a longer-term position with technical targets located outside of a one-day trading range when it is open in the direction of a current longer-term trend. (Be careful, because a break usually follows soon after the fourthtouch of a line.) If the stops were triggered, then it is possible that the initial loss will be covered very soon after the actual break of the borderline. A position reverse may turn into a trade based on Box 19.5.

 

 

Average P3 daily

range P1

P2

 

Buy

 

 

Stop

 

 

FIGURE 19.6a

 

 


 

 

Sell


Stop


 

 

Average P1 P2 daily

range

P3

 

FIGURE 19.6b


 

 

 
Brief situation description: The market has formed an inclined channel, which can be identified on hourly and daily charts.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Optional.
Trade (entry point) suggestions: Enter the market on the approach to the lowerside of a descendingchannel or at the upperborder of an ascendingone. (The position is taken in the direction towards the opposite side of a channel.)
Entry time: Any time.
Entry execution: Limit order or market order.
Stop loss placed: Right behind the closest border of the channel (10 to 20 pips).
Reverse if stops triggered: Not recommended (if no other technical reason present).
Target (custom choice): Average daily range (P1) End of the day (P2) The opposite side of the channel (P3) Other technical level inside the channel
Potential profit estimation: N/A
Profit probability evaluation: Average
Risks evaluation: Average
P/L ratio: Positive
Potential advantages in favor of the open position: N/A
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: Such a trade usually cannot be turned into a longer-term position with technical targets located outside of a one-day trading range. Usually the true reverse can be expected if the market fails to reach the support of a descending channel or a resistance of an ascending one. So the trade described in this template is a counter trade against the current trend, and the profit better be taken as soon as possible.

 

Stop

 


Average daily range


 

Sell P2


 

P1

 

P3

 

 

FIGURE 19.7a

 

 

P3

P1

 

 


Average daily range


 

Buy P2

 

 

Stop


 

 

FIGURE 19.7b


 

 

 
Brief situation description: The market has formed an inclined channel, which can be identified on hourly and daily charts. This trade would be the continuation of the one described in Box 19.6 (in case the stops were triggered and the position reversed). It can also be traded independently, and the signal to enter the market would be the break of the border of such a channel.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Basic (conservative).
Trade (entry point) suggestions: Enter the market on the break of the lowerside of an ascendingchannel or at the upperborder of a descendingone.
Entry time: Any time.
Entry execution: Entry-stop order.
Stop loss placed: The opposite side of the current day range (if close enough). Other technical level inside the current day range.
Reverse if stops triggered: Recommended (automatic entry-stop order) at the opposite side of a current day range.
Target (custom choice): Average daily range (P1) End of the day (P2) Other
Potential profit estimation: N/A
Profit probability evaluation: High
Risks evaluation: Low
P/L ratio: Neutral to Positive
Potential advantages in favor of the open position: N/A
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: Such a trade can also be turned into a longer-term position with technical targets located outside the day-trading range. In this case, the position was open following a signal indicating potential trend change, and might be kept for longer term.
         

 

Stop

 

P3

 

Sell

 

Average P2 daily

range P1

 

 

FIGURE 19.8a

 

 

Average daily range

P1

 

P2

 

Buy

 

Stop

 

FIGURE 19.8b


 

 

 
Brief situation description: The market has formed a triangle, which can be identified on intraday or daily charts.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Basic (conservative).
Trade (entry point) suggestions: Enter the market on the break of either side of a triangle.
Entry time: Any time.
Entry execution: Entry-stop order.
Stop loss placed: The opposite side of the triangle (if it is narrow enough). The opposite side of the current day range (if close enough). Other technical level inside the current day ranges (if choice #2 is outside the acceptable risk level). Other.
Reverse if stops triggered: Recommended (automatic entry-stop order) in cases 1 and 2.
Target (custom choice): Average daily range (P1) End of the day (P2) Other
Potential profit estimation: N/A
Profit probability evaluation: High
Risks evaluation: Low
P/L ratio: Neutral to Positive
Potential advantages in favor of the open position: This trade is easy to plan in advance, because there is always enough time to identify the triangle and to make a sufficient trading plan. Also, the false break is mostly as good as a true one and indicates the market’s intention to choose the opposite direction for the next move, which is also important for planning of the next trade.
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: It should be remembered that usually a break follows a fourth touch of a triangle’s borderline. Such a trade can be turned into a longer-term position with technical targets located outside of the day trading range if a particular triangle is big enough.
             

 

 

Average P1 daily

range

P2

 

Stop 2

 

 

Stop 1

 

 

FIGURE 19.9a

 

Stop 1

 

Stop 2

 

Sell

 

Average

daily P2 range

 

P1

 

 

FIGURE 19.9b


 

 

 
Brief situation description: The market is forming a potential triangle, which can be identified on hourly or daily charts. Such a conclusion can be made only after the market has already formed one of the sides of the triangle completely. Completely means that one borderline of such a formation can be drawn through three or more significant points (highs or lows). It also has two significant points on the other side, which allow us to guess that the pattern we can see now will become a triangle in the near future.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Trade of opportunity.
Trade (entry point) suggestions: Enter the market at the projected point, where the third touch of the second side of the triangle takes place. The position should be open in the direction of the opposite side of the formation.
Entry time: Any time.
Entry execution: Limit or market order.
Stop loss placed: 20 pips behind the nearest borderline, which is forming a triangle.
Reverse if stops triggered: Recommended (automatic entry-stop order).
Target (custom choice): Average daily range (P1) End of the day (P2) The opposite side of a triangle (P3)
Potential profit estimation: N/A
Profit probability evaluation: Average
Risks evaluation: Average
P/L ratio: Positive
Potential advantages in favor of the open position: This trade is easy to plan in advance, because there should be enough time to identify a triangle even while it is still in the forming process.
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: In case the stops are triggered and the position was reversed, the initial loss most likely will be covered soon enough. It should also be remembered that usually a break follows a fourth touch of a triangle’s borderline. Such a trade can be turned into a longer-term position with technical targets located outside of the day trading range if a particular triangle is big enough.

 

 


Average daily range


 

Stop


 

Sell

 

 

P2

 

P1

P3

 

 

FIGURE 19.10a

 

Average daily range

 

P3

P1

 

 

P2

 

Buy

 

Stop

 

 

FIGURE 19.10b


 

 

 
Brief situation description: The market has formed a diamond, which can be identified on intraday or daily charts. Because the diamond can be considered as two triangles merged together, the recommendations are basically the same as in the case of a regular triangle. See Box 19.9.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Basic (conservative).
Trade (entry point) suggestions: Enter the market on the break of either side of a diamond.
Entry time: Any time.
Entry execution: Entry-stop order.
Stop loss placed: The opposite side of the triangle (if it is narrow enough). The opposite side of the current day range (if close enough). Other technical level inside the current day ranges (if choice #2 is outside the acceptable risk level). Other
Reverse if stops triggered: Recommended (automatic entry-stop order) in cases 1 and 2.
Target (custom choice): Average daily range (P1) End of the day (P2) Other
Potential profit estimation: N/A
Profit probability evaluation: High
Risks evaluation: Low
P/L ratio: Neutral to Positive
Potential advantages in favor of the open position: This trade is easy to plan in advance, since there is always enough time to identify the triangle and to make a sufficient trading plan. Also, the false break is mostly as good as a true one and indicates the market’s intention to choose the opposite direction for the next move, which is also important for planning of the next trade.
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: A diamond is a rare formation. The first half of it could be a real disaster for a trader, because it represents a broadening triangle that is very difficult to identify before it is fully formed and very difficult to trade on. The rest is much easier, and no particular problem with trading on diamond should arise. It has to be remembered that usually a break follows a fourth touch of diamond’s second half borderline. Such a trade can be turned into a longer- term position with technical targets located outside the day trading range, if a particular diamond is big enough.
             

 

Stop

 

Stop

 

Sell

 

Average P2 daily

range

 

P1

 

 

FIGURE 19.11a

 

 

Average P1 daily

range

 

P2

 

B
uy

 

Stop

 

Stop

 

FIGURE 19.11b


 

 

 
Brief situation description: The market is forming a potential diamond formation, which can be identified on hourly or daily charts. Such a conclusion can be made only after the market has already formed the left side of the formation (which is nothing but a broadening triangle) and at the moment is forming a second half of the formation. The second half is also a triangle, but a regular one. So, the recommendations for a trade are pretty much the same as in the case of a regular triangle.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Trade of opportunity.
Trade (entry point) suggestions: Enter the market at the projected point where the third touch of the second side of the triangle (second diamond part) takes place. The position should be open in the direction towards the opposite side of the formation.
Entry time: Any time.
Entry execution: Limit or market order.
Stop loss placed: 20 pips behind the nearest borderline, which is forming a triangle.
Reverse if stops triggered: Recommended (automatic entry-stop order).
Target (custom choice): Average daily range (P1) End of the day (P2) The opposite side of a diamond (P3)
Potential profit estimation: N/A
Profit probability evaluation: Average
Risks evaluation: Average
P/L ratio: Positive
Potential advantages in favor of the open position: This trade is easy to plan in advance, because there should be enough time to identify a triangle even while it is still in the forming process.
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: In case the stops are triggered and the position was reversed, the initial loss most likely will be covered soon enough. Remember that usually a break follows a fourth touch of a triangle’s borderline. Such a trade can be turned into a longer-term position with technical targets located outside of the day trading range, if a particular triangle is big enough.

 

Stop

 

 

P2

 

P1

 

P3

 

Average daily range

 

 

FIGURE 19.12a

 

 

Average daily range

 

P3

 

P1

P2

 

 

Stop

 

 

FIGURE 19.12b


 

 

 
Brief situation description: The market is forming a potential head and shoulders formation (inverted H&S formation as well) on hourly or daily charts, which cannot be identified as such since it is only a projection at the moment. The projection can be made at the moment when the market has already formed what may appear to be the left shoulder, the head, and the first half of the right shoulder. It works best when seen on hourly and daily charts.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Trade of opportunity.
Trade (entry point) suggestions: Enter the market at the projected point where the projected top (bottom) of the second shoulder could be formed.
Entry time: Any time.
Entry execution: Limit or market order.
Stop loss placed: Depends on the time frame and the scale of the potential formation. The trailing stop can also be used if some floating profit accumulated.
Reverse if stops triggered: Not recommended.
Target: Measured objective (P1)
Potential profit estimation: N/A
Profit probability evaluation: Below average
Risks evaluation: Above average
P/L ratio: Positive
Potential advantages in favor of the open position: N/A
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: This trade is not easy to plan in advance. A good imagination should help, but, from the other side, it can be excessive too. The trade also requires a lot of practical experience from a trader.
Additional notices, recommendations, and trading tips: In case of a successful entry, the profit is usually very significant, especially to enter the position on a bigger scale. It is better for longer-term positional trading rather than for intraday.

 

 

Sell

 

P1

 

FIGURE 19.13a

 

P1

 

 

Buy

 

FIGURE 19.13b


 

 

 
Brief situation description: A head and shoulders formation (inverted H&S formation as well) is fully formed on hourly or daily charts.
Currency recommended for a trade: All majors and crosses.
Trade characteristics: Classic (textbook style).
Trade (entry point) suggestions: Enter the market on the break of the neckline.
Entry time: Any time.
Entry execution: Entry-stop order.
Stop loss placed: The opposite side of the day range. Above (below) the top (bottom) of the right shoulder.
Reverse if stops triggered: Recommended.
Target: Measured objective (P1) End of the day (P2) Average daily range (P3) Other
Potential profit estimation: N/A
Profit probability evaluation: Average
Risks evaluation: Average
P/L ratio: Positive
Potential advantages in favor of the open position: N/A
Possible complications, disadvantages, and risk warnings, and solutions to avoid them: N/A
Additional notices, recommendations, and trading tips: Although this formation is classic (that means it is widely known and easily recognizable), the chance that the market will behave exactly the way as it is described in technical analysis textbooks is questionable. I do not usually trade on it without having some other reasons to enter a position at the break of a neckline of H&S. However, sometimes it works and, therefore, cannot be ignored completely. Usually the harder the identification, the better it works.
           

 

Stop

 

 

Stop

 

 

Sell

 

Average P2 daily

range P3

 

P1

 

 

FIGURE 19.14a

 

Average P1 daily P3

range P2

 

 

Buy

 

Stop

 

Stop

 

 

FIGURE 19.14b


 


Brief situation description:

Currency recommended for a trade:

Trade characteristics:

Trade (entry point)

suggestions: Entry time:

Entry execution: Stop loss placed:

 

Reverse if stops triggered:

Target:

 

Potential profit estimation:

Profit probability evaluation:

Risks evaluation: P/L ratio:

Potential advantages in favor of the open position:

Possible complications, disadvantages,

and risk warnings, and solutions to avoid them:

Additional notices, recommendations, and trading tips:


A double (triple) top (bottom) formation is fully formed on hourly or daily charts.

All majors and crosses.

 

 

Classic (textbook recommended).

Enter the market on the break of the neckline. Any time.

Entry-stop order.

The opposite side of Above (below) the line drawn Other the day range through both tops (bottoms)

Recommended

 

Measured objective End of the day (P2)Average daily Other

(P1)range (P3)

N/A

 

Below average

 

Above average

Positive

N/A N/A

 

 

Same thing as with the H&S formation. This formation is also a classic one, but the chance to see the exact behavioral pattern prescribed by technical analysis textbooks is slim. I do not usually trade on it without having some other reasons to enter a position at the neckline break.


 

S top 2

 

Stop 1

 

 

Sell

 

 


Average daily range


 

P3


P2

 

 

P1


 

 

FIGURE 19.15a

 

 


 

 

Average daily range


P1

 

P3

P2


 

Buy

 

Stop 1

 

 

Stop 2

 

FIGURE 19.15b


 


 

CHAPTER 20

 

 


Date: 2015-12-17; view: 839


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