Lecture 4 (pattern recognition)

Question 1

How are patterns profitable

Answer 1

They appear to outperform the market

Question 2

What happens to the breakout if there is a false breakout

Answer 2

Final breakout is in the opposite direction

Question 3

What is a trap

Answer 3

failure that turns into a reversal (ex: security climbs to then fall)

Question 4

Draw a rectangle/trading range pattern

Answer 4

It usually is a continuation pattern

Question 5

What are the two types of classified patterns

Answer 5

1) continuation
2) reversal

Question 6

When are patterns completed or confirmed?

Answer 6

Upon breakout only

Question 7

What is a measured move (MM) or Measured rule? When are they used?

Answer 7

-method to calculate a price target from a pattern breakout.
-Used in most patterns besides wedges and diamonds

Question 8

Draw a double tops: reversal patter
-What is a characteristic about the price reversal

Answer 8

Price reverses lower after testing the high twice. Second high can be slightly higher or lower than the first high

Question 9

Draw a triple top pattern with breakout down
-What is a characteristic of this pattern

Answer 9

Has 3 touches to the resistance area

Question 10

Draw a triple bottom pattern with breakout up
-What is a characteristic of this pattern

Answer 10

Has 3 touches on the support line then breakout up

Question 11

Name all 6 of the triangle patterns

Answer 11

1) descending triangle
2) ascending triangle
3) symmetric triangle
4) broadening triangle (megaphone)
5) diamond triangle
6) wedge triangle

Question 12

What is the name of the point where both the resistance and the support line cross

Answer 12

It is called the apex or cradle

Question 13

What is the name for the distance between the first high reversal point and the first low reversal point within the triangle

Answer 13

It is called the base

Question 14

Draw a descending triangle with a breakout DOWN (identify each point)

Question 15

Draw a descending triangle with a breakout UP (identify each point)

Question 16

Name 2 characteristics of descending triangles

Answer 16

-can be a continuation or reversal patterns
-are very reliable, increasing volume is better for best performance

Question 17

Draw a ascending triangle with breakout DOWN (identify each point)

-What is one characteristics of this pattern

Answer 17

Can be a continuation or reversal patterns

Question 18

Draw a ascending triangle with breakout UP (identify each point)

Question 19

Draw a symmetrical triangle with breakout UP (identify each point)

-What are two characteristics of this pattern

Answer 19

-Also known as the “coil” is a very profitable pattern
-Can be a reversal or continuation

Question 20

Draw a broadening triangle formation or “megaphone top” with breakout UP (identify each point)

-What are 4 characteristics of this pattern

Answer 20

-Trend lines look like a megaphone
-price swings with volatility - out of control
-poor for profit
-can be a reversal or continuation

Question 21

Draw a diamond pattern with breakout DOWN (identify each point)

-What are 3 characteristics of this pattern

Answer 21

-combination of symmetrical and broadening triangle formations
-most difficult to observe and very rare, but very powerful
-usually a reversal pattern

Question 22

What is a wedge pattern (name 5 characteristics)

Answer 22

-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)

Question 23

Draw a rising (bearish) wedge (identify each point)

-What are 3 characteristics of wedge patterns

Answer 23

-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

Question 24

Draw a falling/declining (bullish) wedge (identify each point)
-What are 1 characteristics of wedge patterns

Answer 24

-declining edge with a breakout up from a climatic low - this is bullish

Question 25

What is the difference between both triangle patterns (ascending and descending) and both wedge patterns (rising and falling)

Answer 25

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)

Question 26

Draw a rounded pattern: cup and handle /saucer with rounding bottom and breakout up (identify each point)

-What are 3 characteristics of this pattern

Answer 26

-reliable pattern - continuation pattern
-used by canslim method
-has a measured move

Question 27

Name some characteristics about the head and shoulders top and bottom/reverse head & shoulders (6)

Answer 27

-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

Question 28

Draw a head and shoulders top with breakout down (identify each point)

Question 29

Draw a head and shoulders bottom with breakout up (identify each point)

Question 30

Name 4 characteristics of pennants and flags

Answer 30

-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

Question 31

Draw a flag pattern with upward trend (identify each point)

Question 32

Draw a pennant in an upward trend (identify each point)

Question 33

What is the difference in terms of shape between a pennant and a triangle pattern

Answer 33

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

Question 34

What are the most profitable patterns in a RISING market (4)
(all of the graphs that have a breakout up)

Answer 34

-Descendin triangle breaking upward
-Declining wedge (breakout up)
-Head and shoulders bottom (breakout up)
-Symmetrical triangle breaking upward

Question 35

What are the most profitable patterns in a DECLINING market (all of the graphs that have a breakout down)

Answer 35

-diamond top, breaking down
-head and shoulders top (breakout down)
-rising wedge (breakout down)
-symmetrical, breaking downward

Question 36

Name 6 characteristic of point & figure chart patterns

Answer 36

-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)

Question 37

What are the two short term patterns

Answer 37

Pennants and flags