short term patterns

Question 1

what do we refer to by short erm patterns

Answer 1

We are referring to ‘short term’ as in a small number of bars or candlesticks forming the pattern

Question 2

The basis for short term patterns is to

Answer 2

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.

Question 3

when does A SETUP occur

Answer 3

when certain known factors needed to establish the pattern have occurred, and the trader is waiting for the action signal to occur.

Question 4

is a breakout an action signal of a set up

Answer 4

yea

Question 5

when should a short term reversal pattern only be considered necessary

Answer 5

when prices are at some sort of support or resistance level, or trend line.

Question 6

The principle data used in short term patterns

Answer 6

Open

Close

High

Low

Question 7

when do GAPS occur

Answer 7

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.

Question 8

what does the void of the GAP represent

Answer 8

represents a price range where no stock changed hands

referred to as windows

Question 9

why do currencies and indices not always form gaps in their trading

Answer 9

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

Question 10

THE FOUR TYPES OF GAPS:

Answer 10

OPENING GAP

BREAKAWAY (or Breakout) GAPS

RUNAWAY GAPS

EXHAUSTION GAPS

Question 11

when do OPENING GAPS (common gaps) occur

Answer 11

when the opening price for the day is outside the range of the previous day

Question 12

what is the recommendation regarding oppening gaps and why

when does this not hold

Answer 12

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

Question 13

why are BREAKAWAY GAPS the most profitable

Answer 13

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.

Question 14

between upward and downward breakaway gaps, which is usually accompanied by heavy volume

Answer 14

upward breakaway gaps

Question 15

what should we remember When analyzing trend using gaps

Answer 15

we should remember that the trend is believed to be in force until the gap is filled

Question 16

how to avoid falling for a breakaway gap being a false gap

Answer 16

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

Question 17

when do runaway gaps occur

Answer 17

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

Question 18

why are runaway gaps also called measuring gaps

Answer 18

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

Question 19

when do exhaustion gaps occur

Answer 19

occur at the end of the moves but are not recognized at that time because they have the same characteristics as runaway gaps.

Question 20

when do exhaustion gaps differentiate themselves from runaway gaps

Answer 20

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

Question 21

An ISLAND REVERSAL

Answer 21

can occur at either the top or bottom and only occurs after a relatively lengthy trend.

Question 22

what does an island reversal require

Answer 22

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.

Question 23

DEAD CAT BOUNCE

Answer 23

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.)

Question 24

the size of the declines preceding dead cat bounce (sell off prior to it)

Answer 24

usually exceeding 20%.

Question 25

what causes the rally behind the dead cat biunce

Answer 25

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.

Question 26

SPIKES

Answer 26

are similar to gaps except that the empty space associated with a gap is a solid line

Question 27

The importance of a spike depends on what

Answer 27

on the context surrounding it. (can occur on a breakout from a formation or as a final reversal day at the end of a trend).

At the ends of trends when either gross enthusiasm or panic appears, the last few bars are often spikes.

Spikes also occur on the dissemination of news (earnings, inventories etc.) which in this case has little net change to the underlying trend following the spike.

Question 28

One Bar Reversal Pattern

Answer 28

When a trading bar high is greater than the previous bar high and the close is down from the previous bar close, it is called a one bar reversal.

The reverse occurs at bottoms.

Question 29

KEY REVERSAL DAY

Answer 29

a one day chart pattern where prices sharply reverse during a trend

In an uptrend, prices open on new highs and then close below the previous day’s closing price

In a downtrend, prices open lower and then close higher

The wider the price ranges on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place

Question 30

Two Bar Reversal Pattern

Answer 30

A classic signal of trend exhaustion

When these patterns occur after a pronounced advance or decline, the first bar should exhibit a dramatic continuation of the inbound trend, closing close to the bar’s extreme end.

The second bar completely negates the first bar, with the open price on the second bar being close to the close of the first bar and the close of the second bar being close to the open of the first bar.

–> Wider trading ranges on both bars denote a more climactic reversal in psychology.

Question 31

An INSIDE BAR

Answer 31

a bar with a range that is smaller than and within the previous bar’s range.

Question 32

meaning of an inside bar

Answer 32

It reflects a decline of momentum in the trend.

It reflects a pause, a period of directionless equilibrium, waiting for something to happen that will signal the next trend direction.

The context of the pattern’s location is more important than the pattern configuration

“buy Next Bar at Opening Above Bar Close”

“Sell Next Bar at Opening Below Inside Bar Close”

Question 33

An OUTSIDE BAR

when does it happen and meaning?

Answer 33

occurs when the high is higher than the high of the previous bar and the low is lower than the low of the previous bar.

It is a wide-range bar that “covers” all the previous bar’s action

–> It basically represents increased volatility in the price of the underlying security, or perhaps the beginning of a trend.

Question 34

what do bullish outside bars look like?

Answer 34

close is higher than the overall bar from the previous day (period)

Question 35

what do bearish outside bars look like?

Answer 35

close is lower than the overall bar from the previous day (period)

Question 36

The principal difference between western bar charts and candlesticks

Answer 36

the emphasis on the opening and close

–> While western bar charts recognize the open and close, they don’t give it a special weighting.

–> In candlesticks this is highlighted in the “real body” and the colour - black is a down day and white is an up day.

Question 37

what does a large body in candlestick mean?

what about a small body?

Answer 37

A large body (in relative terms) indicates strength in the direction of the trend

a small body indicates indecision and a potential reversal, especially after a meaningful prior trend

Question 38

using candlesticks, what are patterns made by?

Answer 38

Patterns are made by the relative position of the body and shadow

the location of the candle in relation to its neighbors

the confirmation the next day

–> Since candlesticks are usually defined as top or bottom patterns it important to determine the preceding price trend.

Question 39

what type of patterns are candlestick patterns?

Answer 39

Candlesticks patterns are short term patterns and are usually formed by only one or two bars.

Question 40

DOJI candlestick

what does it look like?

what does it mean?

Answer 40

A DOJI is a pattern formed when the open and close are identical, or nearly identical

It suggests that the market is in equilibrium and affected by indecision.

It is similar to an inside bar pattern, because it shows a point when the enthusiasm of the trend has stalled

–> It often is a warning of a reversal of the prevailing trend.

Question 41

dragonfly doji

Answer 41

a doji where by the open and close are at the top of the period’s range. This is a BULLISH candle

started high, went down, and went back to top where it opened

Question 42

gravestone doji

Answer 42

a doji where by the open and close are at the bottomof the period’s range. This is a BEARISH candle

started low, went up, and went back to bottom where it opened

Question 43

spinning top

Answer 43

a candle with a long upper shadow, a long lower shadow and a small real body

They also represent indecision

Question 44

The HAMMER

Answer 44

a bullish reversal pattern that comes after a downtrend

The lower shadow must be at least 2 times longer than the real body and the colour of the real body is not important.

at the bottom of bearish trend

–> The real body is located at the upper end of the trading range with the open and closes in the top 1/3 of the bar’s trading range.

–> The upper wick is small or nonexistent.

–> like the hanging man

Question 45

the hanging man

Answer 45

a bearish reversal pattern that must come after an extended rally.

Once again, the lower shadow must be at least 2 times longer than the real body and the colour of the real body is unimportant.

The hanging man, however, needs bearish confirmation

at the peak of the bullish trend

–> that is, a close beneath the hanging man’s real body the following day, or at least it needs to open below the hanging man’s real body the next day.

—-> The real body is located at the upper end of the trading range with the open and closes in the top 1/3 of the bar’s trading range.

—-> The upper wick is small or nonexistent.

—-> like the Hammer

Question 46

the shooting star meaning

Answer 46

upside down hanging man) is a bearish reversal pattern that comes after a rally.

Question 47

shooting star form

Answer 47

It requires the upper shadow to be at least 2 times longer than the real body;

The real body occurs in the lower end of the trading range and;

The colour of the real body is unimportant.

Ideally, the real body should gap away from the previous real body, but it is not necessary

–> If there is no gap, it is more bearish because a rising window is considered bullish, so if there is none, it is considered more bearish.

at the peak of the bull trend

Question 48

which is more bearish between gravestone doji and a shooting star

Answer 48

gravestone doji

Question 49

The INVERTED HAMMER pattern

meaning

Answer 49

a bullish reversal pattern that comes after a decline.

Question 50

The INVERTED HAMMER pattern

form

Answer 50

It requires the upper shadow to be at least 2 times longer than the real body;

The real body occurs in the lower end of the trading range and;

The colour of the real body is unimportant

This pattern needs bullish confirmation. It requires the next day to open above the inverted hammer’s real body or especially close a close the next day above the inverted hammer’s real body.

at the bottom of bear trend

Question 51

The HARAMI pattern

form

Answer 51

a two day pattern consisting of a large body of either colour, followed by a small body of either colour that is completely within the boundaries of the large body

similar to an inside bar pattern, however with the harami, the range or wick, does not have to be within the real body of the first candle.

Question 52

The HARAMI pattern

meaning

Answer 52

reversal patterns because they represent price action indecision that goes from high volatility to one of lower volatility (i.e., smaller price range),

–> which usually signify the beginning of a trend.

Question 53

the harami cross

Answer 53

A slight alteration on the harami

an even stronger reversal signal because the second candle is replaced by a doji

–> implies even greater indecision, and an even stronger signal of an impending end to the prevailing trend

Question 54

A BULLISH ENGULFIING pattern

Answer 54

a 2 candle reversal pattern that comes at the end of a clearly defined downtrend

made up a large white candle that completely engulfs the real body of a smaller black candle found at the bottom of a downtrend.

The larger the white candle and the smaller the first dark candle, the more bullish the reversal is.

Question 55

A BEARISH ENGULFING pattern

Answer 55

simply the opposite of the bullish engulfing pattern

It occurs at the end of a clearly defined uptrend, and is made up of a large black candle that completely engulfs a previous smaller white candle.

Question 56

A DARK CLOUD COVER pattern

Answer 56

2 candle bearish reversal pattern. It occurs at the top of a clearly defined uptrend.

made up of a large white candle followed by a large dark candle with small shadows (though this is not a necessity).

The second dark candle should open above the previous day’s close and it should close at least half way into the real body of the previous white candle

–> The deeper into the white candle that it closes, the more bearish the reversal signal would be.

If the candles are shaven heads (no shadows), then this would give a bigger reversal signal.

If the dark candle occurs on heavy volume, this would also amplify the strength of the reversal signal.

Question 57

A PIERCING PATTERN

Answer 57

the opposite of a dark cloud

It is a 2 day bullish reversal pattern that occurs at the bottom of a clearly defined downtrend and is made up of a large dark candlestick followed by a large white candlestick.

The white candlestick must open below the previous candlestick’s close and close at least halfway into the dark candlestick’s real body.

The deeper into the dark candlestick that it closes, the more bullish the reversal signal would be.

If the candles are shaven heads (no shadows), then this would give a bigger reversal signal. If the white candle occurs on heavy volume, this would also amplify the strength of the reversal signal.

Question 58

A MORNING STAR pattern

Answer 58

a 3 candle bullish reversal pattern that occurs at the end of a downtrend (market bottom).

made up of a long black candlestick, a small ‘STAR’ candlestick (can be either a small black or white candlestick) that gaps below the close of the previous candlestick.

It is followed by a long white candlestick.

Question 59

explain why a morning star is a bullish reversal pattern

Answer 59

The first black candlestick confirms that the decline remains in force and selling dominates.

When the second candlestick gaps down, it provides further evidence of selling pressure.
–> However, the decline ceases or slows significantly after the gap and a small candlestick forms

—-> The small candlestick indicates indecision and a possible reversal of trend.

If the small candlestick is a doji, the chances of a reversal increase.

The third long white candlestick provides bullish confirmation of the reversal.

Question 60

An EVENING STAR pattern

Answer 60

3 candle bearish reversal pattern that occurs at the end of an uptrend (market top).

oppostie of morning star

It is made up of a long white candlestick, a small ‘STAR’ candlestick (can be either a small black or white candlestick) that gaps above the close of the previous candlestick.

It is followed by a long black candlestick.

Question 61

explain why An EVENING STAR pattern is bearish reversal

Answer 61

The first long white candlestick confirms that buying pressure remains strong and the trend is up.

When the second candlestick gaps up, it provides further evidence of residual buying pressure.

–> However, the advance ceases or slows significantly after the gap and a small candlestick forms, indicating indecision and a possible reversal of trend.

If the small candlestick is a doji, the chances of a reversal increase.

The third long black candlestick provides bearish confirmation of the reversal.

Question 62

Continuation Patterns

Answer 62

RISING THREE METHOD

FALLING THREE METHOD

Question 63

RISING THREE METHOD

Answer 63

a bullish continuation pattern

A long white body is followed by three small body days, each contained within the range of the high and low of the first day.

The fifth day closes at a new high.

Please note – that there can be more than 3 candles contained within the long white real bodies.

Question 64

FALLING THREE METHOD

Answer 64

bearish continuation pattern in which

A long black body is followed by three small body days, each contained within the range of the high and low of the first day.

The fifth day closes at a new low.