Price Movement Creates Chart Patterns
When you look at price on a chart there are only so many ways that it can move, after all we are only talking 2D here. Price can only go up, down, or sideways. Understanding every possible situation that could play out is actually not that hard. At the end of these lessons you should know them all.
All price movements can be understood with a few simple patterns. It doesn’t matter if price moves up, down, or sideways, it will do so in pattern formations. If you spend some time understanding the logic of why this is, you will be able to react to them as they present themselves. Eventually, you will be able to fluently read what the next probable moves that price could make are. Let’s take a look at the only way that up, down, or sideways can play out.
Trend Continuation Patterns
When price is moving up or down it will always still be in a competition for direction. This means it will never be a straight line. The up or the down movement needs to be viewed in a pattern format. This is created by the tug of war between the buyers and the sellers. The overall direction of the pattern is what will give you the up or the down movement as a whole.
In the case of the bearish downtrend, the sellers have control of the market. This is clearly signified by the lower highs (LH) and lower lows (LL) that are being made. The piece of this pattern that you would want to be trading as a trend continuation style of trade, would be the 3rd wave of selling
In the case of the bullish uptrend, the buyers have control of the market. This is clearly signified by the higher lows (HL) and higher highs (HH) that are being made. The piece of this pattern that you would want to be trading as a trend continuation style of trade, would be the 3rd wave of buying.
What you are doing here is waiting for a trend to be established and then joining in for the first wave of a confirmed trend (the 3rd wave). You could then go on to trade the 4th and 5th waves in the same direction if there was room for the overall directional move to run. How you can judge that will become clearer to you over time but for now just understand that the 3rd wave is always going to be the safest. The 4th and 5th waves are less common and need a higher level of experience to attempt.