Lecture 5 (short term patterns) Flashcards
Does short term patterns refer to one day patterns??
NO, it refers to “short term” as in a small amount of bars and candlesticks forming the pattern
What is the reason for studying short term patterns
-anticipate sudden moves
-take advantage of a period when prices have reached their extremes
What is a SETUP
It is when certain known factors needed to establish a pattern have occurred and the trader is waiting for the action signal to occur
What happens if the pattern formation (signal) does not abide by the rules?
We ignore it, it is not a setup
When are short term reversal considered
only necessary when prices are at some sort of support or resistance level, or trend line
Short term patterns can be used to see what other kinds of patterns
reversal and continuation patterns
What is the principle data shown in short term patterns
Open, close, high, low
what can be said about how frequently a complex pattern can be seen
the more complex the pattern is, the less frequently it will occur
What are gaps, when do they occur
-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
What does the gap (hole/void) represent
It represents a price range where no stock changes hands
What are gaps referred as in candlestick graph
windows
What are the 4 types of gaps
-opening gap
-breakaway gap
-runaway gap
-exhaustion gap
when do opening gaps (common gaps) occur
-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
Do opening gaps usually get filled?
Yes, usually within 30 mins
What can be said if the gap doesn’t close within 30mins
Chances are that the trend will continue in the direction of the gap
What are breakaway gaps? when do they occur?
-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
What are upward gaps in breakaway gaps usually accompanied with
with heavy volume
Are downward gaps in a breakaway gaps usually accompanies with heavy volume?
Not necessarily
What can be said about analyzing trends using gaps in general
That the trend is believed to be in force (place) until the gap is filled
In order to make sure that a gap is not a false gap, what needs to be done
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
Should we short in upward trending breakaway gaps? Why?
NO, because tends to increase in value
What are runaway gaps (measuring gaps)? when do they occur?
-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)
Can there be more than one runaway gap on a chart?
Yes
What exhaustion gaps? When do they occur?
-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
Since runaway gap and exhaustion gaps have the same characteristics, how do we recognize the difference between the two
-If gap doesn’t close = runaway gap
-If gap closes within a few bars = likely exhaustion gap
What is an island reversal? When do they occur?
-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
What does an island reversal require?
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)
What can occur between the gaps in an island reversal
low volatility (volume) can occur for a certain amount of days or weeks
when does volume usually increase in an island reversal
Usually volume increases on the second gap from an island top, but not necessarily from a bottom
What is a dead cat bounce
it is a term for failed rally after a sharp decline
What is the length of the short rally that ends up failing
several days to up to 2 weeks
Why do the rally’s in dead cat bounce happen
Bottom fishers coming into the market and fuelled by short covering
How much decline is seen after the dead cat
usually exceeding 20%
What are spikes
Spikes are similar to gaps except that the empty space associated with a gap is a solid line
What signals the importance of the spike
The context surrounding it
When do spikes often happen?
-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
What are the characteristics of a one bar reversal patterns?
When a trading bar HIGH is GREATER than the previous bar HIGH and the CLOSE is LOWER (down) from the previous bar CLOSE
Why is it important to study other trends rather than soelly relying on the one bar reveral pattern
because it is a very common pattern and can occur even within a trend
What does a two bar reversal pattern signal
It is a classic signal of exhaustion
What does the two bar reversal pattern remind you of
Train tracks
What is an inside bar?
Is a bar with a range that is smaller than and within the previous bar’s range
What does an inside bar reflect?
Reflects a decline of momentum in the trend, a pause, a period of directionless equilibrium, waiting for something to signal the next trend direction
What is important to keep in mind during an inside bar
The context of the pattern’s location is more important than the pattern configuration
When does the outside bar occur
Occurs when the high is higher than the previous bar high and the low is lower than the low of the previous day low
What does the outside bar cover
covers all the previous bar’s action
Draw some examples of bullish outside bars
-range is bigger than previous day range
-close is HIGHER than previous day close
Draw some examples of bearish outside bars
-range is bigger than previous range
-close LOWER than previous close
What is the difference between western bar charts and candlestick
emphasis on the opening and closing
What does a large body indicate in candlestick formations
Strength in the direction os the trend
What does small body indicate in candlestick formations
indicates indecision and a potential reversal, especially after a meaningful prior trend
Are candlestick patterns short or long term? What are they usually formed by
They are short term patterns and are usually formed by only one or two bars
What are the 8 types of 1 bar candlestick formations + draw each one
1) Doji
2) Dragonfly doji
3) Gravestone doji
4) Spinning top
5) Hammer
6) Hanging man
7) Shooting star
8) Inverted hammer
What is a doji?
A pattern where the open and close are identical, or nearly identical
Does a body matter in a doji?
No
What do doji’s represent in the market
-they represent indecision/equilibrium
-often represent a warning of a reversal pattern of the prevailing trend
What is a dragonfly doji
Is a doji where by the open and close are at the top of the period’s range
What type of candle is a dragonfly doji
Bullish candle
What is a gravestone doji
is a doji where the open and close are at the bottom of the periods range
What type of candle is a gravestone doji
Bearish candle
What is a spinning top
Is a candle with a long uper shadow, a long lower shadow and a small real body
What does a spinning top represent
Indecision
What does a longer range in a spinning top represent
Bearish market
What is a hammer? When does it occur
Is a bullish reversal patter that comes after a downtrend
What 2 key characteristics of a hammer?
1) the lower shadow must be at least 2 times longer than the real body
2) colour of the body is not important
What is a hanging man
Is a bearish reversal patter that comes after an extended rally
What 2 key characteristics of a hammer?
1) the lower shadow must be at least 2 times longer than the real body
2) colour of the body is not important
What does the hanging man require?
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
What is a shooting star (upside down hanging man)
-is a bearish reversal pattern that comes after a rally
What 2 key characteristics of a shooting star?
-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
True or false: a gravestone doji is more bearish than a shooting star because it has no real body
True
What is the invested hammer
-is a bullish reversal pattern that comes after a decline
What 2 key characteristics of a inverted hammer shooting star?
-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
What does the hanging man require? (2)
-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
What are the 6 two bar candlestick formations
1) Harami
2) harami cross
3) engulfing bullish
4) engulfing bearish
5) dark cloud cover
6) piercing pattern
What is a harami pattern
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
What is an important characteristic of harami patterns
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
What is a harami cross? Draw it
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)
What is a bullish engulfing patterns? Draw it
is a 2 candle reversal pattern that comes at the end of a clearly defined downtrend
What 2 key characteristics of a bullish engulfing patter?
-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
What is bearish engulfing pattern? Draw it
it is the opposite of the bullish engulfing pattern.
When does the bearish engulfing pattern occur
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
What is a dark cloud cover? Draw it
Is a 2 candle bearish reversal pattern that occurs at the top of a clearly defined uptrend
What is the dark cloud cover pattern made up of?
Made up of a large white candle followed by a large dark candle with small shadows (though this is not a necessity)
What is an important characteristic about the second dark candle in a dark cloud cover
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
What happens if the candles are shaven heads (no shadows) in dark cloud cover?
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
What is a piercing pattern? Draw it
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
What is important about the white candlestick in the piercing pattern
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
What happens if the candles are shaven heads (no shadows) in piercing patterns?
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
What is a morning star? Draw it
Is a 3 candle bullish reversal pattern that occurs at the end of a downtrend
What is the morning star made up of?
-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
What are some important characteristics of a morning star?
-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
What is the evening star? Draw it
is a 3 candle bearish reversal pattern that occurs at the end of an uptrend
What is the evening star made up of?
-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
What are some important characteristics of a evening star?
-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
