where

the current rally might pause based on previous price movements. This is where traders long on
How to Calculate Next Price Move Bitcoin should consider selling into strength.
Crypto markets are breaking out to all-time highs. The total market cap of all crypto assets, which includes
Bitcoin, now totals $165 billion, a 150 percent gain from mid-July lows of $67 billion and a whopping 16 Use Fibonacci To Point Out Profitable Trades
times crypto’s value of $11 billion at this time last year. Fibonacci analysis can supercharge your market performance but you’ll need to master a few tricks of the
trade to gain maximum benefit from this mathematical sequence, uncovered in the Western world more
Bitcoin itself has reached another all-time high of $4,650, up about three percent in the past 24 hours, and than 800 years ago. Let’s tackle the subject with a quick primer and then get down to business with two
many are wondering where it can go from there. Since cryptocurrencies carry a high degree of speculative original strategies that tap directly into its hidden power.
value and very little fundamental value, technical analysis can offer a roadmap to future price moves. For
this analysis, I am applying trend-based Fibonacci extensions, using TradingView’s platform. 12th century monk and mathematician Leonardo de Pisa (later branded as Fibonacci) uncovered a logical
sequence of numbers that appears throughout nature and in great works of art. Unknown to the great monk,
Trend-based Fibonacci Extensions use past price behavior to establish price targets and potential reversal these Fibonacci numbers fit perfectly into our modern financial markets because they describe, with great
areas. They can be a guide for unchartered territory at new highs and new lows. Remember, these indicators accuracy, complex relationships between individual waves within trends, as well as how far markets will pull
should not be used in isolation and are only to provide context to price moves. back when they return to levels previously traded.

Technical analysts have noted a mathematical relationship between past and future price moves based on Starting with 1+1, the Fibonnacci sequence, of which the first number is 1, consists of numbers that are the
the Fibonacci series, a sequence of numbers in which each number is the sum of the two preceding ones. sum of themselves and the number which precedes them. As a result, 1+1=2, 1+2=3, 2+3=5, 3+5=8, 5+8=13,
This “golden ratio” is witnessed throughout the natural world and can be found in plant growth, astronomical 8+13=21, 13+21=34 and 21+34=55, which indicates that 1, 2, 3 5, 8, 13, 21, 34 and 55 are all Fibonacci
patterns and even financial markets. Trend-based Fibonacci Extensions are a predictive technical indicator numbers. Subdividing these numerical strings uncovers repeating ratios that have become the basis for
that applies this “golden ratio” to asset price movements. Fibonacci grid analysis in swing trading and other market disciplines.

The Fibonacci Extension is drawn over one wave of prices to provide estimates on the magnitude of the next The .386, .50 and .618 retracements form the basic structure of Fibonacci grids found in popular market
price wave. The important Fibonacci levels to watch are: 61.8 percent, 100 percent, 138.2 percent, 161.8 software packages, with .214 and .786 levels coming into play during periods of higher volatility. The initial
percent, 200 percent, 238.2 percent, and 261.8 percent. analysis technique is simple enough for market players at all levels to understand and master. Just place the
grid over the ending points of a major high and low in an uptrend or downtrend and look for close alignment
There are three price points to consider in an uptrend: the former swing low, the most recent swing high and with key price turns.
the most recent swing low. The Fibonacci Extension then plots future levels based on these three price
points. Deeper market analysis requires greater effort because trends are harmonic phenomena, meaning they can
subdivide into smaller and larger waves that show independent price direction. For example, a series of
relative uptrends and downtrends will embed themselves within a one or two-year uptrend in the S&P
500 or Dow Industrials. (See video: The Dow Jones Industrial Average.) We see this complexity most clearly
when shifting higher, from daily to weekly charts, or lower, from daily to 60-minute or 15-minute charts.
(For related reading, see: Understanding And Playing The Dow Jones Industrial Average.)

A single Fibonacci grid on a daily chart will improve results but ratios come into sharper focus when
examining two or more time frames. Swing traders taking the next step will find great value in daily and 60-
minute charts while market timers will benefit when they step back and combine daily and weekly charts. In
both cases, alignment between key Fib levels in different time frames identifies hidden support and
resistances that can be utilized for entry, exit and stop placement. (For related reading see: The Daily Routine
Of A Swing Trader and Market Timing Fails As A Money Maker.)


Strategy 1: The Fibonacci Flush

Bellow Microsoft pounds out a deep low at 42.10 in October and rallies in a vertical wave that ends at 50.05
To draw this Fibonacci extension, I began with the July swing lows at $1,850, then added the mid-August a few weeks later. The subsequent pullback settles on the 38% (.382) for four sessions and breaks down into
swing highs of $4,400. Finally, I connected the most recent swing low of $3,600. From there, I extended the a mid-December gap that lands the price on the 61.8% (.618) Fibonacci retracement. That level marks a
Fibonacci lines horizontally to see where the next breakout might carry Bitcoin. tradable low, ahead of a sharp recovery that stalls at the 78.6% (.786) retracement.

If the past can be any guidance to future moves, the Fibonacci extensions show overhead resistance at
$4,937, $5,253, $5,703, and $6,275. While these shouldn’t be taken as exact price points, they suggest areas
 Strategy 2: The Parabola Pop

Notice how other charting features The 78.6% retracement level

interact with key Fibonacci levels. stands guard as the final
The selloff into the 62% level also harmonic barrier before an
fills the October gap (red circle) instrument completes a 100%
while the subsequent bounce stalls price swing, higher or lower. This
near three November swing highs is valuable information because it
(blue line) aligned with the 78.6% tells us that a breakout above this
retracement. This tells us that level in an uptrend, or a
Fibonacci analysis works most breakdown in a down trend, will
effectively when combined with extend all the way to the last
other technical forces in play, such swing high or low, as a minimum
as gaps, moving averages and target. Doing the math suggests a
easily observed highs and lows. free ride for the last 21.6% of the
(For related reading, see: How To rally or selloff wave.
Use A Moving Average To Buy
Stocks.) This Parabola Pop strategy works
very well on longer time frames
and can even provide early entry
to major breakouts and
breakdowns on widely held
issues. As an example look at Facebook after it peaked at 72.59 in March 2014 and entered a correction that
Now let’s zoom in and identify a found support in the mid-50s. The subsequent bounce reached the 78.6% retracement at 68.75 two months
Fibonacci technique you can use to later and stalled out, yielding nearly three weeks of sideways action.
find low-risk entries missed by less
observant market players. Falling The stock rallied above harmonic resistance on July 21st (red line) and took off, completing the last 21.4% of
price sits on the 38% retracement for the 100% price swing in just four sessions. In addition, the fourth day yielded a breakout above the March
four sessions, sucking in a supply of high, setting off a fresh set of buy signals that gave Fibonacci-focused shareholders many profitable options,
capital looking for a reversal. The including letting it ride, taking partial profits or risking the balance on the new uptrend.
downward gap traps this crowd, who
are shaken out at the same time the The Facebook breakout highlights a second advantage of the Parabola Pop strategy. Markets tend to go
stock posts a volatile low at the 62% vertical into these 100% levels, as if a magnet is pulling on price action. This parabolic tendency can produce
level. While it makes sense to buy at outstanding results over very short time periods. Of course, it isn’t a given because anything can happen at
that support level, it’s a risky strategy any time in our modern markets but even a slight tilt toward the vertical marks a definable edge over the
because the gap could easily kill the competition. (For related reading, see: Introduction to the Parabolic SAR.)
upside and force another breakdown.
(For related reading, see: Playing The As a final note, the thrust from the 78.6% into 100% marks a fractal tendency that appears in all time frames,
Gap.) from 15-minute through monthly charts, and can be traded effectively whether you’re a scalper or market
timer. However, intraday holding periods are more likely to face trade-killing whipsaws and shakeouts, while
the size of the expected rally or selloff is often too small to book a reliable profit, especially after the negative
Now comes the important part. The surge back above the 38% retracement reinstates support, triggering impact of transaction costs.
a Fibonacci Flush buy signal, predicting that positions taken near 47 will produce a reliable profit. At the
same time, shaken out shareholders are reluctant to buy back at this price because, as the expression goes, The Bottom Line
“once bitten, twice shy”. This lowers interest in the trade, allowing new money to carry risk in a lower Viewing the trends of the market through the lenses of a Fibonacci grid enables investors to see larger
volatility tape, relying on a long observed tendency for support to hold after it’s tested, broken and then patterns beyond immediate upturns and downturns and to pinpoint prospects for profits that may be just
remounted. (See: Support and Resistance Basics.) beyond the view of investors who are spooked out by a short-term view of the trends. If used well, the tools
of Fibonacci analysis equip an investor with the confidence and insights needed to withstand shakeouts
prompted by drastic downturns and to take advantage of opportunities to profit from approaching vertical
shifts. Doing so requires, however, a willingness to withstand the unnerving volatility that exists within
compressed periods of time to see the market movements that a Fibonacci believer anticipates, based on
math formulas that have stood the test of time.
Fibonacci Retracement
Taking The Magic Out Of Fibonacci Numbers
The Fibonacci studies are popular trading tools. Understanding how they are used and to what extent they
Fibonacci retracement is named after the 13th century mathematician Leonard Fibonacci, who developed a can be trusted is important to any trader who wants to benefit from the ancient mathematician's scientific
series of numbers that contain ratios that have proved important in technical analysis of the stock legacy. While it's no secret that some traders unquestionably rely on Fibonacci tools to make major trading
market. Fibonacci’s original sequence is 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Certain repeating ratios decisions, others see the Fibonacci studies as exotic scientific baubles, toyed with by so many traders that
exist within these numbers. For instance, the ratio of approximately 61.8%, called the “Golden Ratio”, is they may even influence the market. In this article we'll examine how the Fibonacci studies may influence
created by dividing one number by the number that follows: 8/13 = 61.53%, 34/55 = 61.81%, etc. the market situation by winning the hearts and minds of traders.

The key Fibonacci retracement ratios used by technical analysts are 23.6%, 38.2%, 50%, 61.8% and The Enigmatic Legacy
100%. Although the reasons why are uncertain, a stock’s trend tends to retrace a prior trend once its price
hits one of the key Fibonacci Retracement ratio points. Let us first look more closely at what the Fibonacci numbers are. The Fibonacci sequence is as follows:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, …
Traders take advantage of the trend behavior indicated by the Fibonacci retracement analysis to determine
the best time to buy or sell securities. This sequence moves toward a certain constant, irrational ratio. In other words, it represents a number with
an endless, unpredictable sequence of decimal numbers, which cannot be expressed precisely. For the sake
For instance, if a stock’s price hit the 38.2% point, and then started to trend downwards, a trader using this of brevity, let's quote it as 1.618. At present, the sequence is often referred to as the golden section, or
analysis will expect the stock to start trending back upwards after the price falls to the 23.6% point. He will golden average. In algebra, it is commonly indicated by the Greek letter Phi (Phi = 1.618).
set a buy order to purchase it at the 23.6% point so that he can take advantage of an anticipated upward
trend. The asymptotic behavior of the sequence and the fading fluctuations of its ratio around the irrational Phi
number can be better understood if the relations between several first members of the sequence are shown.
The following example illustrates the relationship of the second member toward the first one, the
Top 4 Fibonacci Retracement Mistakes To Avoid relationship of the third member toward the second one, and so on:
At some point, every foreign exchange trader uses a Fibonacci retracement, which is a technical analysis tool • 1:1 = 1.0000, which is less than phi for 0.6180
that tracks the potential retracement of an asset’s original move in price. After a stock climbs, many traders • 2:1 = 2.0000, which is more than phi for 0.3820
use Fibonacci retracements to predict the extent it will pull back. After a stock falls, traders use them to • 3:2 = 1.5000, which is less than phi for 0.1180
estimate its bounce. • 5:3 = 1.6667, which is more than phi for 0.0486
• 8:5 = 1.6000, which is less than phi 0.0180
There are common mistakes traders make when applying Fibonacci retracements to foreign exchange
markets. Here are four well-known errors to avoid. As the Fibonacci sequence moves on, each new member will divide the next one, coming closer and closer
to the unreachable phi. Fluctuations of the ratio around the value 1.618 for a lesser or greater value can also
Number 1, don’t mix Fibonacci reference points. They need to remain consistent. For example, using a be seen when using the Elliott wave theory. (To learn more about the Elliot wave, check out Elliott Wave
candlestick chart, consistent Fibonacci reference points will measure the closing high to the closing low. Theory and Elliott Wave In The 21st Century.)
Mixing the points would mean measuring from the closing high to the day’s lowest point.
In many cases, it is believed that humans subconsciously seek out the golden ratio. For example, traders
Number 2, don’t ignore long-term trends. Inexperienced traders often measure significant moves in a stock’s aren't psychologically comfortable with excessively long trends. Chart analysis has a lot in common with
price in the short term, while ignoring the long term. For example, a stock may be trending upward over nature, where things that are based on the golden section are beautiful and shapely and things that don't
several days. But if a trader looks at its movement over the period of an hour, it may appear to be trending
contain it look ugly and seem suspicious and unnatural. This, in small part, helps to explain why, when the
down, leading to the wrong conclusion. distance from the golden section becomes excessively long, the feeling of an improperly long trend arises.

Number 3, don’t rely on Fibonacci alone. Technical analysis uses statistics like previous prices and trading Fibonacci Trading Tools
volume to evaluate a stock. Relying on Fibonacci alone is a mistake. Use additional tools like stochastic
There are five types of trading tools that are based on Fibonacci's discovery: arcs, fans, retracements,
oscillators to verify the Fibonacci results and help find a good trade. extensions and time zones. The lines created by these Fibonacci studies are believed to signal changes in
trends as the prices draw near them.
Number 4, don’t use Fibonacci over short intervals. While day trading in the foreign exchange market is
exciting, it’s also volatile. Applying Fibonacci retracement over a short timeframe yields less reliable
retracement levels. As is true with any statistical study, more data leads to better analysis.


Figure
1: Fibonacci times
zones provide
general changes in
the trend areas in
relation to time.
Time zones are
most appropriate
to a long-dated
analysis of price
variation and are
very likely to be of
limited value
while studying
short-dated
charts.





Figure 2: The Fibonacci fan is a three-line guide originating from the Fibonacci number series. It can
assist in identifying the next areas of support and resistance. The zones, indicated by the fan, can
forecast areas of retraction in market trends.
How It Works
Of course, golden ratio discovered does hold true in many instances. However, when used by a vast number
It is a popular opinion that when correctly applied, the Fibonacci tools can successfully predict market of traders, the Fibonacci studies themselves may become a very major factor in influencing the market. Most
behavior in 70% of cases, especially when a specific price is predicted. Others reckon that computations for of the time, the Fibonacci studies work due to the cascade effect, which arises because of the huge number
multiple retracements are too time-consuming and difficult to use. Perhaps the greatest disadvantage of the of traders artificially creating support and resistance levels.
Fibonacci method is the complexity of the results for reading and the ensuing inability of many traders to
really understand them. In other words, traders should not rely on the Fibonacci levels as The market is a complex system and the realization of the true nature of Fibonacci studies as a self-fulfilling
compulsory support and resistance levels. In fact, they may actually be levels of psychological comfort as prophecy will help you use the tools more efficiently. How? Very simple - it will help you avoid any perilous
well as another way to look at a chart. The Fibonacci levels, therefore, are a sort of a frame through which over-reliance on them.
traders look at their charts. This frame neither predicts nor contributes anything, but it does influence the
trading decisions of thousands of traders. Conclusion
The Fibonacci method should only be used in a combination with other methods, and the results derived
However, the Fibonacci studies do not provide a magic solution for traders. Rather, they were created by should be considered just another point in favor of a decision if they coincide with the results produced by
the human mind in an attempt to dispel uncertainty. Therefore, they shouldn't serve as the basis for one's the other methods in the combination.
trading decisions. Most often, Fibonacci studies work when no real market-driving forces are present in the
market. It is obvious that the levels of psychological comfort and the "frame" which they make up and
through which the majority of traders look at their charts, are by no means the determining factors in those
situations, when more important reasons for the prices' growth or reduction exist.

Fibonacci Extensions
What are 'Fibonacci Extensions' REAKING DOWN 'Fibonacci Channel'
Fibonacci extensions are used in Fibonacci retracement to predict spaces of resistance and support in the Many traders use the lines drawn by the Fibonacci channel in combination with other support and resistance
market. These extensions involve all levels drawn past the basic 100% level; they are frequently used by levels found by other indicators. One common technique is to combine the horizontal Fibonacci retracement
traders to determine areas that will bring in profits. One popular extension, the 161.8% level, is used to set levels with the lines established by diagonal Fibonacci channels.
a price target on a breakout of an ascending triangle; this target is calculated by multiplying the vertical
distance of the triangle by key Fibonacci ratio 61.8%, and then adding the result to the triangle’s upper Fibonacci Clusters
resistance level. A tool used in technical analysis that combines various numbers of Fibonacci retracements, all of which are
BREAKING DOWN 'Fibonacci drawn from different highs and lows. Fibonacci clusters are indicators which are usually found on the side of
Extensions' a price chart and look like a series of horizontal bars with various degrees of shading. Each retracement level
that overlaps with another makes the horizontal bar on the side darker at that price level. The most
A retracement movement of a stock is significant levels of support and resistance are found where the Fibonacci cluster is the darkest.
where the stock "retraces" a section of
one of its previous moves. In most cases, BREAKING DOWN 'Fibonacci Clusters'
a stock performs a retracement at one of This is a useful tool to gauge the relative strength of the support or resistance of various price levels in one
three standard Fibonacci levels: 38.2%, quick glance. Traders often pay close attention to the volume around the identified levels to confirm the
50% and 61.8%. When a stock retraces strength of the support/resistance.
more than 100% of its prior move, a
Fibonacci extension can be calculated. Fibonacci Fan
These extensions, used in combination A charting technique consisting of three diagonal lines that use Fibonacci ratios to help identify key levels of
with a variety of other indicators or support and resistance.
patterns, are common practice for
traders looking to determine one or BREAKING DOWN 'Fibonacci Fan'
multiple price targets.
Fibonacci fans are created by first drawing
a trendline through two points (usually the
high and low in a given period), and then
Practical Use by dividing the vertical distance between
It is best, and most practical, to calculate Fibonacci extensions when stocks are at new highs or new lows, the two points by the key Fibonacci ratios
and when there are no clear levels of resistance or support on the chart. If, for example, a trader is long on of 38.2%, 50% and 61.8%. The result of
a stock and the stock begins to generate new highs, the trader can calculate Fibonacci extension levels to these divisions each represent a point
get a basic idea of where the stock is likely to fall and is more likely to make profits. The same is true for a within the vertical distance. The three 'fan'
trader who is short. Fibonacci extension levels can be calculated to give the trader a general idea of where lines are then created by drawing a line
the stock may begin to rally. The trader then has the option to decide if he wishes to cover his position at from the leftmost point to each of the
that level. three representing a Fibonacci ratio.

Keeping practicality, and basic common sense, in mind, decisions to buy and sell stocks should never be
made based solely on Fibonacci extensions. It is wise for traders to wait and watch for candlestick patterns,
such as price action, to become evident to confirm whether a stock is likely to reverse at the traders' target
price.


Bottom Line Fibonacci Time Zones
Fibonacci extensions are applicable to any timeframe, such as monthly charts to one-minute charts, and are An indicator used by technical traders to identify periods in which the price of an asset will experience a
tools best used on price waves so projections of future price waves can be generated. It is also wise for significant amount of movement. This charting technique consists of a series of vertical lines that correspond
traders to note that clusters of Fibonacci levels are indicative of a price area that will inevitably be significant. to the sequence of numbers known as Fibonacci numbers (1, 2, 3, 5, 8, 13, 21, 34, etc.). Once a trader chooses
The most important aspect traders should know is Fibonacci extensions should never be the sole deciding a starting position (most commonly following a major move) on the chart, a vertical line is placed on every
factor when making trading and position choices. subsequent day that corresponds to the position in the Fibonacci number sequence.

Fibonacci Channel
A variation of the Fibonacci retracement pattern in which the trendlines run diagonally rather than
horizontally. These channels are used to estimate areas of support and resistance in the same way as the
horizontal Fibonacci retracement levels.

BREAKING DOWN 'Fibonacci Time Zones' BREAKING DOWN 'Retracement'
Fibonacci numbers are a sequence of Whether an investor identifies a change in a stock's
numbers where each successive number is direction as a retracement or a reversal will impact
the sum of the two previous numbers. For how he responds to it. A retracement can be positive
reasons unknown, these numbers play an or negative in direction as long as it is the reversal of
important role in determining relative the prevailing trend. For example, if a stock’s price
areas where the prices of financial assets experiences an upward movement from $10 to a peak
experience large price moves or change of $30 that may be considered part of a growth trend.
direction. The four popular Fibonacci If the same stock then falls to $25, it is still well above
studies are arcs, fans, retracements and the starting price of $10. In this case, the shift from
time zones. $30 to $25 would be considered a retracement if the
price then continued along the aforementioned
growth trend. If the price continued to fall from $25,
returning to the previous low of $10, it may be considered a reversal instead of a retracement as all previous
gains associated with the growth period have been lost.

Fibonacci Arc Technical Analysis and Retracements
A charting technique consisting of three curved lines that are drawn for the purpose of anticipating key Technical analysts make an important distinction between retracements and reversals as retracements are
support and resistance levels, and areas of ranging. short-term changes within a longer-term trend, while reversals indicate the end of a larger trend and the
beginning of a new trend. When a retracement first begins, it is difficult to tell whether it is a retracement
or a reversal as a retracement does not have a defined time period to complete. Technical analysts try to
BREAKING DOWN 'Fibonacci Arc' distinguish between the two using Fibonacci retracements, pivot point support and resistance levels,
Fibonacci arcs are created by first and trendline support and resistance levels.
drawing an invisible trendline
between two points (usually the high Breakout Trader
and low in a given period), and then A type of trader who uses technical analysis to find potential trading opportunities, identifying situations
by drawing three curves that where the price of an asset is likely to experience a substantial movement over a short period of time.
intersect this trendline at the key Breakout traders generally look for key levels of support and resistance and will place transactions when the
Fibonacci levels of 38.2%, 50% and asset's price passes through these levels. Long positions are taken when the price of an asset breaks through
61.8%. Transaction decisions are a level of resistance, and short positions are taken when the price breaks below a level of support.
made when the price of the asset
crosses through these key levels.

BREAKING DOWN 'Breakout Trader'
Many breakout traders find trading opportunities by
identifying chart patterns such as channels, ascending
triangles, descending triangles, head and shoulders, etc.
These types of traders will generally set up target prices
Retracement to be equal to the distance between support and
A retracement is a temporary reversal in the direction of a stock's price that goes against the prevailing trend. resistance levels.
A retracement does not signify a change in the larger trend. On a chart where a stock's price is generally
headed upward, retracements are the small dips in price that the stock experiences during its overall upward
trend.





Swing Trading
1. A fluctuation in the value of an asset, liability or account. This term is most commonly used when BREAKING DOWN 'Swing High'
referring to a situation in which the price of an asset experiences a significant change over a short Swing highs can be used by traders to
period. identify possible areas of support and
resistance, which can then be used to
2. A short-term trading strategy in which a trader attempts to capture gains by holding a security for determine optimal positions for stop-loss
only a few days. Also known as "swing trading". orders. If an indicator fails to create a new
swing high while the price of the security
BREAKING DOWN 'Swing' does reach a new high, there is a divergence
1. The volatility that exists in the financial markets can be seen easily when the price of a certain security between price and indicator, which could
undergoes rapid changes in value. These sharp shifts are often referred to as a swing. For example, it is not be a signal that the trend is reversing.
uncommon to see a major index swing from negative territory to positive territory just prior to the market
close.

2. Swing trading is often used by individual investors since their small positions won't have a dramatic impact
on the price of the security. On the other hand, financial institutions do not have the luxury of entering or Price Target
exiting a position over a matter of days since the size of their orders can greatly influence the price of the What is a 'Price Target'
asset. A price target is the projected price level of a financial security stated by an investment analyst or advisor. It
represents a security's price that, if achieved, results in a trader recognizing the best possible outcome for
Swing Low his investment. This is the price at which the trader or investor wants to exit his existing position so he can
DEFINITION of 'Swing Low' realize the most reward.
A term used in technical analysis that refers to the troughs reached by an indicator or an asset's price. A
swing low is created when a low is lower than any other point over a given time period. Successively lower BREAKING DOWN 'Price Target'
swing lows indicate that the underlying asset is in a downtrend, while higher lows mean it is in an uptrend. Essentially, a price target is an individual analyst's expectation on the future price of a security, usually a
stock. There may be many price targets for a single security. An influential analyst on Wall Street may give a
BREAKING DOWN 'Swing Low' stock that is currently trading at $60 a one-year price target of $90; however, there is no concrete way to
Swing lows are useful for an investor calculate a price target. Different analysts and financial institutions use various valuation methods and take
who holds a long position in an asset into account different economic forces when deciding on a price target.
because swing lows can be used to
determine strategic positions for For example, two separate traders holding a stock trading at $60 may have drastically different opinions
a stop-loss order. One main tenet of about where the stock will go. One trader may set his price target at $75, while the other sets it at $120.
the Dow Theory is that a if a major Price targets are a function of risk tolerance and the amount of time an investor plans on holding the security.
average breaks below a previous Using technical analysis, traders rely on tools such as previous support and resistance, Fibonacci
low, this movement can be extensions and moving averages to aid them in determining an appropriate price target.
interpreted as the beginning of a
downtrend. In the case of an A Real World Example of Price Target
indicator, if it fails to make a new Price targets often affect the price of a stock itself. For example, if a stock is trading at $60, and the company
swing low while the price continues has a bad quarter and analysts reduce the price target from $70 to $50, it is going to generate selling activity
to decline, a divergence occurs and reduce the share price closer to the $50 target. Conversely, if the same company with a $60 share price
which could mean that has a good quarter and analysts increase its price target from $70 to $80, more investors will choose in
the downtrend is coming to an end. invest, driving up the share price.
Using a real example, on July 7, 2016, Walgreens Boots Alliance reported its Q3 results and beat analysts'
expectations. This means the company's financial performance was better than what was forecasted. As a
result of the positive performance, Barclays increased its price target on Walgreens to $79, up from $76.
This, along with the good performance itself, caused the share price to increase 0.12% by the end of the
trading day on July 7.
Swing High

A term used in technical analysis that refers to the peak reached by an indicator or an asset's price. A swing
high is formed when the high of a price is greater than a given number of highs positioned around it. A series
of consecutively higher swing highs indicates that the given asset is in an uptrend.
Triangle Descending Triangle

A triangle is a technical analysis pattern created by drawing trendlines along a price range that gets narrower An ascending triangle is the bullish counterpart of a descending triangle.
over time because of lower tops and higher bottoms. Variations of a triangle include ascending, descending
and symmetrical triangles. Triangles are very similar to wedges and pennants. A bearish chart pattern used in technical analysis that is created by drawing one trendline that connects a
Technical analysts see a breakout of this triangular pattern as either bullish (on a breakout above the upper series of lower highs and a second trendline that has historically proven to be a strong level of support.
line) or bearish (on a breakout below the lower line). Traders watch for a move below support, as it suggests that downward momentum is building. Once the
breakdown occurs, traders enter into short positions and aggressively push the price of the asset lower. The
BREAKING DOWN 'Triangle' chart below is an example of a descending triangle:
Triangle patterns are aptly named BREAKING DOWN 'Descending Triangle'
because the upper and lower trendlines This is a very popular tool among traders
ultimately meet at the apex on the right because it clearly shows that the demand for an
side, forming a corner. Connecting the asset is weakening, and when the price breaks
start of the upper trendline to the start below the lower support, it is a clear indication
of the lower trendline then completes that downsidemomentum is likely to continue or
the other two corners to complete the become stronger. Descending triangles give
triangle. The upper trendline is formed technical traders the opportunity to make
by connecting the highs, while the lower substantial profits over a brief period of time.
trendline is formed by connecting the The most common price targetsare generally set
lows. There are three potential to equal the entry price minus the vertical height
outcomes that can form as the price between the two trendlines.
nears the apex,

Ascending Triangle Symmetrical Triangle

What is an 'Ascending Triangle' A chart pattern used in technical analysis that is easily recognized by the distinct shape created by two
An ascending triangle is a bullish chart pattern used in technical analysis that is easily recognizable by the converging trendlines. The pattern is identified by drawing two trendlines that connect a series of
distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a sequentially lower peaks and a series of sequentially higher troughs. Both trendlines act as barriers that
level that has historically prevented the price from heading higher, while the second trendline connects a prevent the price from heading higher or lower, but once the price breaches one of these levels, a sharp
series of increasing troughs. Traders enter into long positions when the price of the asset breaks above the movement often follows.
top resistance. The chart below is an example of an ascending triangle: BREAKING DOWN 'Symmetrical Triangle'
A symmetrical triangle is generally regarded as a
BREAKING DOWN 'Ascending Triangle' period of consolidation before the price moves
An ascending triangle is generally beyond one of the identified trendlines. A break
considered to be a continuation pattern, below the lower trendline is used by
meaning that it is usually found amid a technical traders to signal a move lower, while a
period of consolidation within an uptrend. break above the upper trendline signals the
Once the breakout occurs, buyers will beginning of a move upward. As you can see from
aggressively send the price of the asset the chart above, technical traders use a sharp
higher, usually on high volume. The most increase in volume or any other available technical
common price target is generally set to be indicator to confirm a breakout beyond one of the
equal to the entry price plus the vertical trendlines.
height of the triangle.
The sharp price movement that often follows a
breakout of this formation can be captured by
traders who are able to identify the pattern early
enough.

Trendline strategy on the same security or can provide an opportunity to profit. Intraday reversals are often the result
of news events and company announcements that change the valuation outlook for a specific stock.
What is a 'Trendline'
A trendline is a line drawn over pivot highs or under pivot lows to show the prevailing direction of price.
Trendlines are a visual representation of support and resistance in any timeframe. Trendlines are used to Trading Strategy
show direction and speed of price, and also describe patterns during periods of price contraction.
BREAKING DOWN 'Trendline' Potential Trading Strategies
There are two branches of analysis in stock research: fundamental analysisand technical analysis. By watching the technical charting of a stock’s price, traders can identify when a reversal is occurring. Traders
Fundamental analysis is used to determine what to buy, while technical analysis is used to determine when often anticipate a reversal to occur in a stock that has been consecutively reaching new highs or new lows.
to buy it. One of the most important tools used by technical analysts is the trendline. In technical trading analysis, traders often closely watch the candlestick movements of a stock. In technical
Fundamental vs. Technical Analysis analysis, the candlestick represents the stock’s trading price range throughout the day, with the top being
The bottom line for companies is profit. A company with growth in earnings and revenues is also likely to its highest price and the bottom being its lowest price. A candlestick chart shows the consecutive movement
have an increase in stock price, which is what fundamental analysts count on. This is because the market of the stock’s price throughout the day, with emphasis on its trading range.
likes to assign a value to earnings. This value is represented by the market price, which is what technical
analysts and chartists use to analyze the market. Instead of looking at past business performance, technical Example of Trading Strategy
analysts look for trends in price action. At the foundation of identifying trends is a tool called the trendline. An example of a trading strategy for a stock reversal to the downside could occur when a technical
A trendline helps technical analysts determine the current direction in market prices. Technical analysts analyst holds stock ABC and notices a reversal pattern in the candlestick charts. Technical analysts typically
believe the trend is your friend, and identifying this trend is the first step in the process of making a good consider a reversal trading pattern reliable to trade upon after five to 10 consecutively lower candlestick
trade. patterns trading within approximately a five-minute timeframe. When this occurs, a trader seeking to profit
Creating Trendlines on a reversal to the downside could close his existing long position and assume a short position,
To create a trendline, the analysts must have at least two points on a price chart. Some analysts like to use to capitalize on the downward movement of the stock's price.
different timeframes such as one minute or five minutes. Others look at daily charts or weekly charts. Some Given the opposite trading scenario, a technical analyst seeking to profit from a reversal to the upside would
analysts put aside time altogether, choosing to view trends based on tick intervals rather than intervals of initiate the opposite strategy. If the trader sees adequate consecutive candlestick pattern movement to the
time. What makes trendlines so universal in usage and appeal is they can be used to help identify trends upside after the stock’s price has been trending downward, the trader may assume a reversal and could then
regardless of the time period, timeframe or interval used. enter into long positions to benefit from the rising prices, and close out short positions to stop the
If company A is trading at $35 and moves to $40 in two days and $45 in three days, the analyst has three investment from incurring further losses.
points to plot on a chart, starting at $35, then moving to $40, and then moving to $45. If the analyst draws
a line between all three price points, she has an upward trend. The trendline drawn has a positive slope and What is a 'Trading Strategy'
is therefore telling the analyst to buy in the direction of the trend. If company A's price goes from $35 to A set of objective rules defining the conditions that must be met for a trade entry and exit to occur. Trading
$25, however, the trendline has a negative slope and the analyst should sell in the direction of the trend. strategies include specifications for trade entries, including trade filters and triggers, as well as rules for trade
exits, money management, timeframes, order types, and other relevant information. A trading strategy, if
Reversal based on quantifiably specifications, can be analyzed based on historical data to project future performance.
What is a 'Reversal'
A reversal is a change in the direction of a price trend, which can be a positive or negative change against BREAKING DOWN 'Trading Strategy'
the prevailing trend. On a price chart, reversals undergo a recognizable change in the price structure. A A trading strategy outlines the specifications for making trades, including rules for trade entries, trade exits,
reversal is also referred to as a "trend reversal," a "rally" or a "correction." and money management. When properly researched and executed, a trading strategy can provide a
mathematical expectation for the specified rules, which helps trades and investors determine if a trading
BREAKING DOWN 'Reversal' idea is potentially profitable. Investors should generally consider using a systemized trading strategy, but be
An uptrend, which is a series of higher highs aware of its many limitations. Trading strategies aren’t a guarantee for success, but they may be effective in
and higher lows, reverses into increasing risk-adjusted returns.
a downtrend by changing to a series of lower
highs and lower lows. A downtrend, which is Pros and Cons of a Trading Strategy
a series of lower highs and lower lows, Trading strategies are a great way to avoid behavioral finance biases and ensure consistent results over time.
reverses into an uptrend by changing to a For example, traders with a specific set of rules governing when to exit a trade will be less likely to succumb
series of higher highs and higher lows. to the disposition effect, which causes investors to hold on to stocks that have lost value and sell those that
rise in value. Trading strategies can also be stress tested under many different market conditions to ensure
Reversals often occur in intraday trading and consistency.
happen rather quickly, but they can also
occur over days or weeks of trading. The downside is that profitable trading strategies are difficult to develop and it’s easy to become overly
Technical analysts watch for reversal reliant on the strategy. For instance, a trader may curve fit a trading strategy to specific back testing data,
patterns throughout the day, because they which can generate a false sense of confidence. The strategy may have performed great based on the past
can indicate the need for a different trading
data, but that’s no guarantee that it will perform just as well using live market data since the conditions may
be different. BREAKING DOWN 'Divergence'

Developing a Trading Strategy In technical analysis, divergence is
There are many different types of trading strategies for investors and traders to consider, but they can be considered to be positive or negative. Either
generally broken down into technical and fundamental trading strategies. The common thread between direction is a signal of a major shift in the
these two types of strategies is that they both rely on quantifiable information that can be back tested for direction of the price. Positive
accuracy. divergence occurs when the price of a
security makes a new low while the indicator
Technical trading strategies rely on technical indicators to generate trading signals. For example, a simple starts to climb. Negative divergence happens
trading strategy may be a moving average crossover whereby a short-term moving average crosses above when the price of the security makes a new
or below a long-term moving average. high, but the indicator fails to do the same
and instead closes lower than the previous
Fundamental trading strategies take fundamental factors into account. For instance, an investor may have a high.
specific set of screening criteria to generate a list of opportunities. These criteria may look at things like
revenue growth or profitability.

Investors and traders should find the strategy that works best for them through experimentation, back Interpreting Divergence
testing, and paper trading. For more, see How to Practice Day Trading. Divergence is usually associated with oscillator indicators. Oscillators measure the position of the current
data for a specific factor (such as price, momentum or volume) relative to the total range of said factor for a
specified number of historical bars on a bar chart. The calculation for oscillators takes various factors into
Volatility account. A situation in which the calculation of an oscillator results in peaks that are trending lower, while
1. Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility the price action of the underlying security is exhibiting peaks that are making new highs with every price
can either be measured by using the standard deviation or variance between returns from that same security swing, indicates that each new high achieved by the underlying price is getting weaker in terms of the factor
or market index. Commonly, the higher the volatility, the riskier the security. that is measured by the oscillator. On an appropriate price chart, a display of negative divergence will appear.

2. A variable in option pricing formulas showing the extent to which the return of the underlying For example, the Chaikin oscillator, takes the trading volume of the underlying security into account. In a
asset will fluctuate between now and the option's expiration. Volatility, as expressed as a percentage negative divergence situation (also referred to as bearish divergence), as price makes higher highs while the
coefficient within option-pricing formulas, arises from daily trading activities. How volatility is Chaikin indicator makes lower highs with each price swing, traders can conclude that the higher highs for
measured will affect the value of the coefficient used. price are being made with decreasing volume, signaling a potential reversal to the downside.

BREAKING DOWN 'Volatility' The inverse holds true for positive divergence. The relative strength index (RSI) takes into account the
In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security's momentum of price action for the underlying security. In a positive divergence situation (also referred to as
value. A higher volatility means that a security's value can potentially be spread out over a larger range of bullish divergence), as price makes lower lows while RSI makes higher lows with each price swing, traders
values. This means that the price of the security can change dramatically over a short time period in either can conclude that the lower lows for price are being made with less and less momentum, signaling a potential
direction. A lower volatility means that a security's value does not fluctuate dramatically, but changes in reversal to the upside.
value at a steady pace over a period of time.
Misinterpreting Divergence
One measure of the relative volatility of a particular stock to the market is its beta. A betaapproximates the Trading signals derived from divergence that are based on oscillator indicators can be difficult to read, and
overall volatility of a security's returns against the returns of a relevant benchmark(usually the S&P 500 is they are sometimes misleading. When the market is in a strong trend in either direction, oscillators do not
used). For example, a stock with a beta value of 1.1 has historically moved 110% for every 100% move in the function well. Any signs of divergence during a strong trend would be ambiguous at best. Divergence is best
benchmark, based on price level. Conversely, a stock with a beta of .9 has historically moved 90% for every suited for confirming market moves and should be used in conjunction with other technical indicators and
100% move in the underlying index. fundamental analysis.

Divergence
Divergence appears on a bar chart when the price of an asset and an indicator, index or other related asset
move in opposite directions. In technical analysis, traders make transaction decisions by identifying
situations of divergence, where the price of a stock and a set of relevant indicators, such as the money flow
index (MFI), are moving in opposite directions.
13 Stock Chart Patterns That You Can’t Afford To Forget Cup And Handle
Stock chart patterns play an important role in any useful technical analysis and can be a powerful asset for
any trader at any level. We all love patterns and naturally look for them in everything we do, that’s just A cup and handle pattern
part of human nature and using stock chart patterns is an essential part of your trading psychology. gets its name from the
By learning to recognize patterns early on in trading, you will be able to work out how to profit from obvious pattern it makes on
breakouts and reversals. I am a believer in technical analysis and do feel that chart patterns are a very the chart. The cup is a
powerful tool. curved u-shape, while the
handle slopes slightly
Why Are Stock Chart Patterns So Important? downwards. In general, the
On a very basic level stock chart patterns are a way of viewing a series of price actions which occur right-hand side of the
during a stock trading period. It can be over any time frame – monthly, weekly, daily and intra-day. The diagram has low trading
great thing about chart patterns is that they tend to repeat themselves over and over again. This repetition volume, and it can last from
helps to appeal to our human psychology and trader psychology in particular. seven weeks up to around
65 weeks.
If you can learn to recognize these patterns early they will help you to gain a real competitive
advantage in the markets. Just as volume, support and resistance levels, RSI, and Fibonacci
Retracements can help your technical analysis trading, stock chart patterns can contribute to
identifying trend reversals and continuations.
Ascending Triangle
What Stock Chart Patterns Should I Look Out For?
Why not print out this article and you will have the answer right next to you whenever you need it. All of This triangle usually appears
the most common patterns and what they mean to you as a trader are highlighted here. Keep this by during an upward trend and is
your desk and I promise it will be a huge help in the coming weeks and months. Just having them in your regarded as a continuation
face each and every day will subconsciously help you learn to recognize them during live trading. pattern. It is a bullish pattern.
Sometimes it can be created as
part of a reversal at the end of
Pennant a downward trend, but more
commonly it is a continuation.
A pennant is created when there is a
Ascending triangles are always
significant movement in the stock,
bullish patterns whenever they
followed by a period of consolidation
occur.
– this creates the pennant shape due
to the converging lines. A breakout
movement then occurs in the same
direction as the big stock move. These
are similar to flag patterns and tend to Triple Bottom
last between one and three weeks.
There will be significant volume at the The Triple Bottom pattern is
initial stock movement, followed by used in technical analysis as a
weaker volume in the pennant predictor of a reverse position
section, and growth in volume at the following a long downward
breakout. trend. The Triple Bottom occurs
when the price of the stock
creates three distinct downward
prongs, at around the same
price level, before breaking out
and reversing the trend.





Descending Triangle

The descending triangle is another Rounding Bottom

continuation pattern, but this
triangle is a bearish pattern and is This pattern is sometimes also called a
usually created as a continuation “saucer bottom” and demonstrates a long-
during a downward trend. term reversal showing that the stock is
Occasionally it can be seen as a moving from a downward trend towards an
reversal during an upward trend upward trend instead. It can last any time
(the opposite of the ascending from several months to years. It is very similar
triangle pattern), but it is to the cup and handle, but in this case, there
considered to be a continuation. is no handle to the pattern, hence the name.

Flag Continuation
The flag stock chart pattern forms through a
Inverse Head & Shoulders rectangle. The rectangle develops from two
trendlines which form the support and
The inverse head and shoulders stock chart resistance until the price breaks out. The flag
pattern is used as a predictor for the will have sloping trendlines, and the slope
reversal of a downward trend. It is also should move in the opposite direction to the
sometimes called the “head and shoulders original price movement. Once the price
bottom” or even a “reverse head and breaks through either the support or
shoulders, ” but all of these names mean resistance lines, this creates the buy or sell
the same thing within technical analysis. It signal.
gets the name from having one longer
peak, forming the head, and two level
peaks on either side which create the
shoulders.

Double Top
The flag stock chart pattern forms through a
rectangle. The rectangle develops from two
Bullish Symmetric trendlines which form the support and
Triangle resistance until the price breaks out. The flag
will have sloping trendlines, and the slope
The symmetrical triangle pattern is should move in the opposite direction to the
easy to spot thanks to the distinctive original price movement. Once the price
shape which is developed by the two breaks through either the support or
trendlines which converge. This pattern resistance lines, this creates the buy or sell
occurs by drawing trendlines, which signal.
connect a series of peaks and troughs.
The trendlines create a barrier, and
once the price breaks through these, a
very sharp movement in price follows.




Bearish Symmetric Triangle

The symmetrical triangle pattern is easy to spot
thanks to the distinctive shape which is
developed by the two trendlines which
converge. This pattern is created by drawing
trendlines, which connect a series of peaks and
troughs. The trendlines create a barrier, and
once the price breaks through these, it is usually
followed by a very sharp movement in price.

Falling Wedge
The symmetrical triangle pattern is easy to
spot thanks to the distinctive shape which is
developed by the two trendlines which
converge. This pattern is created by drawing
trendlines, which connect a series of peaks
and troughs. The trendlines create a barrier,
and once the price breaks through these, it is
usually followed by a very sharp movement in
price.

Head & Shoulders Top

The symmetrical triangle pattern is easy to
spot thanks to the distinctive shape which is
developed by the two trendlines which
converge. This pattern is created by drawing
trendlines, which connect a series of peaks
and troughs. The trendlines create a barrier,
and once the price breaks through these, it is
usually followed by a very sharp movement in
price.