Transcript Pattern Recognition

Pattern Recognition
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However, before this you must firstly
understand the concepts behind these
patterns and what type of patterns to
look for.
Over time you will be able to identify
these more freely in hindsight, the true
strength of a great trader is to be able to
see these evolving in real time.
Pattern Recognition
Technical Analyst set up trading
decisions based on continual exposure
to repeated patterns. You will eventually
be able to visualise and see these
patterns as they are developing.
They can give more clues as to how the market may move
in the future
They can be used generate price objectives for potential
future moves
Continuation
Patterns
Reversal Patterns
Pattern Recognition
Identifying recognisable patterns (trends) within
the price movements helps in a couple of ways:
Pattern Recognition
Continuation Patterns
Triangles
3
Pennants
Flags
Pattern Recognition
Triangles
As the name suggests, triangle formations
involve the price action trading in a narrowing
range to form the shape of a triangle.
3 types of triangle:
Ascending
Descending
Symmetrical
Symmetrical:
Pattern Recognition
Triangle Rules
It is a continuation pattern so it is likely to break out of the
pattern in the direction of the prevailing trend (down in this
example)
You only establish your position after the break out at point X on
the diagram (you would short your position here)
Y
Your target and minimum price objective (MPO) is the height of
the pattern (measured at point Y), projected from the breakout,
X
X
The price must break out between ½ and ¾ way through the
pattern.
MPO
Your stop should be placed inside the triangle, tracking the triangle
support line. Especially as price often retraces back to support line
before continuing the breakout.
Pennants are formed over a shorter time scale
than triangles - up to a few hours.
As far as the shape of the pattern is
concerned, pennants are identical to
symmetrical triangles.
Pennants, unlike triangles, rarely reverse price
action. However, you do not trade them until
they have broken.
Pattern Recognition
Pennants
There should be an area of price congestion
followed by a sharp move in one direction
The price then forms a sideways pattern like a
continuation triangle
The price will then break out and move sharply
again in the original direction
This pattern is difficult to trade because the
moves are explosive and it is difficult to
establish the position following the break out
of the pattern.
Previous area of
congestion
The advantage of a pennant is that the target
is the height of the “flag pole” rather then the
height of the consolidation, giving a larger
comparable profit potential.
Pattern Recognition
Pennant Rules
Flags are continuation patterns which can
occur between the short and medium term they do not usually form over much more than
a week.
Flags consist of a channel of price action
moving against the direction of the prevailing
trend, followed by a break in the direction of
the trend.
Pattern Recognition
Flags
Pattern Recognition
Flag Rules
x
x
The target is the height of ‘x’ projected from
the break-out point at ‘y’.
y
This is generally a very short term pattern and
would be traded in a similar fashion to a
triangle.
Double Tops / Bottoms
Triple Tops / Bottoms
Wedges
Head & Shoulders
Pattern Recognition
Reversal Patterns
Pattern Recognition
Double Tops & Bottoms
Easy to detect
Only trade on a double top when price the
action breaks below the reaction low
The minimum price objective for this
pattern is derived by projecting the
height of a-b from the breakout at c
The double bottom is the exact opposite
but is a bullish reversal pattern
Pattern Recognition
Triple Tops & Bottoms
Stronger than Double Tops and Bottoms
but less common as a third test of the
high or low is required
Target
Always wait for the breakout before
trading
The Japanese call this a three mountain
top
A triple top is bearish and a triple bottom
is a bullish reversal pattern.
A rising wedge is a top reversal pattern
(bearish) where the trend becomes less steep
and the range of the market becomes
narrower
Following the break out from the support line
the wedge may trade back up to this line so it
is important to put your stop inside the wedge
Minimum Price
Objective
The target is calculated by projecting the
height of the pattern at its widest point from
the breakout point
The falling wedge is a bullish reversal pattern.
Pattern Recognition
Rising Falling Wedge
Pattern Recognition
Head and Shoulders
H
S
S
The Head and Shoulders pattern was first
discovered in the 17th Century by Sokyu
Honma and was called the Three Buddha
pattern.
As its name implies, the ‘Head and Shoulders’
formation consists of two ‘shoulders’ with a
higher ‘head’ in the middle.
Classically the Head and Shoulders pattern is a
long term reversal pattern, however it does
also work over a shorter time frame.
Pattern Recognition
Highs start to top out
Broken Trend Line
Lower High
Return Move
Broken Trend Line
Minimum Price
Objective
Prior Trend Required
Possible Oscillator Divergence may occur
Head and Shoulders Top
H
S
Prior Trend in Place
S
Divergence in Oscillator
Continuation Patterns
Triangles
Pennants
Flags
Reversal Patterns
Double Tops / Bottoms
Triple Tops / Bottoms
Wedges
Head & Shoulders
Pattern Recognition
Summary
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