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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 (we are biased to the Common Sense Commodities
Course). A brief and simplistic review of some basic
charting concepts are provided for reference or to stimulate
further study.
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
Patterns
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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 |
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 |
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 |
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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