Price Pattern Recognition Flashcards
Continuation patterns
Formed by a pause in the prevailing trend after which the trend continues in the same direction
What are the major continuation patterns
Triangles
Pennants
Flags
When can triangles appear?
In any time frame where there has been a prior directional trend (up or down)
What are the three types of triangle?
Descending
Symmetrical
Ascending
MPO
Minimum Price objective
How do you set your MPO for a symmetrical triangle?
Add the height of the triangle base to the breakout point
When do you typically see the breakout occur in a triangle pattern
Usually 1/2 to 3/4 of the way through the pattern
When do pennants and flags occur?
Short term up to a few hours. Can be bullish or bearish. After a prior trend
Characteristics of pennants and flags
They may reverse price action, they are hard to trade and are very explosive
Describe how a bullish flag is formed
- Fast (almost vertical) move in one direction
- Price hits short term resistance
- Market pulls back gently to form a flag pattern
- Price breaks upwards
How should you trade a bullish flag?
Buy using time/ price filters
Place a stop loss below recent low
Calculate MPO by adding height of original breakout onto the second breakout.
Major reversal patterns
Head and shoulders
Double tops/ bottoms
Triple tops/ bottoms
Rising/ falling wedges (can also appear as continuation pattern)
Head and shoulders properties
Requires a prior directional trend
The head must be the highest point
They form bearish reversals
They can be found in any time frame
Inverse head and shoulders properties
Requires a prior downtrend
The head must be the lowest point
Bullish reversal pattern
Can be found in any time frame
Neckline
A line drawn to show the resistance of the head and shoulders
Where do you place your MPO on a (inverse) head and shoulders pattern?
Add the distance of the head from the neckline to the neckline in the opposite direction
Properties of double/ triple tops
Prior uptrend required Reversal pattern Double tops fairly common Triple tops are rare Any time frame
How to trade double tops and bottoms
Only sell (or buy) after the breakout point. Use filters to confirm that the breakout is reliable. A return move gives a second chance to sell (or buy). MPO is calculated by adding the height to the breakout point
When do some of the best reversal patterns occur?
In the correction of a longer term trend
What are the two types of wedges?
Rising wedges (bearish) Falling wedges (bearish)
Are wedges continuation or reversal patterns?
Both rising and falling wedges can be found in uptrends and downtrends. Therefore they can’t be defined as continuation or reversal patterns.
What happens during wedge formation
Short term trend energy is fading, suggesting a breakout in the opposite direction to the angle of the wedge
What is the impact of a rising wedge in an uptrend or downtrend
In a downtrend it can be a trend continuation. In an uptrend it can be a reversal. So in both cases rising wedge causes price drops
What is the impact of a falling wedge in an uptrend and downtrend
In an uptrend it may be a continuation after a correction. In a downtrend it mag be a downward reversal so in both cases prices rise
What are forms of confirmation that should be used?
Support or resistance levels
Candlestick analysis
Momentum analysis (oscillators)
Patterns within patterns
