As you become familiar with the basics of trading, essential candlestick tools, and terms, we will explore more technical patterns, a few market psychology tools, and some noteworthy expressions to make reading analysis easier.
After reading the first two guides, the mystery of the trading world should now be turning into curiosity. In trading, curiosity helps not only to understand a broader perspective on how finance and flows interact with prices to shape the markets as we know them today. It also helps us take on new ventures, explore new perspectives, and approach a trading day with more flexibility.
The best traders are those who stay curious throughout their trading journey. Even once they think they know enough, they keep researching and perfecting their game – as Benjamin Franklin said, “the doors of wisdom are never shut.”
After our first look at technical analysis, which aimed to help traders understand technical charts, we will now be diving into the final installment of the series. We will dive into some of the most popular technical patterns and expressions that you’ll hear as you discover more about trading.
Read our previous installments in the series:
Diving deeper into technical analysis – terms, channels, and trends
A peculiar aspect of technical analysis is its vocabulary and expressions.
Let’s dive right into some of these particular wordings.
Some important technical expression
“Lower high, lower low”
A lower high, lower low formation. Chart created by Elior Manier. Past performance is not indicative of future results.
This is the typical way to signal that a financial asset has entered a downtrend.
Essential to spot turning points in momentum, a lower high on a chart indicates that buyers are not in a position to push prices to new highs and suggests their past strength is turning into relative weakness.
While a single lower high doesn’t imply a downtrend is forming, if it's followed by a fresh low, it tends to signal a shift in price action.
Only when streaks of lower highs and lower lows are formed, traditionally after three sequences, can traders confirm that a corrective downtrend is taking shape. Sellers will then be said to have taken control of the price action.
“Higher low, higher high”
A higher low, higher high formation. Chart created by Elior Manier. Past performance is not indicative of future results.
This expression is the precise inverse of the preceding term.
After failing to reach a new low, the price action is now turning the other direction and forming the beginning of an uptrend.
Sellers, who previously controlled the chart, are now showing signs of exhaustion and are leaving the action to buyers as demand overtakes supply.
This will be characterised by a new high being reached – the “higher high”.
Only when prices correct and fail to reach the preceding bottom can it be said that a “higher low” was reached.
Like in the preceding formation, an uptrend will be confirmed after a few “higher high, higher low” sequences.
“Rangy/Range-bound” or “Sideways” action
Range-bound price action is characterised by a lack of trend formation and may be interpreted as a price consolidation.
It typically implies that current prices are forming an equilibrium, where supply and demand are in balance. They will also form after volatile trends, before high-tier data releases, and when fundamentals are stable (no new data or changes in monetary policy).
There are two visualisations for such:
Clear sideways price evolution
A classic trading range and range-bound price action. Chart created by Elior Manier. Past performance is not indicative of future results.
This chart shows the details of what can happen in a trading range. A range characterised by short-term uptrends and downtrends that are unable to break support and resistance, translating into directionless trading.
One particularity of such price action is that it provides a decent guide to “elevated” and “low” prices – the trap, however, is that ranges tend to break at unexpected times, hence the importance of maintaining a tight risk-management when trading them.
Overlapping candles
Range-bound candlesticks. Created by Elior Manier. Past performance is not indicative of future results.
A “fakeout”
Fakeouts will traditionally occur during consolidation phases when no particular trends or directions are unfolding.
They happen when a sudden inflow of buying or selling orders occurs, which breaks the preceding resistance/support but fails to materialise into a proper trend.
When this happens, attempts to break higher or lower (as seen on the range-bound chart) are rejected and returned to the range.
“Squeeze” and “Dump”
A squeeze, or “short squeeze,” happens when short-positioning in a trading asset is elevated and a trading asset fails to translate into lower prices.
When this happens, short sellers tend to cover (close) their positions and push prices higher. In a squeeze, however, this trend can become extreme, leading to sudden price spikes. When no one wants to take the other side of an extreme price rise, it can turn into a mountain of buying orders, and demand will then largely outpace the supply.
This is what happened in 2021 during the infamous GameStop (GME) short squeeze, when retail traders pushed the price of heavily shorted GME stock from $3 in July 2020 to close to $500 in January 2021.
A “dump,” however, will occur when too many buyers are positioned in a trading asset, and no more sidelined demand remains to hold elevated prices.
Then, heavily positioned traders can suddenly sell their positions, and with no one else to buy them back, the price falls in a cascade. This can sometimes happen in the very brutal “pump-and-dump” schemes orchestrated by some market participants.
Trading channels
Bull channel
A bull channel. Chart created by Elior Manier. Past performance is not indicative of future results.
A bull channel forms when a streak of higher lows and highs defines distinct upper and lower bounds in an upward trend.
Bear channel
A bear channel. Chart created by Elior Manier.
It is the exact inverse of a bull channel, when streaks of lower highs and lows are constrained by upper and lower bounds, indicating a downtrend.
It is notable that fakeouts can also happen within bull and bear channels.
Navigating through trading blogs
No one knows the exact path of a trade. The trading world is probabilistic. This is why it is important to be cautious, even when experienced traders project their views. This is why it is essential to always attempt to form your own view of what could happen in an asset that you would be interested in trading.
However, through trial and failure, and with time, traders gain experience, which allows them to spot patterns that are unfolding, which could resemble previously seen developments and hence provide a sense of higher-probability trading setups.
One thing is certain: being successful in trading requires patience, making mistakes inevitably, and remaining resilient. Fighting the need for certainty and being right helps traders remain flexible and keep learning, while developing their ability to read charts and generate trades.
In conclusion, the journey into trading demands continuous curiosity and research. Recognise that market certainty is an illusion, often influenced by unpredictable events.
Above all, strict risk control remains the bedrock of sustainable trading success, echoing the lessons of market history, which often rhyme, even if they don't exactly repeat.
This article and its contents are intended for educational purposes only and should not be considered trading advice.
