After a recent drop in the FTSE 100, it shot up higher out of the blue. This may surprise many people, but there is an explanation for that. I just found it really interesting that indexes can go down and then recover from the losses very fast. As traders, we should always study the price action in the past and learn from it. That way when we see a similar pattern in the future, we will be able to take advantage of it and profit from it.
The chart above is the daily chart of the FTSE 100 Futures. After the general election in June 2017 where Theresa May was not able to have a majority to form a full Conservative government, the FTSE 100 drifted sideways for 2 months. Sideways trading can be very frustrating for traders as directionless trading can provide lots of whipsaws for traders. In September, the FTSE 100 dropped below an uptrendline and quickly had a rapid decline for 2 days.
The FTSE 100 then grinded higher and the last 3 days it had a rapid rise.
What happened to make it rise so fast?
Well the answer is an ascending triangle.
But the trader will ask "How come I don't see an ascending triangle in this chart?".
The reason is because the ascending triangle chart pattern appeared in a lower time frame. The pattern actually appeared in the 60 min chart of the FTSE 100 Futures. Which is why it is very very important for the trader to do multiple time frame analysis on indexes and stocks.
Multiple time frame analysis is the art of analyzing stocks or indexes using different time frames. Amateurs will usually start by looking at the daily chart of stocks. That is what that is usually taught in investing and trading classes. It is very rare that new traders will learn to look at the weekly charts or the 60 min charts.
There are many many different time frames and you can even customize your own time frame. But the popular time frames among seasoned traders are:
It may seem a big list with many time frames to look at. But no worries. Most traders will only look at a few time frames for serious analysis.
Looking at different time frames will give you more confidence in your trading.
One of the great things about the ascending triangle pattern is that it can be a bottoming pattern as well as a continuation pattern. When the patterns works, the index or stock can really fly off and give the trader magnificent profits.
The chart above is the 60 min chart of FTSE 100 Futures.
After the huge sell off, the index started to grind higher and continued to make higher lows. It was a step by step process that took some time even in the 60 min chart. As it moved higher, it made higher lows and same highs. The trader will notice that it is trying to make an ascending triangle pattern in the 60 min chart.
The ascending triangle starts with a volatile movement and as the pattern forms, prices tend to be less volatile and eventually converges. This is called volatility contraction and big moves in an index or stock can happen when price starts to contract after a wide and whippy movement.
The trader can draw two lines and both of them will help the trader to spot the ascending triangle pattern. Notice how the FTSE 100 broke higher when it traded above the upper trendline?
In the case of the FTSE 100, this ascending triangle pattern can be said to be a bottoming type of pattern because it helps to absorb the supply from the left.
The beautiful thing about an ascending triangle is its ability to help traders get a 1st initial price target. I say initial 1st target because the index or stock can often go higher then the projected target. Therefore it is advisable to treat the target that the pattern give us as the 1st target. Traders can sell 1/3 or 1/2 when the target is met and then slowly decide whether they should sell the remaining position.
The chart above shows how we can use the height of the pattern and project it upwards from the breakout to get an initial target. You can see how FTSE 100 quickly met the first target. When the 1st target is met, we do not know if the index will go any higher. But if it goes higher we might miss out on the big move upwards if we have sold everything.
Therefore, the trader could sell 1/3 or 1/2 of his position to take advantage of the strong 60 min utprend. When the index is above its rising 60 min 20 MA and 50 MA, it tells us that the uptrend in the index is very strong. Therefore, it will be wise to take partial profits so take we can take advantage of the strong rise. Sometimes, a stock or index can rise and rise and the 1/2 remaining position can give the trader twice as much profits as the initial profit that you took off the table.
If there is one thing that I learned from studying different markets around the world, it is technical analysis works in any market in the world. The same technical principles that work in one market will work in another market. This is true even in any instrument that you choose to invest or trade in. Technical chart patterns work in stock indexes, commodities and forex. Its great to see that the ascending triangle worked so well in the 60 min chart of FTSE 100. Let us continue to spot this pattern in different markets and different time frames and profit from it.
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