class 4: [attern recognition Flashcards
Characteristics of patterns
Each has an entry and exit direction (from the breakout)
Continuation vs. reversal
Fractal
Pullbacks and throwbacks
Failures - after breakout fails to move a certain distance
Trap - failure that turns into a reversal
False vs. premature breakouts – return to formation, false means final breakout is in opposite direction
Almost every pattern has a “Measure move”
when are patterns completed or confirmed?
are only completed or confirmed upon breakout
“Measured move” (MM) or “Measured rule”
Method to calculate a price target from a pattern breakout
MM = height of pattern – the base of the pattern +/- breakout point
Can be calculated in a conservative or aggressive manner
Used to calculate price targets for most patterns (except wedges and diamonds)
Double top with a breakout down, “M”
Price reverses lower after testing the highs twice. Second high can be slightly higher or lower than the first high
reversal
Double bottom with a breakout “W”
Price reverses higher after testing the lows twice. Second low can be slightly lower or higher than the first low
reversal
Triple Top
Triple top with a breakout down
Similar to a rectangle/trading range, has 3 touches to the resistance area
reversal
Triple bottom with a breakout up
Similar to a rectangle/trading range, has 3 touches to the resistance area
reversal
Triangles
defined by the slope of two lines: resistance and support
The point at which these two lines of a triangle extend and cross over
called the apex or cradle
the distance between the first high reversal point and the first low reversal point within the triangle
the base
Descending triangles
Can be continuation or reversal patterns
Are very reliable, increasing volume is better for best performance
types of trianlges
Descending triangles
Ascending Triangle
Symmetrical triangle
Broadening triangle formation or “megaphone top”
Diamond
Wedges
Broadening triangle formation or “megaphone top”
Trend lines look like a megaphone
Price swings with volatility – out of control
Poor for profit
Can be reversal or continuation
Diamond
Combination of a symmetrical and broadening triangle formations
Most difficult to observe and very rare, but very powerful
Usually a reversal pattern
Wedges
A triangle pattern with both trend lines heading in the same direction
Need at Least 5 reversal points: a-b-c-d-e
Are characterized by declining volume as the pattern progresses
Are long in duration, many months- a year or so
Rising (Bearish) Wedge
Rising wedge with a breakout down from a climactic peak
Breakout is in opposite direction of the wedge, therefore these are reversal patterns
First a Climax occurs: is a sharp quick move
higher/lower resulting in a top/bottom usually on high volume
Rounded Patterns: Cup and handle/Saucer
Reliable pattern – continuation pattern
Used by the CANSLIM method
Head and shoulders top and bottom/Reverse Head & shoulders
Most famous technical pattern, with high reliability and statistical significance, and profitable of the classic formations
characteristics of Head and shoulders top and bottom/Reverse Head & shoulders
trend line, support/resistance and rounding
Can have multiple heads + shoulders need not be of same height + left shoulder usually lower
–> Shoulders should be symmetrical
Neckline usually upward sloping for a top, downward for a bottom
This is a reversal pattern!!
in a Head and shoulders top and bottom/Reverse Head & shoulders, when is volume usually highest?
usually highest on the rise and the peak of the left shoulder and decreases throughout the pattern
when is the pattern only complete Head and shoulders top and bottom/Reverse Head & shoulders
Pattern only complete upon neckline breakout, be careful not to anticipate!
Pennants and Flags
short term continuation patterns, that last a few (10) days to a few weeks (3 – 7) that look like their description
Volume usually declines as the pattern progresses
Require a sharp move preceding them
–> breakout is expected in the direction of the prior trend because they are a pause in the prevailing trend
Can occur in an upward or downward trend
Are said to fly at “half mast” because they occur at the half way point of a measured move
Most profitable patterns in a Rising market
- Descending triangle breaking upward
- Declining wedge
- Head & Shoulders bottom
- Symmetrical triangle breaking upward
Most profitable patterns in a Declining market
- Diamond top, breaking down
- Head & Shoulders top
- Rising Wedge
- Symmetrical, breaking downward
Point & Figure Chart Patterns
Time and Volume omitted: Irrelevant as price action is sole focus
Requires continuous price flow to be accurate
P&F useful in Future markets where volume is unknown and not a consideration in trading.
Continuous prices are used, therefore P&F charts are great for markets that are 24hrs (currencies, commodities)
Trend lines are drawn at 45 degrees
