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FINA 408 > Lecture 5 (short term patterns) > Flashcards

Lecture 5 (short term patterns) Flashcards

1
Q

Does short term patterns refer to one day patterns??

A

NO, it refers to “short term” as in a small amount of bars and candlesticks forming the pattern

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2
Q

What is the reason for studying short term patterns

A

-anticipate sudden moves
-take advantage of a period when prices have reached their extremes

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3
Q

What is a SETUP

A

It is when certain known factors needed to establish a pattern have occurred and the trader is waiting for the action signal to occur

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4
Q

What happens if the pattern formation (signal) does not abide by the rules?

A

We ignore it, it is not a setup

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5
Q

When are short term reversal considered

A

only necessary when prices are at some sort of support or resistance level, or trend line

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6
Q

Short term patterns can be used to see what other kinds of patterns

A

reversal and continuation patterns

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7
Q

What is the principle data shown in short term patterns

A

Open, close, high, low

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8
Q

what can be said about how frequently a complex pattern can be seen

A

the more complex the pattern is, the less frequently it will occur

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9
Q

What are gaps, when do they occur

A

-they are actual gaps in the chart (hole)
-occur when either when the low for the current bar is above the high of the previous bar
-occur when high for the current bar is lower than the low of the previous bar

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10
Q

What does the gap (hole/void) represent

A

It represents a price range where no stock changes hands

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11
Q

What are gaps referred as in candlestick graph

A

windows

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12
Q

What are the 4 types of gaps

A

-opening gap
-breakaway gap
-runaway gap
-exhaustion gap

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13
Q

when do opening gaps (common gaps) occur

A

-occur when the opening price for the day is outside the range of the previous day
-supply and demand in-balance at beginning of the day, from one day to the next

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14
Q

Do opening gaps usually get filled?

A

Yes, usually within 30 mins

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15
Q

What can be said if the gap doesn’t close within 30mins

A

Chances are that the trend will continue in the direction of the gap

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16
Q

What are breakaway gaps? when do they occur?

A

-Breakaway gaps are the first gap tp appear on the chart and are the most profitable
-They occur at the beginning of a new trend

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17
Q

What are upward gaps in breakaway gaps usually accompanied with

A

with heavy volume

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18
Q

Are downward gaps in a breakaway gaps usually accompanies with heavy volume?

A

Not necessarily

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19
Q

What can be said about analyzing trends using gaps in general

A

That the trend is believed to be in force (place) until the gap is filled

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20
Q

In order to make sure that a gap is not a false gap, what needs to be done

A

We want a breakaway gap to establish a new high, for at least the past 20 days, and for the subsequent retracement not to fill the gap

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21
Q

Should we short in upward trending breakaway gaps? Why?

A

NO, because tends to increase in value

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22
Q

What are runaway gaps (measuring gaps)? when do they occur?

A

-They are gaps that occur along the trend
-Runaway gaps are usually larger gaps than breakaway gaps
-Usually occur at halfway of the price run (trend)

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23
Q

Can there be more than one runaway gap on a chart?

A

Yes

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24
Q

What exhaustion gaps? When do they occur?

A

-Exhaustion gaps occur at the end of a trend but are not recognized at the time since they have the same characteristics as a runaway gap

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25
Q

Since runaway gap and exhaustion gaps have the same characteristics, how do we recognize the difference between the two

A

-If gap doesn’t close = runaway gap
-If gap closes within a few bars = likely exhaustion gap

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26
Q

What is an island reversal? When do they occur?

A

-Island reversals look like an island on the chart
-They can occur at either the top or bottom and only occurs after a relatively lengthy trend

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27
Q

What does an island reversal require?

A

Requires 2 gaps at roughly the same price
-the first in the direction of the trend (exhaustion gap)
-the second gap in the reverse direction (breakaway gap/start of new trend)

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28
Q

What can occur between the gaps in an island reversal

A

low volatility (volume) can occur for a certain amount of days or weeks

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29
Q

when does volume usually increase in an island reversal

A

Usually volume increases on the second gap from an island top, but not necessarily from a bottom

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30
Q

What is a dead cat bounce

A

it is a term for failed rally after a sharp decline

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31
Q

What is the length of the short rally that ends up failing

A

several days to up to 2 weeks

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32
Q

Why do the rally’s in dead cat bounce happen

A

Bottom fishers coming into the market and fuelled by short covering

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33
Q

How much decline is seen after the dead cat

A

usually exceeding 20%

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34
Q

What are spikes

A

Spikes are similar to gaps except that the empty space associated with a gap is a solid line

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35
Q

What signals the importance of the spike

A

The context surrounding it

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36
Q

When do spikes often happen?

A

-At the end of trends when either gross enthusiasm or panic appears, the last few bars are often spikes
-Spikes also occur on the dissemination of news

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37
Q

What are the characteristics of a one bar reversal patterns?

A

When a trading bar HIGH is GREATER than the previous bar HIGH and the CLOSE is LOWER (down) from the previous bar CLOSE

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38
Q

Why is it important to study other trends rather than soelly relying on the one bar reveral pattern

A

because it is a very common pattern and can occur even within a trend

39
Q

What does a two bar reversal pattern signal

A

It is a classic signal of exhaustion

40
Q

What does the two bar reversal pattern remind you of

A

Train tracks

41
Q

What is an inside bar?

A

Is a bar with a range that is smaller than and within the previous bar’s range

42
Q

What does an inside bar reflect?

A

Reflects a decline of momentum in the trend, a pause, a period of directionless equilibrium, waiting for something to signal the next trend direction

43
Q

What is important to keep in mind during an inside bar

A

The context of the pattern’s location is more important than the pattern configuration

44
Q

When does the outside bar occur

A

Occurs when the high is higher than the previous bar high and the low is lower than the low of the previous day low

45
Q

What does the outside bar cover

A

covers all the previous bar’s action

46
Q

Draw some examples of bullish outside bars

A

-range is bigger than previous day range
-close is HIGHER than previous day close

47
Q

Draw some examples of bearish outside bars

A

-range is bigger than previous range
-close LOWER than previous close

48
Q

What is the difference between western bar charts and candlestick

A

emphasis on the opening and closing

49
Q

What does a large body indicate in candlestick formations

A

Strength in the direction os the trend

50
Q

What does small body indicate in candlestick formations

A

indicates indecision and a potential reversal, especially after a meaningful prior trend

51
Q

Are candlestick patterns short or long term? What are they usually formed by

A

They are short term patterns and are usually formed by only one or two bars

52
Q

What are the 8 types of 1 bar candlestick formations + draw each one

A

1) Doji
2) Dragonfly doji
3) Gravestone doji
4) Spinning top
5) Hammer
6) Hanging man
7) Shooting star
8) Inverted hammer

53
Q

What is a doji?

A

A pattern where the open and close are identical, or nearly identical

54
Q

Does a body matter in a doji?

A

No

55
Q

What do doji’s represent in the market

A

-they represent indecision/equilibrium
-often represent a warning of a reversal pattern of the prevailing trend

56
Q

What is a dragonfly doji

A

Is a doji where by the open and close are at the top of the period’s range

57
Q

What type of candle is a dragonfly doji

A

Bullish candle

58
Q

What is a gravestone doji

A

is a doji where the open and close are at the bottom of the periods range

59
Q

What type of candle is a gravestone doji

A

Bearish candle

60
Q

What is a spinning top

A

Is a candle with a long uper shadow, a long lower shadow and a small real body

61
Q

What does a spinning top represent

A

Indecision

62
Q

What does a longer range in a spinning top represent

A

Bearish market

63
Q

What is a hammer? When does it occur

A

Is a bullish reversal patter that comes after a downtrend

64
Q

What 2 key characteristics of a hammer?

A

1) the lower shadow must be at least 2 times longer than the real body
2) colour of the body is not important

65
Q

What is a hanging man

A

Is a bearish reversal patter that comes after an extended rally

66
Q

What 2 key characteristics of a hammer?

A

1) the lower shadow must be at least 2 times longer than the real body
2) colour of the body is not important

67
Q

What does the hanging man require?

A

Needs bearish confirmation: a close beneath the hanging man’s real body the following day, or at least it needs to open below the hanging man’s real body the next day

68
Q

What is a shooting star (upside down hanging man)

A

-is a bearish reversal pattern that comes after a rally

69
Q

What 2 key characteristics of a shooting star?

A

-it requires the upper shadow to be at least 2 times longer than the real body
-the real body occurs in the lower end of the trading range

70
Q

True or false: a gravestone doji is more bearish than a shooting star because it has no real body

A

True

71
Q

What is the invested hammer

A

-is a bullish reversal pattern that comes after a decline

72
Q

What 2 key characteristics of a inverted hammer shooting star?

A

-it requires the upper shadow to be at least 2 times longer than the real body
-the real body occurs in the lower end of the trading range

73
Q

What does the hanging man require? (2)

A

-needs bullish confirmation
-requires the next day to open above the inverted hammer’s real body or especially close a close the next day above the inverted hammer’s real body

74
Q

What are the 6 two bar candlestick formations

A

1) Harami
2) harami cross
3) engulfing bullish
4) engulfing bearish
5) dark cloud cover
6) piercing pattern

75
Q

What is a harami pattern

A

A two day pattern consisting of a large body of either colour, followed by a small body of either colour that is completely within the boundaries of the large body

76
Q

What is an important characteristic of harami patterns

A

they are reversal patterns because they represent price action indecision that goes from high volatility to one of lower volatility which usually signify the beginning of a trend

77
Q

What is a harami cross? Draw it

A

Similar to harami but with a cross (doji). The second candle is replaced by a doji, which implies even greater indecision and an even stronger signal of an impending end to the prevailing trend (even stronger signal of reversal)

78
Q

What is a bullish engulfing patterns? Draw it

A

is a 2 candle reversal pattern that comes at the end of a clearly defined downtrend

79
Q

What 2 key characteristics of a bullish engulfing patter?

A

-it is made up of a large WHITE candle that completely engulfs (is bigger) the real body of the smaller BLACK candle found at the bottom of the downtrend
-the larger the white candle and the smaller the first dark candle, the more bullish the reversal is

80
Q

What is bearish engulfing pattern? Draw it

A

it is the opposite of the bullish engulfing pattern.

81
Q

When does the bearish engulfing pattern occur

A

It occurs at the end of a clearly defined uptrend and is made up of a large BLACK candle that completely engulfs a previous smaller WHITE candle

82
Q

What is a dark cloud cover? Draw it

A

Is a 2 candle bearish reversal pattern that occurs at the top of a clearly defined uptrend

83
Q

What is the dark cloud cover pattern made up of?

A

Made up of a large white candle followed by a large dark candle with small shadows (though this is not a necessity)

84
Q

What is an important characteristic about the second dark candle in a dark cloud cover

A

the second dark candle should open above the previous day’s close and it should close at least half way into the real body of the previous white candle. The deeper into the white candle that it closes, the more bearish the reversal signal would be

85
Q

What happens if the candles are shaven heads (no shadows) in dark cloud cover?

A

Then this would give a bigger reversal signal. If the DARK candle occurs on heavy volume, this would also amplify the strength of the reversal signal

86
Q

What is a piercing pattern? Draw it

A

it is the opposite of a dark cloud. It is a 2 day BULLISH pattern that occurs at the bottom of a clearly defined downtrend and is made up of large dark candlestick followed by a large white candlestick

87
Q

What is important about the white candlestick in the piercing pattern

A

the white candlestick must open below the previous candlestick’s close and close at least halfway into the dark candlestick’s real body. The deeper into the dark candlestick that it closes, the more bullish the reversal signal would be

88
Q

What happens if the candles are shaven heads (no shadows) in piercing patterns?

A

Then this would give a bigger reversal signal. If the WHITE candle occurs on heavy volume, this would also amplify the strength of the reversal signal

89
Q

What is a morning star? Draw it

A

Is a 3 candle bullish reversal pattern that occurs at the end of a downtrend

90
Q

What is the morning star made up of?

A

-It is made up of a long black candlestick, a small “star” candlestick (can be black or white) that gaps BELOW the close of the previous candlestick
- it is followed by a long white candlestick

91
Q

What are some important characteristics of a morning star?

A

-the first candlestick confirms that the decline remains in force and selling dominates
-when the second candlestick gaps DOWN, it provides further evidence of selling pressure
-if small candlestick is a doji, the chances of a reversal increases
-the third long white candlestick provides bullish confirmation of the reversal

92
Q

What is the evening star? Draw it

A

is a 3 candle bearish reversal pattern that occurs at the end of an uptrend

93
Q

What is the evening star made up of?

A

-it is made u[p of a long white candlestick, a small “star” candlestick (can be white or black) that gaps above the close of the previoys candlestick
-it is followed by a long black candlestick

94
Q

What are some important characteristics of a evening star?

A

-the first long white candlestick confirms that buying pressure remains strong and the trend is up
-when the second candlestick gaps up, it provides further evidence of residual buying pressure
-if the small candlestick is a doji, the chance of reversal increase
-the third long black candlestick provides bearish confirmation of the reversal

FINA 408 (15 decks)

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