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With experience, every trader gains knowledge about support and resistance levels, trends and corrections, as well as various technical indicators. By actively trading every month, it becomes easier to see candlestick and chart patterns. However, you’ll still need to master some of the more complicated stuff to keep moving forward.
1. Wolfe Wave
Look for price shapes that are similar to wedges. Pay attention to the stages of the pattern. You should be wary after the price has formed the first four points – in other words, the range is getting smaller. After that, there are three possible scenarios:
- The price broke through lines 1-3 and then continued to move in the direction of the breakout.
- The reserve price drops from lines 1-3.
- The price rose slightly above the 1-3 line and then reversed.
The third scenario reflects what we call ‘Wolfe waves’. If points 3 and 4 are above points 1 and 2 respectively, then get ready for the formation of a bearish Wolfe wave pattern. It is very important that waves 1-2 and 2-3 are equal (symmetrical). The Fibonacci tool will also help a lot to confirm the pattern: point 3 is usually located at the 127.2% or 161.8% extension of wave 1-2.
Pay attention to point 5. A beginner would mistake that for a breakout, and that’s the hard part. Point 5 is usually at 127.2% or 161.8% extension of wave 3-4. In addition, there is a certain chart area between lines 1-3 and parallel lines 2-4 taken from point 3: if the price reverses down in this ‘sweet zone’, then this is a signal to sell. Otherwise, the bearish Wolfe wave pattern is not confirmed.
Take Profit and Stop Loss
The nice part is that the pattern gives the trader a clear target.
TP1: garis support 2-4.
TP2: Draw a line through points 1 and 4: the second target, point 6, should be there. The movement between points 5 and 6 will last a long time and thus will allow the trader to earn enough profit points.
You can put Stop Loss above point 5.
If you see a reversal candlestick pattern in the ‘sweet zone’, cheer up and consider trading with a big target (point 6). If the price crosses the ‘sweet zone’, then this is a different pattern, therefore consider trading in the direction of the breakout.
Not difficult is it? The main thing you have to train is your eyes: you have to do a visual analysis of the price chart to recognize the Wolfe wave above it.
Gartley patterns belong to a group called harmonic patterns. The patterns (Crab, Butterfly, Bat, and Shark) are very similar to each other. The difference between the two lies in the proportion of price changes. To understand logic and its patterns, start by mastering Gartley, the rest will be easy.
The main difficulty with the Gartley pattern is that it looks very much like a top market, but price increases will follow. Note that in all bullish harmonic patterns, the second peak is lower than the first. In addition, the structure of the ascending pattern resembles the letter M, while the descending pattern resembles the letter W.
As soon as you see such a shape on a chart, the first thing that pops into your mind should be: the situation may not be as simple as it seems. Take action: use the Fibonacci retracement tool to check the position of key points.
- Point B is at the 61.8% retracement of XA. This is the most important condition.
- Point C could be at the 38.2% -88.6% retracement of AB.
- Point D can be found at the 127.2% -161.8% extension of AB or at the 78.6% retracement of XA.
Bullish Gartley pattern example
Take Profit dan Stop Loss
TP1: 61.8% of CD.
TP2: the projected size of XA from D.
Stop Loss can be placed below X for a bullish Gartley (above X for a bearish Gartley) or according to your risk management rules.
The problem with harmonic patterns is that in real life, the patterns you find on charts often don’t match the ratios listed above perfectly. As a result, the greater the difference between the Gartley pattern and the pattern you wish to trade, the higher risk of error must be taken into account.
Renew the way you view the market. Even if you decide not to use the Gartley pattern as a signal, you should still get used to its shape so as not to mistake the market’s tops or bottoms. You’d be surprised how often these patterns occur.
3. Pola Three drives
Here’s another tricky pattern. A novice trader may mistake this for a healthy trending market. However, advanced traders should be able to avoid such mistakes.
Patterns like this occur in different trends. In other words, a market that has direction over some period. Then, you notice that the price movements start to look very similar in size and shape. This will tell you: be careful, the trend is likely to change direction!
Like the previous two patterns, you will find several Fibonacci ratios in this pattern.
- Point A is at the 61.8% retracement of drive 1.
- Point B is at the 61.8% retracement of drive 2.
- Drive 2 is at 127.2% -161.8% extension A.
- Drive 3 is at 127.2%-161.8% extension B.
An example of a bearish Three drive pattern
But that doesn’t mean you have to memorize the ratio. The 61.8% retracement is quite natural and you can remember how it looks visually.
- You can trade drive 3. Enter the market when you believe that the market has formed point B (buy a bearish Three-Drive and sell in a bullish Three-Drive). Take Profit should be around 127.2% -161.8% extension B.
- You can trade when all patterns are complete. Enter the market at 127.2% -161.8% extension B (sell in a bearish Three-Drive and buy in a bullish Three-Drive). Take Profit can be placed at the 61.8% Fibonacci retracement of the overall pattern.
Sometimes the trend ends in a Double Top or Head and Shoulders pattern, but coincidentally the trend ends with three similar movements. It is important to understand this pattern. In addition, it provides a great opportunity for open trading.