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Chart
Patterns and Technical Analysis
(note: the following is
reproduced with permission from Gecko Software, Inc. Be sure to
visit www.trytnt.com
for the very best in futures technical analysis tools)
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
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Trendlines
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Inclining
Trendline
A
straight line usually drawn to define an uptrend against or
through price bar lows.
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Declining
Trendline
A
straight line usually drawn to define a downtrend against or
through price bar highs. |
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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.
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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.
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Channels
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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.
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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.
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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.
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Triangles
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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.
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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.
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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.
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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.
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Pennants
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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.
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Wedges
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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.
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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.
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Flags
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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.
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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.
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Top
and Bottom Formations
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1-2-3
(A-B-C) Top
Anticipates a change in trend from up to down on a break below
the number 2 point. |
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1-2-3
(A-B-C) Bottom
Anticipates a change in trend from down to up on a break above
the number 2 point. |
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Head
and Shoulders Top
Anticipates a
decline on a break below the Neckline.
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Head
and Shoulders Bottom
Anticipates a
rise in prices on a break above the Neckline.
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Double
Top
Anticipates a
change in trend from up to down.
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Double
Bottom
Anticipates a
change in trend for down to up.
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Triple
Top
Anticipates a
change in trend from up to down.
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Triple
Bottom
Anticipates a
change in trend from down to up.
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Rounded
Top
Anticipates a
change in trend from up to down.
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Rounded
Bottom
Anticipates a
change in trend from down to up.
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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. |
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Gaps
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Breakaway
Gaps
Occur when prices gap higher or lower out of a congestion
pattern in the direction of the prevailing trend. |
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Measuring
or Running Gaps
Difficult to identify, but usually occur at the midpoint in a
price rally or decline. |
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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. |
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Retracements
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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. |
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