How to Make Profit From Reversal Formations In Stock Market

Reversal formations are of several different type to make profit from reversal formation you need to know the basics of this formations  So we will start with basic definitions and then go into the detail understanding of all the formations. Some of the examples of this formations are like head and shoulders, triangles, rectangle, wedge etc.  We will learn about them all in detail.

What are Definition of Reversal Formations?

Stocks price move in trend. Sometime the trend is straight, sometime curve, sometime long sometime short. Some of these trends we can see clearly on chart and some are not that clear. You can see several type of trend in action when you study price chart of any stock.

Sooner or later this trends change direction this sometime start with a consolidation pattern and then there is change in trend. When his happens they form a pattern what we call a reversal pattern. This is indication that the trend is about to change it can be in any direction up or down. By use of reversal formations we can change our strategy accordingly.

As technical analysis we just have to follow trend. In this chapter you will learn how to spot this reversal formation and make changes to your portfolio accordingly. So that you can make profit out of the trend that is about to start.

How much Time is Required to Build a reversal formation

The time required to build reversal depends on time frame you are using. Like it will take hours in minute chart weeks in day chart and months in weekly chart. So there is no fix time that is required to form a reversal pattern.

We can understand reversal in trend by an analogy like when there is speeding car which is running at 90 km/h it will not stop instantly it will take some time. In same way when we’re is trend up or down it will take so time to reverse it.

What Is Technical Analysis?

Technical Analysis (TA) is study of market action itself at the place of study of individual security that trade in it. In Technical Analysis we study price the most important piece of information that contain all the information that is related to the movement of price. At place of understanding the fundamental factors that influence price of stock, future or currency.

It assumes that price reflects all the given information about the market. Study of the price will give us the information about the trend of the market which is needed to make profit in the market.

It uses several different tools to find the trend in price like price patterns, indicators, candlesticks and many more. The main purpose of all this tools is to find the trend and then ride the trend long enough to make profit out of it.

 

How does Technical Analyst Make Money?

 

Think of technical analyst as a surfer who rides the tide of sea till it’s going in direction then shift to the other when it changes. In the same way an analyst buy the stock low at the stating of the trend and sell it high or sell high and buy low. It doesn’t matter in which direction the price is going up or down. He will make profit if he is in the right side of the trend.

 

What is a Trend?

 

Trend is directional movement of price that remains in effect long enough to make profit out of it. There are two types of trend uptrend and the down trend.

When there is higher high and higher lows this is called an uptrend. When there is lower high and lower lows this is called the down trend.

If you are new to Technical Analysis you can start by reading Technical Analysis: The Complete Resource for Financial Market Technicians (2nd Edition) it is a good book and you will get most of the information to start with.

 

21 Surefire Ways To Become A Great Trader

Is it possible to become a great trader? YES it is! The most important quality of a great trader is disciple if you are a disciplined trader you will become a great trader in time. This are some guideline that will make you a disciplined trader/investor in stock market, Forex market or money market all you have do is follow it. Read this list for 30 day when you wake up in morning till it become a second nature to you.

  1. The market pays you to be disciplined.
  2. Be disciplined every day, in every trade, and the market will reward you. But don’t claim to be disciplined if you are not 100 percent of the time.
  3. Always lower you’re trade size when you’re trading poorly.
  4. Your biggest loser can’t exceed your biggest winner.
  5. Develop a methodology and don’t change methodology from day to day.
  6. Be your self don’t try to be someone else.
  7. You always want to be able to come back and play the next day.
  8. Get out of your losers.
  9. The first loss is the best loss.
  10. Don’t hope and pray. If you do, you will lose.
  11. Don’t worry about news. It’s history.
  12. Don’t speculate. If you do, you will lose.
  13. Love to lose money.
  14. If your trade is not going anywhere in a given time frame, it’s time to exit.
  15. Never take a big loss. Only a big loss can hurt you.
  16. Start with little have little goals and achieve it continually.
  17. Hit singles not home runs.
  18. Consistency builds confidence and control.
  19. Make the same type of trades over and over again – be a bricklayer.
  20. Don’t over-analyse. Don’t procrastinate. Don’t hesitate. If you do, you will lose.
  21. Market work as he likes not as you think.

Doing a little work every day has more effect that doing all the work in a single day. Your effort will compound over time so keep working. You can learn more about trading and investing on the blog you should read more. Knowledge is power.

Terms Start With G

 

Important terms starting with G that can be useful for making money in stock market, Forex or any financial market it pays to know them.

Gap: When stock’s high and low prices on a given day do not overlap the stock’s high and low of the previous day. In other words, when instrument trades above the previous day’s high or trades below the previous day’s low and remains in that direction. When a gap initiates a trend, it is called a breakaway gap; an exhaustion gap ends or reverses a trend, and measuring gaps usually duplicate the most recent move before the gap.

Terms Start With B

 

Important terms starting with B that can be useful for making money in stock market, Forex or any financial market it pays to know them.

Back and Fill: Same as Consolidation. See also Stabilization. Trading back and forth in a narrow range.

Bar Chart: Price/time chart that depicts high, low and close data as bars on the vertical axis and time intervals on the horizontal axis. Volume is usually indicated also, as vertical bars on the bottom of the chart under the applicable price data.

Base: Period of accumulation (see above), also called “Bottom.” Can also be described as price level where buyers continue to buy supporting the market.

Bear Market: A long period of time, often a year or more, when the general trend of securities prices is down.

Bear Trap: A false move to the downside that does not initiate a new downtrend, but is actually the final reaction prior to a sustained advance, hence “trapping the bears.”

Block: A single transaction of large number of shares. The NYSE defines transactions of 10,000 shares or more as blocks.

Blow Off: The final phase of an uptrend, ending a mark up phase, when prices rise very rapidly usually on high volume, leading to a sharp reaction. See “Climax.”

Breadth: Net number of stocks advancing versus declining. When advances exceed declines, breadth is positive; when the reverse is true, breadth is negative.

Breakdown: Like “Breakout,” but used to refer to the downside.

Breakout: When stock’s price or volume exceeds previously recorded high or low (or resistance or support level) or some other predetermined criteria. Also called “Penetration.”

Bull Market: A long period of time, usually a year or more, when the general trend of securities prices is up.

Bull Trap: A false move to the upside that does not initiate a new uptrend, but is actually the final rally before a sustained decline, hence “trapping the bulls.” A bull trap can be described as a strong rally in the context of a “Bear Market” which traps buyers into believing that the market is turning to the upside.

Terms Start With A

 

Important terms starting with A that can be useful for making money in stock market, Forex or any financial market it pays to know them.

Accumulation: A time when buyers emerge purchasing securities, generally from distressed sellers. It can be seen as a period when equities are absorbed by expanding demand over a period of time resulting in a possible favorable effect on price or a period of price equilibrium following a decline. This can be viewed as the first phase of a bull trend, or perhaps even the beginning of a bull market.

Advance-Decline Line: Number of stocks advancing divided by the number of stocks declining over a particular time period.

Advisory Services: Newsletters that comment upon and attempt to forecast the course of various markets. They tend to be trend followers and are often overly bullish at tops and overly bearish at bottoms.

Apex: A peak or a point of intersection of two trendlines; the usual connotation that some new trend may evolve as prices approach that intersection.

Arbitrage: Simultaneous buying in one market and selling in another market in order to take advantage of differences in price. As it relates to stock could be the purchase of the aquiree and the sale of the acquirer. In futures could relate to buying one futures contract and selling a like contract to capture price inefficiencies.

Volume Spikes

Volume spikes (not to be confused with price spikes) are most common at the beginning of a trend and at the end of a trend. The beginning of a trend often arises out of a pattern with a breakout, and the end of a trend often occurs on a speculative or panic climax. Higher-than-usual volume tends to occur with each event. By screening for volume, the trader can often find issues that are either ready to reverse or that have already reversed. The usual method of screening for a volume spike is to compare daily volume to a moving average. The trader can look for volume that is either a number of standard deviations from the average volume or a particular percentage deviation from the average. As for interpretation of the spike when it occurs, it is often difficult to determine which variety of spike has occurred until after the spike peaks and you observe the subsequent price action.
Usually there is a reason for a volume spike, but the reason for the spike may be unrelated to the technical issues of price trends and behavior. Of course, heavy trading may be related to a news announcement made about the company. Or, heavy trading volume in a stock can occur if the stock is a component of an index or basket that had a large institutional trade that day.
Options expiring can also influence volume figures. In all spikes, any outside reason must first be investigated because it may have nothing to do with the issue’s trend and price behaviour.

Volume Spike on Breakout

Breakouts are usually obvious. High volume on a gap or on a breakout from a pre-existing chart pattern is usually the sign of a valid breakout. Although breakouts do not necessarily require high volume, many analysts use a spike in volume as a confirmation of the breakout and ignore those without a volume spike.

Volume Spike and Climax

A climax usually marks the end of a trend and either a subsequent reversal or consolidation. Climaxes come in many forms, however, and are not always identifiable except in retrospect. Generally, climaxes occur with one of the short-term reversal patterns. These typically can be price spikes or poles, one- or two-bar reversals, exhaustion gaps, key reversals, or any of the other short-term reversal patterns.