.jpg)
Chart Patterns and Candle Stick Explanation
Introduction
The origins of chart patterns can be found in the work of Charles Dow in a
series of articles published in his editorials for The Wall Street Journal from
1900-1902. His views were later developed into what is now known as “Dow
Theory.” Dow’s observations of price trends and his understanding or trend
based on the progression of peaks and troughs form the foundation for
modern-day technical analysis.
The observations that Dow made, and the methodologies found in technical
analysis are fractal in nature. This means that the techniques used can be
applied to any aggregation period whether its intraday, daily, weekly or
monthly.
As you study charts and look to identify patterns, you’ll want to spend time to
identify the successive peaks and troughs or highs and lows. Also, as part of
your pattern recognition it is important to be able to identify the previous
trend based on the aggregation period being used.
The combination of the
previous trend and the current highs and lows will form the foundation for
proper chart pattern recognition.
This resource is intended to introduce you to 50 different price patterns. With
every price pattern there is a setup, a trigger and a projected move. For each
pattern, there is a description of whether the pattern is bullish, bearish or nondirectional.
Whether it’s a signal of a continuation of the trend, a reversal of
the trend, or is non-directional. Also, there is a description of how volume
develops during the formation of the pattern, and how to establish a price
projection based on the measuring technique for each pattern.
Statistical references in this book is taken from the Encyclopedia of Chart
Patterns by Thomas Bulkowski. His work represents the most comprehensive
study of the effectiveness of chart patterns to date.
1 - Broadening Bottoms
.png)
Directional Bias: Bullish
Pattern Type: Reversal
Pattern
Description: This pattern forms at the tail end of a downtrend. The
pattern takes on the appearance of a megaphone as the price forms a series of
higher highs and lower lows throughout the formation. The pattern needs at
least two highs and lows to be a valid formation.
Volume Description: The volume should diminish through the pattern up
until the breakout
Breakout Confirmation: A close above the upper trend-line on above average
volume.
Measuring Technique: Measure from the highest high to the lowest low
before the breakout, and add that amount to the highest high for the price
target.
amount to the highest high for the price target.
year lows tend to perform better.
2- Broadening Tops
.png)
Directional Bias: Bearish
Pattern Type: Reversal
Pattern
Description: This pattern forms at the tail end of an uptrend. The
pattern takes on the appearance of a megaphone as the price forms a series of
higher highs and lower lows throughout the formation. The pattern needs at
least two highs and lows to be a valid formation.
Volume Description: The volume should diminish through the pattern up
until the breakout
Breakout Confirmation: A close below the lower trend-line on above average
volume.
Measuring Technique: Measure from the highest high to the lowest low
before the breakout and subtract that amount from the lowest low for the
price target.
that amount from the lowest low for the price target.
year highs tend to perform better.
The observations that Dow made, and the methodologies found in technical analysis are fractal in nature. This means that the techniques used can be applied to any aggregation period whether its intraday, daily, weekly or monthly. As you study charts and look to identify patterns, you’ll want to spend time to identify the successive peaks and troughs or highs and lows. Also, as part of your pattern recognition it is important to be able to identify the previous trend based on the aggregation period being used.
The combination of the previous trend and the current highs and lows will form the foundation for proper chart pattern recognition. This resource is intended to introduce you to 50 different price patterns. With every price pattern there is a setup, a trigger and a projected move. For each pattern, there is a description of whether the pattern is bullish, bearish or nondirectional.
Whether it’s a signal of a continuation of the trend, a reversal of the trend, or is non-directional. Also, there is a description of how volume develops during the formation of the pattern, and how to establish a price projection based on the measuring technique for each pattern.
Statistical references in this book is taken from the Encyclopedia of Chart Patterns by Thomas Bulkowski. His work represents the most comprehensive study of the effectiveness of chart patterns to date.
1 - Broadening Bottoms
.png)
Directional Bias: Bullish
Pattern Type: Reversal
Pattern
Description: This pattern forms at the tail end of a downtrend. The
pattern takes on the appearance of a megaphone as the price forms a series of
higher highs and lower lows throughout the formation. The pattern needs at
least two highs and lows to be a valid formation.
Volume Description: The volume should diminish through the pattern up
until the breakout
Breakout Confirmation: A close above the upper trend-line on above average
volume.
Measuring Technique: Measure from the highest high to the lowest low
before the breakout, and add that amount to the highest high for the price
target.
amount to the highest high for the price target.
year lows tend to perform better.
2- Broadening Tops
Directional Bias: Bearish
Pattern Type: Reversal
Pattern
Description: This pattern forms at the tail end of an uptrend. The
pattern takes on the appearance of a megaphone as the price forms a series of
higher highs and lower lows throughout the formation. The pattern needs at
least two highs and lows to be a valid formation.
Volume Description: The volume should diminish through the pattern up
until the breakout
Breakout Confirmation: A close below the lower trend-line on above average
volume.
Measuring Technique: Measure from the highest high to the lowest low
before the breakout and subtract that amount from the lowest low for the
price target.
that amount from the lowest low for the price target.
year highs tend to perform better.
.png)
Directional Bias: Bearish
Pattern Type: Reversal Pattern
Description: This pattern forms at the tail end of an uptrend. The pattern takes on the appearance of a megaphone as the price forms a series of higher highs and lower lows throughout the formation. The pattern needs at least two highs and lows to be a valid formation.
Volume Description: The volume should diminish through the pattern up until the breakout
Breakout Confirmation: A close below the lower trend-line on above average volume.
Measuring Technique: Measure from the highest high to the lowest low before the breakout and subtract that amount from the lowest low for the price target. that amount from the lowest low for the price target. year highs tend to perform better.
3- Bump and Run Reversal Bottoms
.png)
Directional Bias: Bullish
Pattern Type: Non-Directional
Pattern
Description: This pattern is comprised of three phases and looks
similar to a frying pan. There is the lead-in phase, the bump phase and the
uphill run. The lead-in phase is the handle of the frying pan before a larger
decline. Following the decline, the bump phase forms as the price forms a flat
or rounded bottom. The uphill run phase is after the breakout. For this type of
formation to be analyzed an arithmetic chart will need to be used.
Volume Description: Volume is typically high at the beginning of each phase
and decreases throughout each phase.
Breakout Confirmation: A close above the upper trend-line drawn across the
highs, during the lead-in phase, with above average volume.
Measuring Technique: The price target is the highest point of the lead-in
phase.
Statistical Notes: Wider formations tend to perform better than narrower
formations, and a throwback
.png)
Directional Bias: Bullish
Pattern Type: Non-Directional Pattern
Description: This pattern is comprised of three phases and looks similar to a frying pan. There is the lead-in phase, the bump phase and the uphill run. The lead-in phase is the handle of the frying pan before a larger decline. Following the decline, the bump phase forms as the price forms a flat or rounded bottom. The uphill run phase is after the breakout. For this type of formation to be analyzed an arithmetic chart will need to be used.
Volume Description: Volume is typically high at the beginning of each phase and decreases throughout each phase.
Breakout Confirmation: A close above the upper trend-line drawn across the highs, during the lead-in phase, with above average volume.
Measuring Technique: The price target is the highest point of the lead-in phase.
Statistical Notes: Wider formations tend to perform better than narrower formations, and a throwback
4- Bump and Run Reversal Tops
.png)
Directional Bias: Bearish
Pattern Type: Non-Directional
Pattern
Description: This pattern is comprised of three phases and looks
similar to a mountain range. There is the lead-in phase, the bump phase and
the downhill run. The lead-in phase is like a small range of foothills before
the larger mountains. Following an advance, the bump phase forms as the
price forms a flat or rounded top. The downhill run phase is after the
breakout. For this type of formation to be analyzed an arithmetic chart will
need to be used.
Volume Description: Volume is typically high at the beginning of each phase
and decreases throughout each phase.
Breakout Confirmation: A close below the lower trend-line drawn across the
lows, during the lead-in phase, with above average volume.
Measuring Technique: The price target is the lowest point of the lead-in
phase.
Statistical Notes: Wider formations tend to perform better than narrower
formations, and a pullback
.png)
Pattern Type: Non-Directional Pattern
Description: This pattern is comprised of three phases and looks similar to a mountain range. There is the lead-in phase, the bump phase and the downhill run. The lead-in phase is like a small range of foothills before the larger mountains. Following an advance, the bump phase forms as the price forms a flat or rounded top. The downhill run phase is after the breakout. For this type of formation to be analyzed an arithmetic chart will need to be used.
Volume Description: Volume is typically high at the beginning of each phase and decreases throughout each phase.
Breakout Confirmation: A close below the lower trend-line drawn across the lows, during the lead-in phase, with above average volume.
Measuring Technique: The price target is the lowest point of the lead-in phase.
Statistical Notes: Wider formations tend to perform better than narrower formations, and a pullback
5- Cup and Handle
.png)
Directional Bias: Bullish
Pattern Type: Continuation
Pattern
Description: This pattern occurs within the context of a longer
uptrend and is characterized by the price forming a u-shaped cup with a short
handle on the right. The duration of the cup should last at least 7 weeks if
using a daily chart.
Volume Description: Volume will typically follow the shape of the cup, with
high volume as the left lip forms, falling volume as the bottom of the cup
forms and rising volume toward the right lip and on the breakout.
Breakout Confirmation: A close above the upper trend-line drawn across the
handle with above average volume.
Measuring Technique: The price target is obtained by measuring the right lip
to the bottom of the cup and then added to the price level of the right lip.
Statistical Notes: The pattern has a low failure rate but doesn’t move as
strongly as other patterns. Patterns with shorter handles perform better than
longer handles, and deeper cups with the left lip slightly higher than the right
lip perform better.
.png)
Directional Bias: Bullish
Pattern Type: Continuation Pattern
Description: This pattern occurs within the context of a longer uptrend and is characterized by the price forming a u-shaped cup with a short handle on the right. The duration of the cup should last at least 7 weeks if using a daily chart.
Volume Description: Volume will typically follow the shape of the cup, with high volume as the left lip forms, falling volume as the bottom of the cup forms and rising volume toward the right lip and on the breakout.
Breakout Confirmation: A close above the upper trend-line drawn across the handle with above average volume.
Measuring Technique: The price target is obtained by measuring the right lip to the bottom of the cup and then added to the price level of the right lip.
Statistical Notes: The pattern has a low failure rate but doesn’t move as strongly as other patterns. Patterns with shorter handles perform better than longer handles, and deeper cups with the left lip slightly higher than the right lip perform better.
This Chart Pattern article series includes 10 articles ( 50 Chart Patterns)
See you soon with the 2nd article!!
