Hello Steemians, good tidings are all I wish every member of this academy. Technical analysis involves traders looking for the best strategy to use that guarantees the best profiting results. One of such strategies includes the Contractile Diagonal also known as wedges. Prof @allbert gave a detailed lesson on the concept of contractile diagonals and how they can be used right. I will be doing the homework task from the study.
Question 1: Define in your own words what a contractile diagonal is and why it is important to study it. Explain what happens in the market for this chart pattern to occur. (screenshot required / Bitcoin not allowed)
Contratile Diagonal
Contractile Diagonal is a price pattern identified by converging diagonal lines used in technical analysis to predict trend reversals. Price forms a converging wave pattern of highs and lows tagged 1-2-3-4-5.
Contractile Diagonal, also known as Wedges, are of two types, the rising wedge (signaling a bearish reversal) and falling wedge (signaling a bullish reversal); these wedges depends on the direction of the current trend.
The contractile diagonal occurs in the market due to a reduction in the volume of trade in the current trend leading to a sort of compression in price movement, which later results in a trend reversal.
From the image above, ALICEUSDT was on an uptrend, but after every correction in price movement, the preceding bullish run kept reducing in volume, creating a contraction in the trend. The said contraction/compression result is a breakout from the trend lines, indicating a reverse trend.
Question 2: Give an example of a Contractile Diagonal that meets the criteria of operability and an example of a Contractile Diagonal that does NOT meet the criteria. (screenshot required / Bitcoin not allowed)
Contratile Diagonal Criteria
There are criteria set in place for the contractile diagonal structure to be termed correct and operable. The requirements are stated as follows;
Wave 1 must be greater than wave 3.
Wave 3 must be more significant than wave 5.
Wave 2 must be larger than wave 4.
Points the diagonal line must trace 1 - 3. Point 5 should also be traced by the diagonal line but, in some cases, can be excused.
The trace of the second diagonal must join the point 2 - 4.
Both diagonal lines should converge and be able to cross at some nearby point.
Following the requirements above, the image below is an example of a Contractile Diagonal or wedge pattern that fits all criteria. It shows a rising wedge pattern with a breakout of the diagonal trend line, causing a trend reversal.
The image below shows a wedge pattern that did not meet the requirements as Wave 3 is larger than Wave 1, contrary to an operable and functional wedge pattern.
Though the pattern experiences a breakout of the trendline and a trend reversal, it still does not meet the criteria of a legitimate wedge structure.
Question 3: Through your Verified exchange account, perform one REAL buy operation (15 USD minimum) through the Contractile Diagonal method. Explain the process and demonstrate the results and graphical analysis through screenshots. Your purchase data must match your analysis data: such as cryptocurrency and entry price.
Buy Order AVAXUSDT
Buy order was entered on the AVAXUSDT market following technical analysis done on the chart using the Contractile Diagonal or Wedge Pattern.
From the image above, a falling contractile diagonal pattern was identified on the AVAXUSDT chart. The diagonal lines were drawn, and the wave patterns were identified and numbered 1-2-3-4-5. The contractile diagonal fits the criteria for a legitimate wedge pattern.
Price was expected to break the trendline to signal a trend reversal which it did. Therefore, a buy order was entered after the breakout candle. As a result, a buy order of 15USDT worth of AVAX price at 75.12 USDT was executed, as shown below.
The trade history in Binance indicates the purchase made.
Question 4: Through a DEMO account, perform one sell operation through the Contractile Diagonal method. Explain the process and demonstrate the results and graphical analysis through screenshots. Bitcoin is not allowed.
Sell Order AVAXUSDT
A sell order was entered on the AVAXUSDT market following technical analysis done on the chart using the Contractile Diagonal or Wedge Pattern.
From the image above, a contractile diagonal pattern was identified on the AVAXUSDT chart. The diagonal lines were drawn, and the wave patterns were identified and numbered 1-2-3-4-5. The contractile diagonal fits the criteria for a legitimate wedge pattern.
Price was expected to break the trendline to signal a trend reversal which it did. A sell order was entered after the breakout candle. Stop-loss was set at line 5 and Take-profit slightly above line 2 as shown below.
The trade was in profit as of this writing.
Question 5: Explain and develop why not all contractile diagonals are operative from a practical point of view. (screenshot required / Bitcoin not allowed)
In trading, it is common to plan to make more than what you risk, and anything contrary to this is not a good risk management practice. When it comes to contractile diagonal, the aim is to plot a legitimate structure to increase the chances of Profit. Although some contractile diagonal patterns meet the criteria, they are not operative because they give an adverse risk/reward ratio.
In contractile diagonal stop-loss and take-profit are placed at strategic points as it does not use the typical 1:1 R/R ratio. However, some contractile diagonals are practically inoperative as some structures produce an adverse risk to reward ratio.
The stop loss is placed below point 5, and the take profit is set slightly above the point 2 lines.
From the image above, the contractile diagonal meets the requirements given. Still, it is not operative because the stop-loss is 1% greater than the take Profit, making it an adverse R/R ratio which is not practical in good risk management trading.
The image above shows a practical operative contractile diagonal as it takes higher profit than the stop loss.
Conclusion
Contractile Diagonal or Wedges are technical analysis indicators used to predict trend reversals. This is done by constructing structures that indicate a contracting nature in the current trends using diagonal lines and waves patterns labeled 1-2-3-4-5.
The wedges have requirements that its structure must follow to make it operative and legitimate. Although they meet the criteria, some wedges are not practically operative because they produce an adverse risk-reward ratio.
Thanks.