Hello Crypto Lovers,
It is another wonderful time again at the academy. This week is the 2nd week corresponding to week 5. I hope you enjoyed the week one. I am Kehinde Micheal and my username is @msquaretwins here on this great platform. I have gone through the lecture presented by professor @sachin08 on "Recognizing Simple Patterns in Trading" in the beginner class. Therefore, in this post, I will be answering the questions posted in the homework section. Happy reading!
1. What is your understanding about Triangles in Trading. Explain all forms of triangles in your own words. (Screenshot required)
In finance trading, chart often form different patterns and over the years, traders and financial analysts have identified, named and classified some of these patterns based on the shape or how they are seen in chart. For instance, some of these patterns form shapes and so they are named after different shapes they form.
Triangles in trading are nothing but chart patterns that appear on a chart which dictate distinctive state of a market at a particular period of time. When triangles chart pattern form, there may be continuation of a trend or reversal of a trend. This means that triangles chart patterns are both continuation and reversal pattern.
There are two broad of types of triangles in trading. They are symmetrical and asymmetrical triangles. But asymmetrical triangle is further categorized as ascending triangle and descending triangle
An Ascending Triangle is a type of triangle that is formed when a bullish move pauses and consolidates for a while such that the one side of the triangle(upper side) form a flat side while the lower part keep rising until a break out to the upside for bullish trend to continue.
As seen in the screenshot uploaded above, price keeps dropping every time it reaches the flat side of the triangle and this shows thsat the buyers are more stronger than the sellers because the buying pressure keep rising where the supply area stood still. At some point, buyers violently dragged the price upward and a breakout of the flat trendline occurred as seen in the screenshot above.
Descending Triangle is another form of pattern in trading. This pattern is the mirror image of ascending pattern. While ascending pattern occur in a bullish direction, descending triangle pattern occur during a bearish move. This triangle has a flat side in the downward side and the upper side keep decreasing until a break of the flat side.
As seen from the image above, price keeps bouncing back at every approach of the flat side of the triangle, this shows that the buying power is weaken as compared to the selling pressure. At a point, seller later dragged price with full force downward and a break of the flat side occurred as demonstrated in the picture above.
Symmetrical triangle just as it name implies has the two side of the triangle similar to each other. What does this mean? This means that both the upper and and the lower side of the triangle keep decreasing and increasing respectively. In other words, the two lines when drawn converge at a point.
The main different this triangular pattern and the other types of pattern is that symmetrical triangle is neutral in that break out may occur in either direction. If the break out happens to be to the upside, a bullish order is always envisaged but if it is otherwise, traders look for a sell order.
2. Can we also use some Indicators along with it Triangle Patterns? Explain with Screenshots.
In finance trading, the best way to have a great and good chance of winning is yo never relied on a single strategy. While it is better to master a strategy and to maximally follow it, it is far more better to always confirm the strategy with some tools and this is where indicators come into scene.
In light of the above, I say a capital YES to this question that indicators can be used along with different Triangle patterns we have discussed in the subsequent paragraphs. By the way, what are indicators? Indicators are great technical tools which traders or financial analysts employed on chart for analysis which help them understand the price movement and the directional trend of an asset over a period of time.
Combining Moving Average Indicator with Triangle Pattern
Let's see how an indicator can help a trader to better trade triangle patterns. Let's take a look at a chart below
The chart below is a chart of ETH/USDT on a 4hours time frame. As seen in the screenshot above, a descending triangle pattern was supported as demonstrated in the screenshot. Then two moving averages indicators are added to this chart.
The two moving average indicators are Moving average 20 and Exponential Moving average 50. The moving average indicator is blue and the exponential moving average is red.
Now, we can see that a cross of the two moving average occur even before the breakout of the descending triangle. What does this tells us? It shows bearish trend. Anytime there is a cross of two moving average to the the downside, it signifies downward movement. Also, when the price is trading below the moving averages, it indicates decline of the asset and interestingly, in the chart above, Immediately after the cross, price started trading below the two moving averages.
Then, in a short while, a break of the descending triangle occurred. Wonderful, this is a great confluence for a trader to take a sell order. The two confluence; a sell confirmation from the moving averages and a breakout of a descending triangle further reinforce the confidence to enter a sell order at this place.
Using Bollinger Band Along with a Triangle Pattern
In this second example, I will show how a Bollinger band could be used to better reinforce the signal from triangle pattern on a chart.
Let's take a look at the picture uploaded below
On the chart above, an ascending triangle pattern was spotted. Also added to the chart is Bollinger band. Bollinger band is an indicator that help a trader tp know the price movement of an asset. It has three band, the upper band, lower band and the middle band. The lower and the upper band are blue lines and the middle band is the brown line which follow the price of an asset as seen in the chart above.
As seen from the chart uploaded above, there was a breakout of the ascending triangle and at this point, trader would place a buy order. Now, Bollinger band further reinforced the buy signal from the ascending triangle in that after a breakout, price sticks to the upper band and for a long long time which signifies a string bullish trend. Let me tell you or perhaps remind you that, when a price sticks to the upper band of a Bollinger band, it shows strong bullish trend and if it sticks to the lower band, it indicates strong bearish trend.
So we can see that apart from the confluence from the break out, Bollinger band also confirms the buy order signal at this point. Therefore, indicators can be a great way of order confirmation in finance trading.
3. Explain Flags in Trading in your own words and provide screenshots of both Bull Flag and Bear Flag.
Flags patterns are another unique pattern in trading. This pattern is used to indicate and to show trend continuation in market. The flag often give a move that opposes the the current trend which usually follow by a sharp movement of price. Flags pattern can occur either in a bullish trend which is called bull flag or bearish trend trend which is known as bear flag.
Flag pattern can be said to have four phases. which include, the previous trend, the consolidation phase, volume phase, and the breakout.
Let's take a look at the Bull flag which is uploaded below.
• As we can see that the trend of the asset is bullish, then there was a sharp move upward, this sharp move is what I called previous trend. Then at some point, it started to be consolidating as the buyers and sellers are dragging price between themselves. This phase is the area under support and resistance line drawn in the screenshot and this is the consolidation phase.
• And lastly there was a great volume to the upside and a break out occurred as seen in the screenshot below.
Just as we have bull flag that occur to the upside, we also have bear flag that occur to a downward side.
• As seen in this screenshot below, the asset is on a downtrend and a sharp move of price to a downward side occur at a point. After this, a consolidation occurred such that both buyers and sellers keep dragging the price until a break out to the downside.
• Then seller came to the market with a great force and dragged market downward and there was a break of the flag to the downside as illustrated in the screenshot below.
4. Show a full trade setup using these Patterns on any Cryptocurrency chart. (Ascending Triangle, Symmetrical Triangle, Bear Flag)
Trade Set P Using Ascending Triangle
• As we can see from the image uploaded above the ascending triangle is formed and this is marked and demonstrated in the screenshot. We have ascending line which is the support line and a flat line which is the resistance line.
• So for entry, we patiently watch out for a break of flat trendline and the entry is taken at this point.
• For stop loss, the ascending trendline which is the support line is used. The stop loss was placed just below the last low point of ascending trendline before a break occur.
• For target, the difference between the startpoint of flat trendline and the ascending trendline was taken and then added to the entry point to get the target. distance.
Trade Set up Using Symmetrical Triangle
• As we seen in the image uploaded above, the symmetrical triangle formed on the chart and it is illustrated above. The support line and the resistance line are drawn.
• The stop loss is placed immediately below the last low of the support line before a break of the symmetrical triangle.
• And the entry is taken immediately after the break of symmetrical triangle.
• The target is placed above with almost 1:1 risk to reward ratio.
Trade Set up Using Bear Flag
• The screenshot above is the chart of DOT/USD on a 4hr time frame. As seen from the chart, a bear flag formed. After a strong move down, the buyers and seller then dragged the price and at thus point the asset consolidated for a while. Then sellers violently dragged the price downward causing a break of the flag.
• The entry for this order was taken immediately at a break out and the stop loss was placed above the last high of the resistance trendline shortly before the break. The target is taken by measuring the difference between the start of the two trendline and then added to the entry point.
Triangle pattern are unique pattern that are very important in trading. They are not just for a trend direction, they can be applied to different direction based on specific one that forms at a particular period of time. For example ascending triangle is employed for a bullish trend but the mirror image of this is applicable for a bearish trend which is descending triangle.
It should also be noted that it not a good idea to rely only on triangle patterns. While they are very good and can depicts or shows the next move in market, they should be combined with some tools for example, indicators. If these pattern are used with other technical tools it will increase the success rate of traders.
In this post I have explained difference types of triangle patterns used in trading with relevant screenshots. I also explain how indicators could be combined with triangle patterns for effective result in trading with great technical demonstration from chart. Not only that, I also explain different types of flags in trading with appropriate screenshots.
Lastly, I showed full trade set up for ascending triangle, symmetrical triangle and a bear flag. Special thanks to Professor @sachin08 for this wonderful lecture.
Thank you for reading