List of Original Classic Formations with Detailed Explanations
One of the most important aspects of learning to read stock
charts and using Technical Analysis is to remember, that the Market Structure
is changing and evolving over time. Sometimes these changes are very slow,
other times the evolution is occurring at a rapid pace. In the past 5 years,
the pace of change has been accelerating and continues to move at an ever
increasing level. Therefore beginner Independent Investors and Retail Traders
need to be aware that all of the older books, articles, and information on the
internet as well as in bookstores can be studied but also accepted as being
outdated.
The Topping Candlestick Pattern Formations that are
developing now in the Stock Market reflect the fact that now 70-80% of all the
market orders are automated. What this means is that most of the orders are
triggered by a computer. Market Makers used to be humans that made the market,
by filling orders when there was no counter order. Now most of the Market Maker
orders are fully automated.
Computer generated and matched orders create different
technical patterns including topping formations, than human initiated and typed
in orders to the market. In addition the increased use of Alternative Trading
Systems the giant Buy Side Institutions use creating Dark Pools, High Frequency
Trading Firms algorithmic trading, Electronic Communication Networks, and 16
different US stock Exchanges create a far more dynamic Stock Market than what
was present just a few years ago.
To start understanding Topping Formations, beginner
Independent Investors or Retail Traders must learn The Four Original Classic Topping
Candlestick Pattern Formations. Then they must learn the NEW Topping
Candlestick Pattern Formations of the automated marketplace. When both are
learned, then the Independent Investor or Retail Trader is prepared to use
stock charts and Technical Analysis to the fullest advantage and success. The
TechniTrader Candlestick Patterns Explained Webinar shows NEW Candlestick
Patterns.
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Topping Candlestick Pattern Formations occur when a stock has been moving up for a long period of
time, and speculation has entered the price action. Often stock prices will go
vertical with huge gains or shrinking candlestick price action, just before a
topping pattern begins. Tops often take a long time to form because most
Independent Investors and Retail Traders do not want to believe the uptrend is
over. Late comers frequently buy a stock that is topping when it
"dips" in price, because they are unaware of the fact that the stock
has reached the end of its long-term or intermediate-term uptrend and needs to
correct and move down.
This late buying causes tops to form over an extended period
of time with a variety of topping patterns. Sometimes a top comes swiftly and
the price collapses, but usually it takes a while. Regardless of your personal
investing or trading style, being able to recognize topping formations early
will help you keep more profits by exiting before the stock falls.
The Four Original Classic Topping Candlestick Pattern
Formations are the following:
1. Inverted V Top
This is the opposite of a bottoming V stock. The Inverted V
Top occurs when a stock has been running up so fast that it does not develop
any viable support levels. Instead it suddenly peaks and forms a sheer cliff
drop on the other side. These often have gap downs and the runs are so fast
downward that they can be tough to catch. Inverted V tops are rare now due to
how High Frequency Trader activity controls most topping formations.
2. Double Top
This is an inverted W or what is usually called an "M
Top." This is where the stock reaches a high, retraces, and then moves up
again but is unable to move beyond the original previous high to continue up.
It then proceeds to move down again. The confirmation that a reversal of trend
has occurred is when the price of the stock violates the lows of the M formation.
Double Tops are not topping formations until the reversal is signaled. Double
Tops can easily turn into a longer term sideways pattern that meanders up and
down within that price range, so confirmation of price is critical. Also Double
Tops or M Tops are less common and rarely form on long-term trends. With the
automated market, most M Tops are seen only on the short-term trend.
3. Triple Top and Head & Shoulders Top
These are basically that the Head & Shoulders
formation is a variation of the Triple Top. Head & Shoulders Topping
Formations are exceedingly rare nowadays. Triple Tops are also quite rare. The
rule for Head & Shoulders is that it must break the neckline, which is the
low between the shoulders. The neckline can be horizontal or angled, and either
makes no significant difference in the success of the downside formation. The
head should be formed on upside weaker volume, the right shoulder should form
on upside weaker volume still, and the break to the downside should form with
strong red or downside volume.
These tops are very rare nowadays due to how the giant Buy Side Institutions using Alternative Trading Systems, slowly sell out of a stock long before it runs up speculatively. The Head & Shoulders formation peak fails to form very often, as High Frequency Trading triggers massive collapsing sell offs on sudden news events. Since High Frequency Trading is mostly one day events the "Head" that used to form no longer does, because there is no continuation after the huge one day volume surge and price speculative intraday action.
4. Rounding Top
This is the opposite of the rounding bottom, and is
very ominous and reliable. Rounding Tops usually form slowly giving the holder
time to exit. They can be short-term or long-term formations. The Rounding Top
used to be less common but now is forming on all 3 Trends, Long-Term aka
primary, Intermediate-Term, and even the Short-Term Trend. The Rounding Top is
harder to identify early on but is a pattern all Independent Investors and
Retail Traders need to learn, and identify as early as possible to protect more
profits. The Rounding Top can fall quickly, and has less support on the way
down to prior lows.
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Topping Candlestick Pattern Formations on the 3 Trend
timeframes of Long-Term, Intermediate-Term, and Short-Term are caused by
different Fundamental situations. Here are explanations of those situations:
Long-Term Trend
This top starts when the company has reached market
pre-saturation of its main products or services. The overall Stock Market
Topping occurs either when several major new technology industries have reached
market saturation, or speculation has entered a Bull Market causing extreme
Angles of Ascent™ on the long-term trend for most stocks, or due to a
relational impact of a different Financial Market that is collapsing.
Intermediate-Term Trend
This topping action is usually related more to industries
and sectors, and most stocks in that industry or sector will peak at similar
intervals.
Short-Term Trend
This is mostly individual companies that have a weaker
quarter, have cyclical earnings and revenues, or where an unexpected event has
hampered the growth of the company. Regardless of all of the technical patterns
you can learn all tops are based on Fundamental issues, Financial Market
inter-relationships, or a sudden unexpected Black Swan event such as a banking
debacle.
Tops are caused by short-term trading action. Market Tops as opposed to individual Stock Tops, can take quite a bit of time to form. Individual stocks can often top rather rapidly. Contrarian indicators will show extreme readings prior to Market Tops for 2-4 months or longer, before the Market Top actually occurs. This is because of the buying that takes place as a top forms. Individual stocks will show nearly vertical trendlines if the buying that caused the top has become irrational without solid basis, and is therefore pure gambling with get rich speculation.
Contrarian views are tough for beginners. It is really hard to jump onto the river bank of fast flowing trading and emotion. No one likes to be the lone man out. That is why most highly successful traders are loners, and do not participate in group chat rooms. You have to be able to make a call or decision and stick with it, even when others think you are wrong. Contrarian also only works when the market goes to an extreme. It does not work when the market is slightly overbought or slightly oversold. It has to be an extreme.
During a Topping Candlestick Pattern Formations it is
likely that the stock price will go from one extreme high to another, and then
another again before it collapses. Rarely is that first extreme the end of the
price high. The reason is the Odd Lot Buyer and the Small Lot Uninformed Buyer
who have very little knowledge about the market. Their market orders can drive
prices much higher. Then there are the High Frequency Trading Firms using computer
generated algorithms that trigger thousands of orders on the millisecond scale,
which create a daily feeding frenzy second by second.
Retail Day Traders are only permitted to trade on the minute
timeframe, and those orders are filled on a mandatory 90 seconds. High
Frequency Trading Firms trade 1000-3000 times per second. That means the Retail
Day Traders minute order cannot see the 60,000 to 90,000 High Frequency Trading
Firm orders that are being processed, and changing price during that one minute
the Retail Day Trader order is being filled. Therefore, Retail Day Traders are
constantly at a disadvantage in terms of seeing what High Frequency Trading
Firm orders are doing to price on the millisecond scale. That is why the
Securities and Exchange Commission has sent out messages warning Retail Traders
of the hazards and huge risk of Day Trading in the automated marketplace.
The TechniTrader Beginner Webinar Lessons is a good place to
start learning about trading in the Stock Market.
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Webinar Lessons
Summary
For beginner Independent Investors and Retail Traders trying
to trade the Stock Market in an extreme mode can be very dangerous and tricky,
as the volatility increases with each level of price speculation. It is a wave
of euphoric buying that is totally without any logic or rational. My advice for
most beginners is not to trade live but to paper trade and learn. Once you have
a 75-80% success rate on a professional style simulator which are not the
"game simulators" promoted to the retail crowd, then you will be
ready to trade live in the Stock Market.
I also advise avoiding Day Trading for Retail Traders,
because this has become an extremely risky trading style in the past few years.
Instead consider Swing Trading or Position Trading, which provide far superior
profits to Retail Day Trading.
Topping Candlestick Pattern Formations are part of the Stock
Market. They are the normal cycle of business that begins with a new product or
service, grows and expands as the product or service becomes popular, and then
contracts as that product or service reaches market saturation where those who
would buy it already own it. These cycles repeat over and over, and are why
tops and bottoms continually occur in the Stock Market. In addition every
technical pattern is tied back to either fundamentals or to technical trading
techniques.
Followers of this blog may request a specific article topic by emailing: info@technitrader.com
Trade Wisely,
Martha Stokes CMT
Chartered Market Technician
Instructor and Developer of TechniTrader® Stock and Option Courses
TechniTrader DVDs with every course.
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