The Beginners Guide To Chart Patterns Gm

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Risk

Trading Futures, Options on Futures, and retail offexchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time. The lower Day Trade margin the higher the leverage and riskier the trade. Leverage can work for you as well as against you. It magnifies gains as well as losses. Past performance is not necessarily indicative of future results.

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Table of Contents

Introduction……………………………………………………………….4 Head and Shoulder Top….…………………………………….………..8 Head and Shoulders Bottom………………………….……….…..…..10 Ascending Channel ……………………………………….……………12 Descending Channel……………………………………………………14 Ascending Triangle ………..…………….……………….…………….16 Descending Triangle..…………………………………………….…….18 Double Top………………………………………………………………..20 Triple Top.………………………………………………………………...21 Cup and Handle …………………………………………………………23 Pennant………………………………………………….…………….….25 Volume……………………………………………….……………………27

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Why Chart Patterns? Where most indicators are good for measuring a trend or telling you when to get into a trend . . . Chart patterns give you a heads up if the trend is likely to continue or if a reversal is potentially about to happen. Chart patterns also clue you in where we are in the fear/greed cycle of human emotions. And it’s fear and greed that move prices . . . These chart patterns don’t form all the time – but when they do, they are powerful. The key is to not get overwhelmed – You don’t need to know them all! Just focus on the most powerful patterns. And of course – understand how to use them.

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You need to know and understand how to use: -Triangles -Channels -Topping Patterns -Cup and Handle -Pennants -Wedges -Head & Shoulders As well as understanding how volume plays an important role. Let’s dive in and take a look at the basics:

Chart Pattern Basics In many ways, chart patterns are simply more complex versions of trend lines and support/resistance. Chart patterns are the best way to make both short and long term forecasts – provided you know what to look for. They are so powerful that hedge funds create them on purpose to sucker people into trades . . . Indicators combined with the right chart patterns have the best chance of making money.

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With the Right Tools … Once you are able to identify patterns, the key from there is to assemble tools to give you an edge as to “if it is for real and strong” or if it is a complete fake out. It is also important to realize that the larger the time frame, the larger the move. The good news? It is easy to tell if a pattern break will result in a larger term move or a shorter term fake out fairly quickly, no matter what time frame you are trading. Think “6”

Chart Patterns Chart patterns are a powerful and consistent source of trade setups – and they form an important base in every successful traders plan. But first we must ask ourselves, why are these important to know? The main reason is that the stock market, like history, repeats itself over and over again. A chart pattern is a map of human emotions: Fear, greed, worry, joy. It maps them all. These “emotional patterns” lead the markets down a path – either the continuation of the current trend, or the end of the current trend and the start of a reversal The frustration with chart patterns comes with the realization that it is not an exact science.

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In fact, it’s often viewed as more of an art form than a science. However, once the basics of charting are understood, the quality of chart patterns can be significantly enhanced and understood by looking at volume and key indicators. It is also important to understand that a chart pattern is “simply” a more complex version of trendlines and support/resistance. A pattern is, in effect, a specific combination of support and resistance levels and trendlines, designed to give traders a clean understanding of “what process is happening” that tends to lead to a specific result.

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Head and Shoulders Patterns

Head and Shoulders Top

The Head and Shoulders pattern is generally regarded as a reversal pattern and it is most often seen in uptrends. This pattern is most reliable when found in the midst of an uptrend.

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Eventually, after an uptrend, the market begins to slow down and the forces of supply and demand are generally considered in balance. Sellers come in at the highs to take profits (left shoulder) and the downside is probed (beginning neckline.) Buyers soon return to the market and ultimately push through to new highs (head.) However, the new highs are quickly turned back and the downside is tested again (continuing neckline.) Tentative buying re-emerges and the market rallies once more, but fails to take out the previous high. (This last top is considered the right shoulder.) Buying dries up and the market tests the downside yet again. Your trendline for this pattern should be drawn from the beginning neckline to the continuing neckline. Volume has a greater importance in the head and shoulders pattern in comparison to other patterns. Volume generally follows the price higher on the left shoulder. However, the head is formed on diminished volume indicating the buyers aren't as aggressive as they once were. And on the last rallying attempt-the right shoulder-volume is even lighter than on the head, signaling that the buyers may have exhausted themselves. New selling comes in and previous buyers get out. The pattern is complete when the market breaks the neckline. Volume should increase on the breakdown.

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Head and Shoulders Bottom

The Head and Shoulders pattern can sometimes be inverted. The inverted head and shoulders are typically seen in downtrends. What's noteworthy about the inverted head and shoulders is the volume aspect. The inverted left shoulder should be accompanied by an increase in volume as visible here in DIA. The inverted head should be made on lighter volume as once again visible here.

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The rally from the head however, should show greater volume than the rally from the left shoulder. Ultimately, the inverted right shoulder should register the lightest volume of all.

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Channel Patterns Ascending Channel

An Ascending Channel is the price action contained between upward sloping parallel lines as visible above in the example of ABT. Higher pivot highs and higher pivot lows are technical signals of an uptrend. Trendlines frame out the price channel by drawing the lower line on pivot lows, and the upper line is the channel line drawn on pivot highs. Price is not always perfectly contained but the channel lines show areas of support and resistance for price targets. A higher high above

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an ascending channel can signal continuation. A lower low below the low of an ascending channel can signal trend change. Price channels show trend. A trader can trend trade in a channel or swing trade from support to resistance and back to support. In an uptrend, start with the lower trendline drawn on pivot lows and add a parallel channel line to complete the formation.

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Descending Channel

A Descending Channel or downtrend is the price action contained between two downward sloping parallel lines as shown above in DDD. Lower pivot highs and lower pivot lows are a bearish signal. In a downtrend, a trade might be entered at the trendline and exited at the channel line. A lower low below a Descending Channel can signal continuation. A higher high above the low of an ascending channel can signal trend change.

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Price channels show trend direction. The slope of the channel shows momentum. Here is a simple technical edge: start the down trendline using two lower pivot highs and stay short below the trendline.

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Triangle Patterns

Ascending Triangle

An Ascending Triangle is a bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs. Traders enter into long positions when the price of the asset breaks above the top resistance. Page 16

An Ascending Triangle is most commonly considered to be a continuation pattern, meaning that it is usually found amid a period of consolidation within an uptrend. Once the breakout occurs, buyers will aggressively send the price of the asset higher, usually on high volume. The most common price target is generally set to be equal to the entry price plus the vertical height of the triangle.

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Descending Triangle

A Descending Triangle is a bearish chart pattern that connects a series of lower highs and a second trendline that has historically proven to be a strong level of support, as show in the image above. Traders watch for a move below support, as it suggests that downward momentum is building. Once the breakdown occurs, traders may establish short positions and aggressively push the price of the asset lower.

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This is a very popular tool among traders because it clearly shows that the demand for an asset is weakening, and when the price breaks below the lower support, it is a clear indication that downside momentum is likely to continue. Descending Triangles give technical traders the opportunity to make substantial profits over a brief period of time. The most common price targets are generally set to equal the entry price minus the vertical height between the two trendlines.

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Topping Patterns

Double Top

A Double Top is a term used in technical analysis to describe the rise of a stock, a drop, another rise to the same level as the original rise, and finally another drop. The double top looks like the letter "M". The twice touched high is considered a resistance level.

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Triple Top

A Triple Top pattern is used in technical analysis to predict the reversal of an extended uptrend. This pattern is identified when the price of an asset creates three peaks at nearly the same price level. The bounce off the resistance near the third peak is a clear indication that buying interest is becoming exhausted. It is used by traders to predict the reversal of the uptrend.

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The three consecutive tops make this pattern visually similar to the head and shoulders pattern but, in this case, the middle peak is nearly equal to the other peaks rather than being higher. Many traders will enter into a short position once the price of the asset falls below the identified support level (shown by the black line in the chart above)

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Cup and Handle

A Cup and Handle is a unique pattern that resembles just that, a cup with a handle. The cup is in the shape of a "U" and the handle has a slight downward drift. The right-hand side of the pattern has low trading volume. It can be as short as seven weeks and as long as 65 weeks.

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As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for four days to four weeks... then it takes off. A couple points on trying to detect cup and handles: Length - Generally, cups with longer and more "U" shaped bottoms, the stronger the signal. Avoid cups with a sharp "V" bottoms. Depth - Ideally, the cup should not be too deep. Also, avoid handles which are too deep since the handles should form in the top half of the cup pattern. Volume - Volume should dry up on the decline and remain lower than average in the base of the bowl. It should then increase when the stock finally starts to make its move back up to test the old high. Retest (of old high) - doesn't have touch or come within a few ticks of old high. However, the further the top of the handle is away from the highs, the more significant the breakout needs to be.

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Pennant Pattern

A continuation pattern in technical analysis formed when there is a large movement in a stock, the flagpole, followed by a consolidation period with converging trendlines, the pennant, followed by a breakout movement in the same direction as the initial large movement, the second half of the flagpole.

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Pennants, which are similar to flags in terms of structure, have converging trendlines during their consolidation period and they last from one to three weeks. The volume at each period of the pennant is also key. The initial move must be met with large volume while the pennant should have weakening volume, followed by a large increase in volume during the breakout.

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Volume If, on the break of a pattern, volume goes above its 50 period “average” volume, then the pattern has a high probability of success. If the break happens on low volume, it is just a probe and will most likely fail quickly. From a trading perspective, I get in early – and then watch. If the breakout happens on low volume then I can just take a small profit and move on. Chart patterns are the results of human emotions in the markets. These patterns are so powerful because they represent the averages of how people react in the markets. Like anything, the more time you spend reviewing charts the more you’ll be trained to recognize these patterns at just a glance and be ready for the next big move.

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Here’s the next step… Now that you’re familiar with the basics of chart patterns, you should have a solid foundation to start trading. But if you’re serious about trading, then THIS is the logical next step:

“The Most Profitable Stock Trading Patterns” In this course, John F. Carter shares:  How to identify the most profitable stock trading patterns in today’s market and speed up your trading in 2015  How to use chart patterns to make money right now – no matter the current market condition  The step-by-step rules for profiting from chart patterns  The science of chart reading so you can spot major turns in the market  How to identify when hedge funds create a pattern to trick you into buying into a bad trade This course was and is still offered on our site for $297, but through the download of this eBook, you’re able to get it for only $7 (no, that’s not a typo, only $7): Get Instant Access to an HD Copy of the Course w/Notes Here

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