class 4: [attern recognition

Question 1

Characteristics of patterns

Answer 1

Each has an entry and exit direction (from the breakout)

Continuation vs. reversal

Fractal

Pullbacks and throwbacks

Failures - after breakout fails to move a certain distance

Trap - failure that turns into a reversal

False vs. premature breakouts – return to formation, false means final breakout is in opposite direction

Almost every pattern has a “Measure move”

Question 2

when are patterns completed or confirmed?

Answer 2

are only completed or confirmed upon breakout

Question 3

“Measured move” (MM) or “Measured rule”

Answer 3

Method to calculate a price target from a pattern breakout

MM = height of pattern – the base of the pattern +/- breakout point

Can be calculated in a conservative or aggressive manner

Used to calculate price targets for most patterns (except wedges and diamonds)

Question 4

Double top with a breakout down, “M”

Answer 4

Price reverses lower after testing the highs twice. Second high can be slightly higher or lower than the first high

reversal

Question 5

Double bottom with a breakout “W”

Answer 5

Price reverses higher after testing the lows twice. Second low can be slightly lower or higher than the first low

reversal

Question 6

Triple Top

Answer 6

Triple top with a breakout down

Similar to a rectangle/trading range, has 3 touches to the resistance area

reversal

Question 7

Triple bottom with a breakout up

Answer 7

Similar to a rectangle/trading range, has 3 touches to the resistance area

reversal

Question 8

Triangles

Answer 8

defined by the slope of two lines: resistance and support

Question 9

The point at which these two lines of a triangle extend and cross over

Answer 9

called the apex or cradle

Question 10

the distance between the first high reversal point and the first low reversal point within the triangle

Answer 10

the base

Question 11

Descending triangles

Answer 11

Can be continuation or reversal patterns

Are very reliable, increasing volume is better for best performance

Question 12

types of trianlges

Answer 12

Descending triangles

Ascending Triangle

Symmetrical triangle

Broadening triangle formation or “megaphone top”

Diamond

Wedges

Question 13

Broadening triangle formation or “megaphone top”

Answer 13

Trend lines look like a megaphone

Price swings with volatility – out of control

Poor for profit

Can be reversal or continuation

Question 14

Diamond

Answer 14

Combination of a symmetrical and broadening triangle formations

Most difficult to observe and very rare, but very powerful

Usually a reversal pattern

Question 15

Wedges

Answer 15

A triangle pattern with both trend lines heading in the same direction

Need at Least 5 reversal points: a-b-c-d-e
Are characterized by declining volume as the pattern progresses

Are long in duration, many months- a year or so

Question 16

Rising (Bearish) Wedge

Answer 16

Rising wedge with a breakout down from a climactic peak

Breakout is in opposite direction of the wedge, therefore these are reversal patterns

First a Climax occurs: is a sharp quick move
higher/lower resulting in a top/bottom usually on high volume

Question 17

Rounded Patterns: Cup and handle/Saucer

Answer 17

Reliable pattern – continuation pattern

Used by the CANSLIM method

Question 18

Head and shoulders top and bottom/Reverse Head & shoulders

Answer 18

Most famous technical pattern, with high reliability and statistical significance, and profitable of the classic formations

Question 19

characteristics of Head and shoulders top and bottom/Reverse Head & shoulders

Answer 19

trend line, support/resistance and rounding

Can have multiple heads + shoulders need not be of same height + left shoulder usually lower

–> Shoulders should be symmetrical

Neckline usually upward sloping for a top, downward for a bottom

This is a reversal pattern!!

Question 20

in a Head and shoulders top and bottom/Reverse Head & shoulders, when is volume usually highest?

Answer 20

usually highest on the rise and the peak of the left shoulder and decreases throughout the pattern

Question 21

when is the pattern only complete Head and shoulders top and bottom/Reverse Head & shoulders

Answer 21

Pattern only complete upon neckline breakout, be careful not to anticipate!

Question 22

Pennants and Flags

Answer 22

short term continuation patterns, that last a few (10) days to a few weeks (3 – 7) that look like their description

Volume usually declines as the pattern progresses

Require a sharp move preceding them

–> breakout is expected in the direction of the prior trend because they are a pause in the prevailing trend

Can occur in an upward or downward trend

Are said to fly at “half mast” because they occur at the half way point of a measured move

Question 23

Most profitable patterns in a Rising market

Answer 23

• Descending triangle breaking upward
• Declining wedge
• Head & Shoulders bottom
• Symmetrical triangle breaking upward

Question 24

Most profitable patterns in a Declining market

Answer 24

• Diamond top, breaking down
• Head & Shoulders top
• Rising Wedge
• Symmetrical, breaking downward

Question 25

Point & Figure Chart Patterns

Answer 25

Time and Volume omitted: Irrelevant as price action is sole focus

Requires continuous price flow to be accurate

P&F useful in Future markets where volume is unknown and not a consideration in trading.

Continuous prices are used, therefore P&F charts are great for markets that are 24hrs (currencies, commodities)

Trend lines are drawn at 45 degrees