Chart Patterns & Technical Analysis
Trendlines | Channels
| Triangles | Pennants | Wedges
| Flags
Top and Bottom Formations | Congestions
| Continuation Patterns
Gaps | Fibonacci Retracements
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It is important to note that the Technical Analysis Overview provided
does not attempt to be a comprehensive treatment of Charting or Technical
Analysis methods. There are numerous, well-written books on Chart Interpretation
and Technical Analysis. A brief and simplistic review of some basic charting
concepts is provided for reference or to stimulate further study. Please
contact your broker for a recommended reading list on Charting and Technical
Analysis or visit our Library section located
at the Education section of the menu.
Technical Analysis makes the assumption that history repeats itself. Any
trading method or system that works well on a broad sample of historical
data, may have validity when applied to future trading environments. One
should keep in mind that the markets are dynamic. The forces that motivate
price movement are dynamic, and the participants are dynamic. Therefore
any system which has performed well on past historic data may decline
in value as the evolving dynamics of the markets change over time.
The assumption is made that trading results can be improved when trading
skills are improved. This requires practice! Surely any time spent learning
to trade on past historical data, will not be wasted when it comes to
preparing to trade for the future.
Chart Formations
Trendlines
Inclining Trendline - A straight line usually drawn to define an uptrend
against or through price bar lows.
Declining Trendline - A straight line usually drawn to define a downtrend
against or through price bar highs.
Support - A horizontal floor where interest in buying a commodity is strong
enough to overcome the pressure to sell. Therefore a decrease in price
is reversed and prices rise once again. Typically, support can be identified
on a chart by a previous set of lows.
Resistance - A horizontal ceiling where the pressure to sell is greater
than the pressure to buy. Therefore, an increase in price is reversed
and prices revert downward. Typically resistance can be located on a chart
by a previous set of highs.
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Channels
Inclining - The inclining channel is a formation with parallel price barriers
along both the price ceiling and floor. Unlike the sideways channel the
inclining channel has an increase in both the price ceiling and price
floor.
Declining - The declining channel is a formation with parallel price barriers
along both the price ceiling and floor. Unlike the sideways channel the
declining channel has a decrease in both the price ceiling and price floor.
Horizontal or Sideways - A horizontal or sideways is a formation that
features both resistance and support. Support forms the low price bar,
while resistance provides the price ceiling.
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Triangles
Symmetrical - A formation in which the slope of price highs and lows are
converging to a point so as to outline the pattern in a symmetrical triangle.
To trade this formation place a buy order on a break up an out of the
triangle or a sell order on a break down and out of the triangle.
Non-Symmetrical - A formation in which the slope of price highs and lows
are converging to a point so as to outline the pattern in a non-symmetrical
triangle. To trade this formation, place a buy order on a break up an
out of the triangle or a sell order on a break down and out of the triangle.
Ascending Triangle - A formation in which the slope of price highs and
lows come together at a point outlining the pattern of a Right Triangle.
The hypotenuse in an Ascending Triangle should be sloping from lower to
higher and from left to right. To trade this formation, place a buy order
on a break up and out of the triangle or a sell order on a break down
and out of the triangle. Ascending triangles, with a prior downtrend,
are anticipated to break down and out, rather than up and out.
Descending Triangle - A formation in which the slope of price highs and
lows come together at a point outlining the pattern of a Right Triangle.
The hypotenuse in an Descending Triangle should be sloping from higher
to lower and left to right. To trade this formation, place a buy order
on a break up and out of the triangle or a sell order on a break down
and out of the triangle. Descending triangles, with a prior uptrend, are
anticipated to break up and out, rather than down and out.
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Pennants
Pennants - Similar to a Symmetrical Triangle but generally stubbier or
not as elongated. A formation in which the slope of price bar highs and
lows are converging to a point so as to outline the pattern in a symmetrical
triangle. To trade this formation, you can place orders at both the break
up and out of the pennant and break down and out of the pennant.
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Wedges
Rising or Inclining - This formation occurs when the slope of price bar
highs and lows join at a point forming an inclining wedge. The slope of
both lines is up with the lower line being steeper than the higher one.
To trade this formation, place an order on a break up and out of the wedge
or a sell order on a break down and out the wedge. Rising wedges, with
a prior downtrend are anticipated to break down and out, rather than up
and out.
Falling or Declining - This formation occurs when the slope of price bar
highs and lows join at a point forming an declining wedge. The slope of
both lines is down with the upper line being steeper than the lower one.
To trade this formation, place an order on a break up and out of the wedge
or a sell order on a break down and out the wedge. Falling wedges, with
a prior uptrend, are anticipated to break up and out, rather than down
and out.
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Flags
Bull Flag - A formation consisting of a small number of price bars where
the slope of price bar highs and lows are parallel and declining. Bull
Flags are identified by their characteristic pattern and by the context
of the prior trend. In the case of a Bull Flag the trend leading to the
formation of the Bull Flag is up. To trade this formation, place orders
on the break up and break down points, leaving your unfilled order as
your stop loss.
Bear Flag - A formation consisting of a small number of price bars in
which the slope of price bar highs and lows are parallel and inclining.
Bear Flags are identified by their characteristic pattern and by the context
of the prior trend. In the case of a Bear Flag the trend leading to the
formation of the Bear Flag is down. To trade this formation, place buy
and sell orders on the break up and down of the flag, leaving the unfilled
order as your stop loss.
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Top and Bottom Formations
1-2-3 (A-B-C) Top - Anticipates a change in trend from up to down on a
break below the number 2 point.
1-2-3 (A-B-C) Bottom - Anticipates a change in trend from down to up on
a break above the number 2 point.
Head and Shoulders Top - Anticipates a decline on a break below the Neckline.
Head and Shoulders Bottom - Anticipates a rise in prices on a break above
the Neckline.
Double Top - Anticipates a change in trend from up to down.
Double Bottom Anticipates a change in trend for down to up.
Triple Top Anticipates a change in trend from up to down.
Triple Bottom Anticipates a change in trend from down to up.
Rounded Top Anticipates a change in trend from up to down.
Rounded Bottom Anticipates a change in trend from down to up.
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Congestions
Generally refers to any type of chart pattern in which prices are temporarily
trapped in a trading range. The range can be converging, expanding or
defined by parallel lines on the horizontal. Congestions of shorter duration
are usually found to be a variation of a Flag, or some variation of a
converging or expanding triangle. Periods of longer congestion are usually
defined by a variation of a converging or expanding triangle, or may be
an elongated parallel channel on the horizontal. Such patterns are frequently
referred to being Continuation patterns if price break out in the direction
of the trend leading to the formation of the congestion pattern.
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Continuation Patterns
Periods of longer congestion are usually defined by a variation of a converging
or expanding triangle, or may be an elongated parallel channel on the
horizontal. Such patterns are frequently referred to being continuation
patterns if price break out in the direction of the trend leading to the
formation of the congestion pattern.
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Gaps
Breakaway Gaps - Occur when prices gap higher or lower out of a congestion
pattern in the direction of the prevailing trend.
Measuring or Running Gaps - Difficult to identify, but usually occur at
the midpoint in a price rally or decline.
 
Exhaustion Gaps - Occur at the end of a market trend, usually after steep
accelerated uptrend or downtrend. The gap can leave one price bar or a
small number of congestive price bars behind.
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Retracements
Fibonacci Retracements
Fibonacci Retracement levels correspond percentage retracements that occur
in the ebb and flow of a market trend. According to the Elliot Wave Theory,
market trends tend to occur in five distinct waves: three waves that move
in the direction of the trend with the middle or third wave being the
strongest usually, alternating against two counter-trend waves. Elliot
asserted that these counter-trend waves will usually retrace against the
trending waves by 38.2, 50 and 61.8 percent (also, less frequently by
24 and 76 percent). These Retracement Percentages correspond to natural
ratios discovered by the Greeks called the Golden Ratio and rediscovered
by Fibonacci, a medieval, Italian Mathematician.
 
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