short term patterns Flashcards
what do we refer to by short erm patterns
We are referring to ‘short term’ as in a small number of bars or candlesticks forming the pattern
The basis for short term patterns is to
Anticipate a sudden move, similar to the breakout concept in larger patterns.
Take advantage of a period when prices have reached an emotional extreme, or to enter into a trend at an advantageous price, as on a pullback or throwback.
The methods usually have what is called a SETUP.
when does A SETUP occur
when certain known factors needed to establish the pattern have occurred, and the trader is waiting for the action signal to occur.
is a breakout an action signal of a set up
yea
when should a short term reversal pattern only be considered necessary
when prices are at some sort of support or resistance level, or trend line.
The principle data used in short term patterns
Open
Close
High
Low
when do GAPS occur
when either the low for the current bar is above the high of the previous bar
or
the high for the current bar is lower than the low of the previous bar.
what does the void of the GAP represent
represents a price range where no stock changed hands
referred to as windows
why do currencies and indices not always form gaps in their trading
because currencies are traded 24 hours / day, or in the case of indices – they are made up of several underlying securities which gradually open at the day’s opening
THE FOUR TYPES OF GAPS:
OPENING GAP
BREAKAWAY (or Breakout) GAPS
RUNAWAY GAPS
EXHAUSTION GAPS
when do OPENING GAPS (common gaps) occur
when the opening price for the day is outside the range of the previous day
what is the recommendation regarding oppening gaps and why
when does this not hold
General wisdom has us sell into large upward opening gaps, as most often, they are filled
it does not hold In downward opening gaps because a fill is less common.
or, If the gap is not filled within the first 30 minutes of trading, chances are that the trend will continue in the direction of the gap
why are BREAKAWAY GAPS the most profitable
because they occur at the beginning of a trend.
The size of the gap – the space between the two extremes in which no activity occurs – appears to be proportional to the strength of the subsequent price move.
between upward and downward breakaway gaps, which is usually accompanied by heavy volume
upward breakaway gaps
what should we remember When analyzing trend using gaps
we should remember that the trend is believed to be in force until the gap is filled
how to avoid falling for a breakaway gap being a false gap
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
when do runaway gaps occur
occur along the trend
They can appear in strong trends that have very few minor corrections and just keep rising or declining without retracements or other interruptions.
increased volume
why are runaway gaps also called measuring gaps
because they tend to occur at about the middle of the price run
therefore the initial distance before them can be projected above them for a price target
when do exhaustion gaps occur
occur at the end of the moves but are not recognized at that time because they have the same characteristics as runaway gaps.
when do exhaustion gaps differentiate themselves from runaway gaps
If a gap is later closed, it is likely an exhaustion gap
The sign that such gaps are not runaway gaps is an immediate fill within a few bars of the gap.
Prices should not immediately reverse and fill a gap unless the end of the run is approaching
An ISLAND REVERSAL
can occur at either the top or bottom and only occurs after a relatively lengthy trend.
what does an island reversal require
It requires 2 gaps at roughly the same price; the first in the direction of the trend, an exhaustion gap, and the second in the reverse direction, a breakaway gap.
extra info:
Between the gaps, low volatility trading can occur for a number of days or even weeks.
Volume usually increases on the second gap from an island top, but not necessarily from a bottom.
DEAD CAT BOUNCE
term for a failed rally after a sharp decline.
lasting from several days to up to 2 weeks following an event decline (game changing event, loss of a patent, filing for bankruptcy protection etc.)
the size of the declines preceding dead cat bounce (sell off prior to it)
usually exceeding 20%.
what causes the rally behind the dead cat biunce
The rally is due to bottom fishers coming into the market, and is fueled by short covering
Once this is over, the price action resumes its downtrend.