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Learn to Identify Stock Chart Formations
Author: Adam Hewison
POSITIVE AND NEGATIVE FORCE LINES
A Positive Force Line (PFL) means that rates are trending in a positive way and is put into place when a uptrend is underway. In order for a Positive Force Line (PFL) to be valid, it must be joined by at least three points. The longer the Positive Force Line (PFL) is in place the larger the ensuing move will likely be in the opposite direction once the Positive Force Line (PFL) is broken. A Negative Force Line (NFL) acts in just the opposite fashion to a Positive Force Line (PFL). Arrow (A) indicates that a Negative Force Line NFL has been broken to the upside. Arrow (B) shows a Positive Force Line in place.
HEAD AND SHOULDERS FORMATION
One of the oldest and most reliable of all chart formations is the Head and Shoulders Formation. This formation takes place usually after a trend has been established and in place for some time. Both the Head and Shoulders Top (HAST) and the Head and Shoulders Base (HASB) have a high degree of accuracy and usually portend to a major change in direction for either a currency or a cross rate. A Head and Shoulders Formation should only be considered completed when the neckline is broken. Once the neckline is broken, it is possible that prices can set and retest the neckline. The left shoulder (A) gave the market a small rally, which was quickly followed by a break in prices. This break (B) created the head of the HASB. The right shoulder (C) completed the formation.
NEGATIVE FORCE TRIANGLES
Triangles can vary in both shape and size and are easily recognized in their various forms in foreign exchange charts. Positive and Negative force triangles are extremely important, as they often act as a indicator of either new or renewed market action. Triangles can indicate both continuation patterns as well as reversal patterns. One of the strongest assertions about both Positive and Negative Force Triangles is that they usually portend to significant moves. The measurement used is to take the vertical side of the triangle and measure the distance. This will then give you a minimum objective from the breakout point. Both (A) and (B) are Negative Force continuation type triangles.
Double Tops (DT) and Bottoms (DB), when they occur, are among the most important chart formations of all, usually indicating a substantial move in the opposite direction. At times it may appear as though a double top or bottom is forming only to see it fail and become part of another overall chart pattern. One way to avoid this is to wait until either a Positive or Negative Force Pivot Points is taken out; this acts as a confirmation (see Positive or Negative Force Pivot Points). Point (A) creates the is the first drive down of this double bottom ( or potential Triple Bottom). The market confirms the formation by moving over a NFL.
NEGATIVE FORCE FLAG & PENNANT
Positive and Negative Force Flags and Pennants are among the most reliable of indicators. Often Positive and Negative Force Flags and Pennants form when a currency moves into new high or low ground. The more tightly constructed a Flag or Pennant is the more dynamic and reliable the move. It is safe to say that both a flag and pennant formation are among the most reliable of all indicators, especially after a fast move in one direction. Measuring objectives can be particularly rewarding using either a flag or pennant formation. A tight Negative Force Flag (A) is quickly followed by a Negative Force Pennant (B). Also shown a HAST, with its HASTZ having been achieved.
POSITIVE & NEGATIVE FORCE GAPS
A Positive or Negative Force Gap represents a blank space on the chart at which no trading took place. Gaps are generally very significant, and should not be ignored. In the currency markets gaps occur usually in sets of three. Occasionally you will get an extra gap thrown in. Positive or Negative Force Gaps should be watched carefully, as they measure the pulse of the market and give you advanced warning of potential trend changes. A dynamic series of Negative Force Gaps (A) was followed by a equally powerful series of (B) Positive Force Gaps.
NEGATIVE RESISTANCE LINE
Both Positive Support and Negative Resistance Lines are important, as they show exactly where the support or resistance is for a particular currency. Unlike Positive Force Lines, which are drawn on an angle and must be connected by three points to be valid; Positive Support and Negative Resistance Lines are drawn horizontally. These lines need a minimum of two points to justify being called Positive Support. The more points and the greater the length of time involved, the greater the significance of that area. A Negative Resistance Line (A) is broken on the upside. See how quickly the market moves after it breaks over a NRL. Another NRL (B) forms using three points.
POSITIVE FORCE PIVOT POINT
Positive and Negative Force Pivot Points have a history of successfully picking both tops and bottoms. Pivot Points, whether they be positive or negative should never be ignored; they give very few false signals and have proven themselves over time. The breaking of a pivot point signals very clearly that the market has failed and should now move in the direction that the V is pointing (see Chart). Measurement of pivot points are as follows. Locate the pivot point, move over to the right and measure from the pivot point to the highest/lowest point of the failed rally/or break. Then take that measurement and add or subtract it from the pivot point. Arrow (A) marks a Positive Force Pivot Point. Arrow (B) indicates the Positive Force Target Zone PFTZ. To achieve the PFTZ simply add the setback to the PFPP.
POSITIVE FORCE TARGET ZONE
Positive and Negative Force Target Zones are activated when they move out of a corresponding technical positive or negative formation. when the market flashes a negative or positive target zone (NFTZ) PFTZ), take a conservative viewpoint and be willing to take profits several points or pips before a target is reached. Always look to take a profit before a big number. Letís say we have a Negative Force Target Zone (NFTZ) of 1.5000 (.6666) on Sterling; look to take profits at 1.5030 (.6653) level. Never wait for the extra ticks. Target zoes should always be shaded a little on the side of conservatism. (A) indicates a NFTZ been achieved. A Positive Force Pivot Point (PFPP) indicates a Positive Force Target Zone PFTZ see (B).
NEGATIVE FORCE CHANNEL
The formation of either a Positive or Negative Force Channel does not happen very often in the currency markets but when it does, it is a thing of beauty. A channel formation, whether it be positive or negative, is simply two parallel lines drawn at an angle that contain all market activity. Here we see a perfect Negative Force Channel (A). Upon reaching a NFTZ, the market makes an Island bottom IB and reverses course, breaking over the NFC.
Owner, Ino.com and Co-creator of the MarketClub Trading Service
About the author:
Adam Hewison is the co-founder and president of ino.com's Marketclub trading service. After a successful career as a futures and options trader at the Chicago Mercantile Exchange, Hewison traveled the globe helping new and seasoned traders and investors become better traders and investors. He eventually compiled his training techniques and trading methodologies into a useable tool called Marketclub. With the help of his partner, who is the software guru behind Markeclub, Hewison released the trading tool to the public with hopes of empowering the trading community with a tool that can be used by swing traders, investors, options traders, futures traders and forex traders, alike. The trading service has evolved into more than just a trading software that provides accurate entry and exit signals, the trading service also provides ongoing trading education via webinars and a powerful stock scanning and charting software. To find reviews on the marketclub trading service, visit the following website: MarketClub review.