Home › Futures Technical Analysis 101
Technical analysis is the study of historical price movements and other market data to identify patterns that may predict future price movements. It is a popular tool used by futures traders to identify potential trading opportunities. Check out the library of technical patterns below to start incorporating these strategies into your trading toolkit.
Triangle patterns are a common technical analysis tool used by futures traders to identify potential reversals or continuations in price trends. They are formed when prices trade within a converging range between two trendlines. There are several types of triangle patterns: ascending, descending, expanding, and symmetrical.
Symmetrical triangles are typically considered a continuation pattern, consisting of a series of lower highs and higher lows, with upper and lower trend lines converging towards an apex.
Ascending & Descending triangles have a unique trait; no matter where you are in the progression of a trend, an ascending triangle is alway bullish, and a descending triangle is always bearish.
The expanding triangle is arguably the most rare of the triangle patterns and is usually considered to be a bearish setup found at major market tops.
Flags, pennants, and wedges are all continuation patterns that can be used to identify potential trading opportunities in futures markets. They are all characterized by a period of consolidation after a sharp move in price.
This shorter time frame setup usually forms mid-trend and represents a temporary pause, or consolidation, that moves counter to the prevailing trend.
Another pattern you should be familiar with is the Wedge Formation. Compared to shorter time frame setups like flags and pennants, the wedge is more of an intermediate formation that develops over a period of up to 50 price bars. Wedges represent a pause in trend, and can be either bullish or bearish, depending on the prevailing trend.
The rectangle formation is another chart pattern that represents a pause, or consolidation period, of a prevailing trend. This formation is unique in that volume holds more weight than price when trying to predict the direction of the breakout.
Continuation and reversal patterns are used in technical analysis to identify potential turning points in the price of a security. Continuation patterns suggest that the current trend is likely to continue, while reversal patterns suggest that the current trend is likely to end and be replaced by a new trend in the opposite direction.
Like most reversal patterns, the H&S is most recognizable to an analyst after it has been formed. The real trick lies in being able to identify the attributes of the formation while it’s setting up so you can be ready to initiate a position once the pattern is confirmed.
Double tops are one of the more frequently seen reversal chart patterns you will come across. They are identified by two peaks, at or near the same price level, separated by a trough in the middle.
Triple tops are commonly found at key resistance areas, and represent multiple unsuccessful attempts of buyers to break through that level. Because this pattern represents a period of price consolidation, it can easily be mistaken for a rectangle formation while it is setting up.
The V Formation is a fairly common reversal pattern and is widely considered the most difficult pattern to identify while it’s forming because of the swift and unpredictable trend reversal it produces. There are very few, if any, early warning signs to tip you off that a true reversal in trend is taking place.
Support and resistance are two of the most important concepts in technical analysis. They are levels on a chart where buyers and sellers are likely to come into balance, resulting in a pause or reversal in the price trend.
The definitions of support and resistance are straightforward enough; support is an area where more aggressive buyers meet sellers, and resistance is an area where more aggressive sellers meet buyers. The question is whether or not their roles will reverse when the area is violated, i.e., will resistance become support?