Scallops Inverted Descending 42 Three Falling Peaks 43 Three Rising Valleys 44 Triangles Ascending 45 Triangles Descending 46 Triangles Symmetrical 47 Triple Bottoms 48 Triple Tops 49 Wedges Falling 50 The origins of chart patterns can be found in the work of Charles Dow in a series of articles published in his editorials for The Wall Street Journal from The observations that Dow made, and the methodologies found in technical analysis are fractal in nature.
This means that the techniques used can be applied to any aggregation period whether its intraday, daily, weekly or monthly. Also, as part of your pattern recognition it is important to be able to identify the previous trend based on the aggregation period being used.
The combination of the previous trend and the current highs and lows will form the foundation for proper chart pattern recognition. This resource is intended to introduce you to 50 different price patterns. With every price pattern there is a setup, a trigger and a projected move. For each pattern, there is a description of whether the pattern is bullish, bearish or non-directional.
Also, there is a description of how volume develops during the formation of the pattern, and how to establish a price projection based on the measuring technique for each pattern. Statistical references in this book is taken from the Encyclopedia of Chart Patterns by Thomas Bulkowski. His work represents the most comprehensive study of the effectiveness of chart patterns to date. Pattern Description: This pattern forms at the tail end of a downtrend.
The pattern takes on the appearance of a megaphone as the price forms a series of higher highs and lower lows throughout the formation. The pattern needs at least two highs and lows to be a valid formation. Measuring Technique: Measure from the highest high to the lowest low before the breakout, and add that amount to the highest high for the price target.
Statistical Notes: Wider megaphones tend to perform better than narrower formations. Formations near 1- year lows tend to perform better. Pattern Description: This pattern forms at the tail end of an uptrend. Measuring Technique: Measure from the highest high to the lowest low before the breakout and subtract that amount from the lowest low for the price target. Formations near 1- year highs tend to perform better.
Pattern Description: This pattern is comprised of three phases and looks similar to a frying pan. There is the lead-in phase, the bump phase and the uphill run.
The lead-in phase is the handle of the frying pan before a larger decline. Following the decline, the bump phase forms as the price forms a flat or rounded bottom. The uphill run phase is after the breakout. For this type of formation to be analyzed an arithmetic chart will need to be used. Volume Description: Volume is typically high at the beginning of each phase and decreases throughout each phase. Breakout Confirmation: A close above the upper trend-line drawn across the highs, during the lead-in phase, with above average volume.
Statistical Notes: Wider formations tend to perform better than narrower formations, and a throwback following a breakout tends to hurt performance. Pattern Description: This pattern is comprised of three phases and looks similar to a mountain range.
There is the lead-in phase, the bump phase and the downhill run. The lead-in phase is like a small range of foothills before the larger mountains. Following an advance, the bump phase forms as the price forms a flat or rounded top. The downhill run phase is after the breakout. Breakout Confirmation: A close below the lower trend-line drawn across the lows, during the lead-in phase, with above average volume. Statistical Notes: Wider formations tend to perform better than narrower formations, and a pullback following a breakout tends to hurt performance.
Pattern Description: This pattern occurs within the context of a longer uptrend and is characterized by the price forming a u-shaped cup with a short handle on the right.
The duration of the cup should last at least 7 weeks if using a daily chart. Volume Description: Volume will typically follow the shape of the cup, with high volume as the left lip forms, falling volume as the bottom of the cup forms and rising volume toward the right lip and on the breakout.
Breakout Confirmation: A close above the upper trend-line drawn across the handle with above average volume. Measuring Technique: The price target is obtained by measuring the right lip to the bottom of the cup and then added to the price level of the right lip. Patterns with shorter handles perform better than longer handles, and deeper cups with the left lip slightly higher than the right lip perform better.
Pattern Description: This pattern occurs within the context of a longer downtrend and is characterized by the price forming an inverted u-shaped cup with a short handle on the right.
Volume Description: Volume will typically follow the opposite of the shape of the cup, with high volume as the left lip forms, falling volume as the rounded top of the cup forms and rising volume toward the right lip and on the breakout. Breakout Confirmation: A close below the lower trend-line drawn across the handle with above average volume.
Measuring Technique: The price target is obtained by measuring the right lip to the top of the cup and then subtracted from the price level of the right lip. Patterns with shorter handles perform better than longer handles, and deeper cups with the left lip slightly lower than the right lip perform better.
Pattern Description: This pattern occurs within the context of a longer downtrend. Initially the pattern begins a broadening formation with higher highs and lower lows, but then begins to narrow with lower highs and higher lows. Volume Description: Volume tends to drift downward during the formation and expand on the breakout. Breakout Confirmation: A close above the upper trend-line drawn across the downward-sloping highs with above average volume.
Statistical Notes: Breakouts nears the 1-year low typically outperform, and throwbacks following the breakout generally hurt performance. The pattern has a low failure rate with decent upside potential but tend to fall-back once the target high is reached. Formations with more range between highs and lows perform better than shorter ranges. Pattern Description: This pattern occurs within the context of a longer uptrend. Breakout Confirmation: A close below the lower trend-line drawn across the upward-sloping highs with above average volume.
Statistical Notes: Breakouts near the 1-year high typically outperform, and pullbacks following the breakout generally hurt performance. The pattern has a low failure rate with decent upside potential but tend to fallback once the target high is reached.
Breakout Confirmation: A close above the upper trend-line drawn horizontally across the intervening high between the lows with above average volume. Measuring Technique: Measure the distance between the high and the two lows and add it to the breakout level. Statistical Notes: Formations with more range between highs and lows perform better than shorter ranges. Formations with declining volume with heavy volume on the left bottom performs better. Measuring Technique: Measure the distance between the high and the two lows, and add it to the breakout level.
The pattern forms two equal lows with each low forming a wider, rounded bottom. Breakout Confirmation: A close below the lower trend-line drawn horizontally across the intervening low between the highs with above average volume. Measuring Technique: Measure the distance between the low and the two highs and subtract it from the breakout level. Formations with declining volume with heavy volume on the left top performs better.
Measuring Technique: Measure the distance between the low and the two highs, and subtract it from the breakout level. The pattern forms two equal highs with each high forming a wider, more rounded top.
Pattern Description: This pattern occurs within the context of a longer uptrend and following a steep, quick upward move. Following the move, the pattern then forms a short horizontal or downward sloping channel shaped like a flag. Breakout Confirmation: A close above the upper trend-line drawn across the highs with above average volume. Measuring Technique: Measure the length of the previous steep move leading into the flag, and then add that amount to the breakout level. Flag formations that breakout in the direction of the prevailing market trend tend to perform better, and flags without gaps tend to perform better.
Pattern Description: This pattern occurs within the context of a longer downtrend and following a steep, quick downward move. Following the move, the pattern then forms a short horizontal or upward sloping channel shaped like a flag. If you are considering trading in the Foreign Exchange or CFDs market, before you trade, make sure you understand how the spot market operates, how ThinkMarkets is compensated, understand the ThinkMarkets trading contract, rules and be thoroughly familiar with the operation of and the limitations of the platform on which you are going to trade.
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If anything this should be split into two topics but then we have to remember this is an introductory guide. It was not until I came to write this section and host the webinars that I realised how many intricacies and areas of judgement I make using these patterns. If you have to take one piece of advice from this guide please take the following: You will significantly increase the usability of each style by combining the two together.
Many try to master one style and use them in isolation as I did but they will create independent problems for your analysis and trading. By blending the two together you will create a more structured and comprehensive view of price.
Combine these two styles of patterns recognition with trends, support and resistance and you will never look at a price chart the same way again. Why do chart Patterns Occur? As this ratio between the three groups change over time, so does the supply and demand for any given market. As this force changes, so does price. If we can identify familiar patterns, technical analysts believe that [to a certain degree] price can become predictable.
Regardless… a Technical Analyst always takes comfort in the fact that history does repeat itself as long as prices are always governed by supply and demand. They are not related to the trading timeframe they are seen on, as LT patterns can be seen on any timeframe. However a rule of thumb is that the higher the timeframe you see a chart pattern it is generally consideredto be more relable, and the lower the timeframe tends to generate more fale signals.
Below is an example of a Double Bottom pattern which took 18 bars to create. I have hidden the timeframes as it is irrelevant — this could be a 1 minute chart or a 1 day chart, but the concept is the same. In turn this either helps us to anticipate the breakout of a pattern to build our trading plan, or avoid jumping in too early. Potential Future direction: Once a pattern is confirmed, regardless of whether it is a continuation or reversal pattern, we then have a directional bias for price to continue trading.
As with LT patterns they appear on all trading timeframes and generally considered to generate more reliable signals the higher the timeframe. ST Provide - Signs of potential strength or weakness - Entry Signals - Exit Signals - Trade Management Signs of potential strength and weakness: You may be monitoring a trend and trying to identify the end of phase 2 or the beginning of phase 1. Some candle formations would suggest a turning point.
However the key with ST candles is to blend them form trends, support and resistance to make them higher probability. Entry signals: Some patterns are ideal for generating a buy or sell signals. However the trick here is to identify a trend and areas of support or resistance which the before Trade Management: When you are in a trade and price is unfolding can adjust your stoploss to suit the price action.
When the stock recovers to its old high, his trading partners sell the remainder of their holdings. The stock tops out and rounds over. During the next month and a half, the stock drifts down, slowly, casually. There does not appear to be a rush for the exits—just a slow trickle as the smart money quietly folds up shop.
Then news of poor holiday sales leaks out. There is a rumor about distribution problems, merchandising mistakes, and cash flow problems. Brokerage firms that only weeks before were touting the stock now advise their clients to sell. One or two analysts say the stock is oversold; it is a bargain and investors should add to their positions. Big mistake. The buying enthusiasm pushes the price up briefly before a new round of selling takes hold. Each day the stock drops a bit lower, nibbling away like waves washing against a castle of sand.
The following quarter JCB Superstores announces that earnings will likely come in well below consensus estimates. The company is trying to correct the distribution problem, but it is not something easily fixed. It decides to stop expanding and to concentrate on the profitability of its existing store base.
Two years later, Tom pulls up the stock chart. The dog has been flat for so long it looks as if its heartbeat has stopped. Jim gushes enthusiastically about a new retailing concept called the Internet. He is excited about the opportunity to sell office supplies online without the need for bricks and mortar. There is some risk because the online community is in its infancy, but Jim predicts it will expand quickly.
Tom is impressed, so he starts doing his homework and is soon buying the stock again…. See author's posts. Even better, swing trading is much faster than traditional trading. Instead of waiting years to see returns, swing trading looks for potential profits in anywhere from a few days to a few weeks. Payment secured by bit encryption. Disclaimer Privacy Policy. All Rights Reserved. Stock chart reading is essential to your investment success… It can make the difference between making a profitable trade and losing your shirt on the wrong stock.
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