Price Pattern Recognition

Question 1

Continuation patterns

Answer 1

Formed by a pause in the prevailing trend after which the trend continues in the same direction

Question 2

What are the major continuation patterns

Answer 2

Triangles
Pennants
Flags

Question 3

When can triangles appear?

Answer 3

In any time frame where there has been a prior directional trend (up or down)

Question 4

What are the three types of triangle?

Answer 4

Descending
Symmetrical
Ascending

Question 5

MPO

Answer 5

Minimum Price objective

Question 6

How do you set your MPO for a symmetrical triangle?

Answer 6

Add the height of the triangle base to the breakout point

Question 7

When do you typically see the breakout occur in a triangle pattern

Answer 7

Usually 1/2 to 3/4 of the way through the pattern

Question 8

When do pennants and flags occur?

Answer 8

Short term up to a few hours. Can be bullish or bearish. After a prior trend

Question 9

Characteristics of pennants and flags

Answer 9

They may reverse price action, they are hard to trade and are very explosive

Question 10

Describe how a bullish flag is formed

Answer 10

1. Fast (almost vertical) move in one direction
2. Price hits short term resistance
3. Market pulls back gently to form a flag pattern
4. Price breaks upwards

Question 11

How should you trade a bullish flag?

Answer 11

Buy using time/ price filters
Place a stop loss below recent low
Calculate MPO by adding height of original breakout onto the second breakout.

Question 12

Major reversal patterns

Answer 12

Head and shoulders
Double tops/ bottoms
Triple tops/ bottoms
Rising/ falling wedges (can also appear as continuation pattern)

Question 13

Head and shoulders properties

Answer 13

Requires a prior directional trend
The head must be the highest point
They form bearish reversals
They can be found in any time frame

Question 14

Inverse head and shoulders properties

Answer 14

Requires a prior downtrend
The head must be the lowest point
Bullish reversal pattern
Can be found in any time frame

Question 15

Neckline

Answer 15

A line drawn to show the resistance of the head and shoulders

Question 16

Where do you place your MPO on a (inverse) head and shoulders pattern?

Answer 16

Add the distance of the head from the neckline to the neckline in the opposite direction

Question 17

Properties of double/ triple tops

Answer 17

Prior uptrend required
Reversal pattern
Double tops fairly common
Triple tops are rare
Any time frame

Question 18

How to trade double tops and bottoms

Answer 18

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

Question 19

When do some of the best reversal patterns occur?

Answer 19

In the correction of a longer term trend

Question 20

What are the two types of wedges?

Answer 20

Rising wedges (bearish) 
Falling wedges (bearish)

Question 21

Are wedges continuation or reversal patterns?

Answer 21

Both rising and falling wedges can be found in uptrends and downtrends. Therefore they can’t be defined as continuation or reversal patterns.

Question 22

What happens during wedge formation

Answer 22

Short term trend energy is fading, suggesting a breakout in the opposite direction to the angle of the wedge

Question 23

What is the impact of a rising wedge in an uptrend or downtrend

Answer 23

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

Question 24

What is the impact of a falling wedge in an uptrend and downtrend

Answer 24

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

Question 25

What are forms of confirmation that should be used?

Answer 25

Support or resistance levels
Candlestick analysis
Momentum analysis (oscillators)
Patterns within patterns