Technical analysts and traders believe that certain chart patterns and shapes are signals for profitable trading opportunities. Many professional and amateur traders claim that they consistently make trading profits by following those signals. In this chapter we introduce some types of chart patterns and the corresponding trading strategies, that, according to our extensive historical tests, give the trader an advantage.

Candle Stick Trend Reversal

A candle stick chart is a good presentation of momentum. On a candlestick chart, one can easily see the secession of up days, down days and sudden changes in the pattern. The following figure is an example of what is sometimes called "First Sunny Day", a typical buy pattern.

Figure 11. A Trend Reversal pattern. After a long, long decline, the rate suddenly goes up in significant magnitude. Furthermore, it closes much higher above its open. This "First Sunny Day" sends a short-term buy signal.

The trading strategy for a "First Sunny Day" pattern is to buy the contract and hold until it recovers the range lost by the recent secession of down days, or to cut losses if it drops back to the prior day's low. This pattern usually signals a very good profit-risk ratio.

Figure 12. This is a short-term Trend-Reversal pattern. After a long, long rise, the rate suddenly drops; its close is much lower than its open. This pattern hints that something has suddenly gone wrong with the stock. This so-called "Sudden Cloudy Day" pattern indicates one should sell without delay.

In this example of the, "Sudden Cloudy Day" pattern, the trading strategy is to short the financial asset and hold it until it retraces the recent secession of up days or to cut losses if it breaks the previous day's high.

For longer-term trend-reversal patterns, we often look for the "Shooting Star"; as shown in the example above. We also look for the "T-Shape" which signals a bounce-back buy signal.

Figure 13. The price soared considerably in the past few days. At present, it shoots up, as if exhausting all its energy. This Shooting Star pattern hints that the market has lost confidence in the further potential of the underline, indicating a likely downturn.

Figure 14. The rate dropped over several days. Presently, it drops precipitously, then bounces back to close near the open, forming a "T" shape. This may indicate that the market finally has finally decided the financial asset has dropped enough, with many bullish traders and investors coming to the rescue.

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