Lecture 4 (pattern recognition) Flashcards
How are patterns profitable
They appear to outperform the market
What happens to the breakout if there is a false breakout
Final breakout is in the opposite direction
What is a trap
failure that turns into a reversal (ex: security climbs to then fall)
Draw a rectangle/trading range pattern
It usually is a continuation pattern
What are the two types of classified patterns
1) continuation
2) reversal
When are patterns completed or confirmed?
Upon breakout only
What is a measured move (MM) or Measured rule? When are they used?
-method to calculate a price target from a pattern breakout.
-Used in most patterns besides wedges and diamonds
Draw a double tops: reversal patter
-What is a characteristic about the price reversal
Price reverses lower after testing the high twice. Second high can be slightly higher or lower than the first high
Draw a triple top pattern with breakout down
-What is a characteristic of this pattern
Has 3 touches to the resistance area
Draw a triple bottom pattern with breakout up
-What is a characteristic of this pattern
Has 3 touches on the support line then breakout up
Name all 6 of the triangle patterns
1) descending triangle
2) ascending triangle
3) symmetric triangle
4) broadening triangle (megaphone)
5) diamond triangle
6) wedge triangle
What is the name of the point where both the resistance and the support line cross
It is called the apex or cradle
What is the name for the distance between the first high reversal point and the first low reversal point within the triangle
It is called the base
Draw a descending triangle with a breakout DOWN (identify each point)
Draw a descending triangle with a breakout UP (identify each point)
Name 2 characteristics of descending triangles
-can be a continuation or reversal patterns
-are very reliable, increasing volume is better for best performance
Draw a ascending triangle with breakout DOWN (identify each point)
-What is one characteristics of this pattern
Can be a continuation or reversal patterns
Draw a ascending triangle with breakout UP (identify each point)
Draw a symmetrical triangle with breakout UP (identify each point)
-What are two characteristics of this pattern
-Also known as the “coil” is a very profitable pattern
-Can be a reversal or continuation
Draw a broadening triangle formation or “megaphone top” with breakout UP (identify each point)
-What are 4 characteristics of this pattern
-Trend lines look like a megaphone
-price swings with volatility - out of control
-poor for profit
-can be a reversal or continuation
Draw a diamond pattern with breakout DOWN (identify each point)
-What are 3 characteristics of this pattern
-combination of symmetrical and broadening triangle formations
-most difficult to observe and very rare, but very powerful
-usually a reversal pattern
What is a wedge pattern (name 5 characteristics)
-a triangle pattern with both trend lines heading in the same direction
-need at LEAST 5 reversal points
-declining volume as the pattern progresses
-are long in duration, many months - a year or so
-the breakout is the opposite of the direction of the trend (rising = breakout down) (falling = breakout down)
Draw a rising (bearish) wedge (identify each point)
-What are 3 characteristics of wedge patterns
-rising wedge with a breakout down from a climatic peak
-breakout is in the opposite direction of the wedge, making it a reversal pattern
-first a climax occurs: is sharp quick move higher/lower resulting in a top/bottom usually on high volume
Draw a falling/declining (bullish) wedge (identify each point)
-What are 1 characteristics of wedge patterns
-declining edge with a breakout up from a climatic low - this is bullish
What is the difference between both triangle patterns (ascending and descending) and both wedge patterns (rising and falling)
In the triangle patterns, the resistance (ascending) and the support (descending) lines are horizontal versus in wedge patterns, they are at a 45 degree angle (heading in the same direction)
Draw a rounded pattern: cup and handle /saucer with rounding bottom and breakout up (identify each point)
-What are 3 characteristics of this pattern
-reliable pattern - continuation pattern
-used by canslim method
-has a measured move
Name some characteristics about the head and shoulders top and bottom/reverse head & shoulders (6)
-most famous technical pattern, with high reliability and statistical significance and profitable of the classic formations
-3 characteristics of patterns: trend line, support / resistance, rounding
-shoulders should be symetrical
-pattern only complete upon neckline breakout, be careful not to anticipate
-this is a reversal pattern
-if shoulders & head go in one way, the breakout goes the opposite direction
Draw a head and shoulders top with breakout down (identify each point)
Draw a head and shoulders bottom with breakout up (identify each point)
Name 4 characteristics of pennants and flags
-are short term continuation patters, that last a few (10) days to a few weeks (3-7) that look like their description
-require 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 a upward and downward trend
-volume usually declines as the pattern progresses
-occur at the halfway point of a measured move
Draw a flag pattern with upward trend (identify each point)
Draw a pennant in an upward trend (identify each point)
What is the difference in terms of shape between a pennant and a triangle pattern
The triangle pattern has a horizontal resistance/support line but in a pennant the resistance and support line are meeting together almost squishing the line
What are the most profitable patterns in a RISING market (4)
(all of the graphs that have a breakout up)
-Descendin triangle breaking upward
-Declining wedge (breakout up)
-Head and shoulders bottom (breakout up)
-Symmetrical triangle breaking upward
What are the most profitable patterns in a DECLINING market (all of the graphs that have a breakout down)
-diamond top, breaking down
-head and shoulders top (breakout down)
-rising wedge (breakout down)
-symmetrical, breaking downward
Name 6 characteristic of point & figure chart patterns
-time and volume is not looked at, only price
-continuous prices are used, therefore P&F charts are great for markets that are 24hrs (currencies, commoities)
-trend lines are drawn at 45 degrees
-“x” means price went up
-“o” means price went down
-there needs to be a change of at least 3 boxes for a new column to be made (ex: $99 to 94, new column made) (ex: $99-97, NO new column made)
What are the two short term patterns
Pennants and flags
