Technical Analysis - Chart Formations
It is important to note that the Technical
Analysis Overview provided does not attempt to
be a comprehensive treatment of Charting or
Technical Analysis methods. There are numerous,
well-written books on Chart Interpretation and
Technical Analysis. A brief and simplistic
review of some basic charting concepts are
provided for reference or to stimulate further
study. Please contact your broker for a
recommended reading list on Charting and
Technical Analysis.
Technical Analysis makes the assumption that
history repeats itself. Any trading method or
system that works well on a broad sample of
historical data, may have validity when applied
to future trading environments. One should keep
in mind that the markets are dynamic. The forces
that motivate price movement are dynamic, and
the participants are dynamic. Therefore any
system which has performed well on past historic
data may decline in value as the evolving
dynamics of the markets change over time.
The assumption is made that trading results
can be improved when trading skills are
improved. This requires practice! Surely any
time spent learning to trade on past historical
data, will not be wasted when it comes to
preparing to trade for the future.
Chart Formations
Trendlines
Inclining Trendline
A straight line usually drawn to define an
uptrend against or through price bar lows.
Declining Trendline
A straight line usually drawn to define a
downtrend against or through price bar highs.
Support
A horizontal floor where interest in buying a
commodity is strong enough to overcome the
pressure to sell. Therefore a decrease in price
is reversed and prices rise once again.
Typically, support can be identified on a chart
by a previous set of lows.
Resistance
A horizontal ceiling where the pressure to
sell is greater than the pressure to buy.
Therefore, an increase in price is reversed and
prices revert downward. Typically resistance can
be located on a chart by a previous set of
highs.
Channels
Inclining
The inclining channel is a formation with
parallel price barriers along both the price
ceiling and floor. Unlike the sideways channel
the inclining channel has an increase in both
the price ceiling and price floor.
Declining
The declining channel is a formation with
parallel price barriers along both the price
ceiling and floor. Unlike the sideways channel
the declining channel has a decrease in both the
price ceiling and price floor.
Horizontal or Sideways
A horizontal or sideways is a formation that
features both resistance and support. Support
forms the low price bar, while resistance
provides the price ceiling.
Triangles
Symmetrical
A formation in which the slope of price highs
and lows are converging to a point so as to
outline the pattern in a symmetrical triangle.
To trade this formation place a buy order on a
break up an out of the triangle or a sell order
on a break down and out of the triangle.
Non-Symmetrical
A formation in which the slope of price highs
and lows are converging to a point so as to
outline the pattern in a non-symmetrical
triangle. To trade this formation, place a buy
order on a break up an out of the triangle or a
sell order on a break down and out of the
triangle.
Ascending Triangle
A formation in which the slope of price highs
and lows come together at a point outlining the
pattern of a Right Triangle. The hypotenuse in
an Ascending Triangle should be sloping from
lower to higher and from left to right. To trade
this formation, place a buy order on a break up
and out of the triangle or a sell order on a
break down and out of the triangle. Ascending
triangles, with a prior downtrend, are
anticipated to break down and out, rather than
up and out.
Descending Triangle
A formation in which the slope of price highs
and lows come together at a point outlining the
pattern of a Right Triangle. The hypotenuse in
an Descending Triangle should be sloping from
higher to lower and left to right. To trade this
formation, place a buy order on a break up and
out of the triangle or a sell order on a break
down and out of the triangle. Descending
triangles, with a prior uptrend, are anticipated
to break up and out, rather than down and out.
Pennants
Similar to a Symmetrical Triangle but
generally stubbier or not as elongated. A
formation in which the slope of price bar highs
and lows are converging to a point so as to
outline the pattern in a symmetrical triangle.
To trade this formation, you can place orders at
both the break up and out of the pennant and
break down and out of the pennant.
Wedges
Rising or Inclining
This formation occurs when the slope of price
bar highs and lows join at a point forming an
inclining wedge. The slope of both lines is up
with the lower line being steeper than the
higher one. To trade this formation, place an
order on a break up and out of the wedge or a
sell order on a break down and out the wedge.
Rising wedges, with a prior downtrend are
anticipated to break down and out, rather than
up and out.
Falling or Declining
This formation occurs when the slope of price
bar highs and lows join at a point forming an
declining wedge. The slope of both lines is down
with the upper line being steeper than the lower
one. To trade this formation, place an order on
a break up and out of the wedge or a sell order
on a break down and out the wedge. Falling
wedges, with a prior uptrend, are anticipated to
break up and out, rather than down and out.
Flags
Bull Flag
A formation consisting of a small number of
price bars where the slope of price bar highs
and lows are parallel and declining. Bull Flags
are identified by their characteristic pattern
and by the context of the prior trend. In the
case of a Bull Flag the trend leading to the
formation of the Bull Flag is up. To trade this
formation, place orders on the break up and
break down points, leaving your unfilled order
as your stop loss.
Bear Flag
A formation consisting of a small number of
price bars in which the slope of price bar highs
and lows are parallel and inclining. Bear Flags
are identified by their characteristic pattern
and by the context of the prior trend. In the
case of a Bear Flag the trend leading to the
formation of the Bear Flag is down. To trade
this formation, place buy and sell orders on the
break up and down of the flag, leaving the
unfilled order as your stop loss.
Top and Bottom Formations
1-2-3 (A-B-C) Top
Anticipates a change in trend from up to down
on a break below the number 2 point.
1-2-3 (A-B-C) Bottom
Anticipates a change in trend from down to up
on a break above the number 2 point.
Head and Shoulders Top
Anticipates a decline on a break below the
Neckline.
Head and Shoulders Bottom
Anticipates a rise in prices on a break above
the Neckline.
Double Top
Anticipates a change in trend from up to
down.
Double Bottom
Anticipates a change in trend for down to up.
Triple Top
Anticipates a change in trend from up to
down.
Triple Bottom
Anticipates a change in trend from down to
up.
Rounded Top
Anticipates a change in trend from up to
down.
Rounded Bottom
Anticipates a change in trend from down to
up.
Congestions
Generally refers to any type of chart pattern
in which prices are temporarily trapped in a
trading range. The range can be converging,
expanding or defined by parallel lines on the
horizontal. Congestions of shorter duration are
usually found to be a variation of a Flag, or
some variation of a converging or expanding
triangle. Periods of longer congestion are
usually defined by a variation of a converging
or expanding triangle, or may be an elongated
parallel channel on the horizontal. Such
patterns are frequently referred to being
Continuation patterns if price break out in the
direction of the trend leading to the formation
of the congestion pattern.
Continuation Patterns
Periods of longer congestion are usually
defined by a variation of a converging or
expanding triangle, or may be an elongated
parallel channel on the horizontal. Such
patterns are frequently referred to being
continuation patterns if price break out in the
direction of the trend leading to the formation
of the congestion pattern.
Gaps
Breakaway Gaps
Occur when prices gap higher or lower out of
a congestion pattern in the direction of the
prevailing trend.
Measuring or Running Gaps
Difficult to identify, but usually occur at
the midpoint in a price rally or decline.
Exhaustion Gaps
Occur at the end of a market trend, usually
after steep accelerated uptrend or downtrend.
The gap can leave one price bar or a small
number of congestive price bars behind.
OR
Retracements
Fibonacci Retracements
Fibonacci Retracement levels correspond
percentage retracements that occur in the ebb
and flow of a market trend. According to the
Elliot Wave Theory, market trends tend to occur
in five distinct waves: three waves that move in
the direction of the trend with the middle or
third wave being the strongest usually,
alternating against two counter-trend waves.
Elliot asserted that these counter-trend waves
will usually retrace against the trending waves
by 38.2, 50 and 61.8 percent (also, less
frequently by 24 and 76 percent). These
Retracement Percentages correspond to natural
ratios discovered by the Greeks called the
Golden Ratio and rediscovered by Fibonacci, a
medieval, Italian Mathematician.
|