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1.3 - Reversal patterns, trend lines & channels

The trend is your friend

  • A trend will persist until its reversal is indicated
  • Understanding the trend helps traders avoid unnecessary speculation and align their trades with the dominant market direction
  • A trend stays in motion until external factors cause a shift, such as news, economic data, or exhaustion in buying or selling pressure

The three reversal patterns

Failure swing

Double top/bottom

Non-Failure swing

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  • Failure swings are the least reliable as it may just be an ABC correction
  • Sell signal is break of the HL (box)

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  • Fails to break the previous peak, making a LL
  • The first sell signal is the break of the previous HL
  • Second sell signal is a break of the LL (box)
  • Double top confirmation is when price breaks the LL

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  • More conclusive sell signal at the pentitration of the lower support
  • Confirmatioin of the reversal happens when the price breaks below the LL (box)

  • A breach of the prior support signals a potential change of the trend & represents a technical sell signal

    Trend lines

    Dow theory states that the only valid trend line is horizontal as angled trend lines are subjective

    • Trend lines can help identify when a trend may be about to change
    • Trend lines should be drawn to connect as many points as possible

     

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    Channels

    • A channel is a continuation pattern where price moves between parallel trendlines
    • Channels can be upward, sideways or down

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