In this Part of the Trend Trading Report we'll cover chart patterns, what do they look like, what are they meant to communicate, and recommendations for their use.
Review: Wikipedia defines a chart pattern as " a pattern that is formed within a chart when prices are graphed. In currency pair trading. C hart pattern studies play a large role during technical analysis. When data is plotted there is usually a pattern which naturally occurs and repeats over a period."
The following chart patterns include multiple candles in different colors and shapes. Note: a black candle/black body is bearish and bearish candlesticks on some currency pair charts may use other colors (e.g. red). A white candle/white body is bullish and bullish candlesticks on some currency pair charts may use other colors (e.g. green).
The descriptions with each pattern are provided by Wikipedia with some additional comments by the author.
The descriptions with each pattern are provided by Wikipedia with some additional comments by the author.
Click on the heading sub-title immediately above for an image of the head and shoulders pattern.
The left shoulder is formed at the end of an extensive move during which volume is noticeably high. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down to a certain extent which generally occurs on low volume. The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume. The right shoulder is formed when prices move up again but remain below the central peak called the Head and fall down nearly equal to the first valley between the left shoulder and the head or at least below the peak of the left shoulder.
Click on the heading sub-title immediately above for an image of the inverted head and shoulders pattern.
This pattern is the inverse of a Head and Shoulders. The formation is upside down in which volume pattern is different from a Head and Shoulder Top. Prices move up from first low with increase volume up to a level to complete the left shoulder formation and then falls down to a new low. It follows by a recovery move that is marked by somewhat more volume than seen before to complete the head formation. A corrective reaction on low volume occurs to start formation of the right shoulder and then a sharp move up that must be on quite heavy volume breaks though the neckline.
Click on the heading sub-title immediately above for triangle pattern images.
Triangle Patterns can be broken down into three categories: the ascending triangle, the descending triangle, and the symmetrical triangle. While the shape of the triangle is significant, of more importance is the direction that the market moves when it breaks out of the triangle. In the case of a Symmetrical Triangle, the top line (resistance) is sloped down and the bottom line (support) slopes up.
Click on the heading sub-title immediately above for flag and pennant pattern images.
The flag pattern is encompassed by two parallel lines. These lines can be either flat or pointed in the opposite direction of the primary market trend. The pole is then formed by a line which represents the primary trend in the market. The pattern is seen as the market potentially just taking a “breather” after a big move before continuing its primary trend.
The bull flag pattern is found within an uptrend in a currency pair. This pattern is named for the resemblance of a flag on a pole.The pennant pattern is identical to the flag pattern in its setup and implications; the only difference is that the top (resistance) line and bottom (support line) are not parallel, but rather characterized by converging trend lines rather than parallel trend lines.
Click on the heading sub-title immediately above for wedge pattern images.
The wedge is characterized by a contracting range in prices coupled with an upward trend in prices (known as a rising wedge) or a downward trend in prices (known as a falling wedge).
A wedge pattern is considered to be a pattern which is forming at the top or bottom of the trend. It is a type of formation in which trading activities are confined within converging straight lines which form a pattern. It should take about 3 to 4 weeks to complete the wedge. This pattern has a rising or falling slant pointing in the same direction. It differs from the triangle in the sense that both boundary lines either slope up or down. Price breaking out point creates another difference from the triangle. Falling and rising wedges are a small part of intermediate or major trend. As they are reserved for minor trends, they are not considered to be major patterns.
A wedge pattern is considered to be a pattern which is forming at the top or bottom of the trend. It is a type of formation in which trading activities are confined within converging straight lines which form a pattern. It should take about 3 to 4 weeks to complete the wedge. This pattern has a rising or falling slant pointing in the same direction. It differs from the triangle in the sense that both boundary lines either slope up or down. Price breaking out point creates another difference from the triangle. Falling and rising wedges are a small part of intermediate or major trend. As they are reserved for minor trends, they are not considered to be major patterns.
Click on the heading sub-title immediately above for double top and double bottom pattern images.
The double top is a frequent price formation at the end of a bull market. It appears as two consecutive peaks of approximately the same price on a price-versus-time chart of a market. The two peaks are separated by a minimum in price, a valley. The price level of this minimum is called the neck line of the formation. The formation is completed and confirmed when the price falls below the neck line, indicating that further price decline is imminent or highly likely.
A double bottom is the end formation in a declining market. It is identical to the double top, except for the inverse relationship in price. The pattern is formed by two price lows separated by local peak defining the neck line. The formation is completed and confirmed when the price rises above the neck line, indicating that further price rise is imminent or highly likely.
A double bottom is the end formation in a declining market. It is identical to the double top, except for the inverse relationship in price. The pattern is formed by two price lows separated by local peak defining the neck line. The formation is completed and confirmed when the price rises above the neck line, indicating that further price rise is imminent or highly likely.
Click on the heading sub-title immediately above for triple top and triple bottom pattern images.
The formation of triple tops is rarer than that of double tops in the rising market trend. The volume is usually low during the second rally up and lesser during the formation of the third top. The peaks may not necessarily be spaced evenly like those which constitute a Double top. The intervening valleys may not bottom out at exactly the same level, i.e. either the first or second may be lower. The triple top is confirmed when the price decline from the third top falls below the bottom of the lowest valley between the three peaks.
Most of the rules that are applied in the formation of the triple top can be reversed in the formation of triple bottom. As far as volume is concerned, the third low bottom should be on low volume and the rally up from that bottom should show a marked increase in activity
Most of the rules that are applied in the formation of the triple top can be reversed in the formation of triple bottom. As far as volume is concerned, the third low bottom should be on low volume and the rally up from that bottom should show a marked increase in activity
Click on the heading sub-title immediately above for price channel images.
A price channel is a pair of parallel trend lines that form a chart pattern for a currency pair. Channels may be horizontal, ascending or descending. When prices pass through and stay through a trend line representing support or resistance, the trend is said to be broken and there is a "breakout".
Summary
Chart patterns are fairly easy to recognize. With a little practice you'll be able to recognize them as well. It's important to keep in mind that channel patterns fall into two categories: Continuation Patterns and Reversal Patterns. We'll cover those in parts VIII and IX of this report.
End of Part VI
Part VII of this report will be released in about one week. The topic is "Support, Resistance, and Trend Lines"
No comments:
Post a Comment