AN INTRODUCTION
TO THE CHART
TECHNICAL ANALYSIS AND CHART PATTERNS CHARACTERISTICS OF PATTERNS PATTERNS Channels Rising Wedge Falling Wedge Triangle Ascending Triangle Descending Triangle Double Bottom Double Top Triple Bottom Triple Top Rectangle
NAVIGATION IN THE TRADE PATTERN WIDGET General guidelines
Design customisation Functionality customisation Finding the pattern
TECHNICAL ANALYSIS AND CHART PATTERNS
As long as the chart represents the action in a freely traded market, a technical analyst is not required to possess detailed knowledge of that instrument. He does not even need to know the name or type of the security to conduct the analysis. Technical analysis is based on few main assumptions:
In finance, technical analysis is a technique • Technical analysts believe that it is which uses past market data, primarily unreasonable to assume that investing is the volume and prices, to predict future one exception where humans always behave movements of prices. Technical analysis is rationally since one's behaviour is influenced used on a wide range of financial instruments, by many aspects of life and that market including equities, bonds, commodity trends and patterns reflect this irrationality; futures, and currency futures. The underlying • Collective knowledge and sentiment is logic of technical analysis is simple: reflected in buying and selling activities of market participants, therefore actions of • Supply and demand determine prices; the traders determine volume and price of • Changes in supply and demand cause a financial instrument.
changes in prices;
• Prices can be projected with charts and From the first assumption comes the existence other technical tools. of chart patterns. A chart pattern is a pattern that is formed within a chart when prices are graphed in a candlestick or bar chart and it is believed they represent the irrationality and influence of various aspects in the behaviour of traders. Chart patterns play a large role during technical analysis of financial instruments. When data is plotted there is usually a pattern of support and resistance levels which naturally occurs and repeats over a period. Chart patterns are used as either reversal or continuation signals.
Technical
Technical
analysis
analysis
chart
CHARACTERISTICS OF PATTERNS
Every pattern has individual characteristics which
can be quantified in a pattern quality and
magnitude reading.
Quality
Magnitude
Magnitude is a reading which shows expected returns of a financial instrument which has formed a chart pattern.
Calculation takes in to account minimum and maximum prices of the pair in chart and historical volatility. This helps to approximate the scale of the pair’s movements and potential returns after the pair breaks the pattern’s boundaries.
Quality is a reading which quanifies a pattern’s trend. It shows how well a price fits in the boundaries of a pattern's support and resis-tance (green and red lines in Figure 1) and how well it
moves from one touch point to another (blue line in Figure 1). Calculations include the symmetry or
asymmetry (depending on the pattern at hand) of support and resistance lines, the number of touch points and gaps between them, and a few other factors.
PATTERNS
PATTERNS
PATTERNS
This section will introduce with main guidelines for patterns which can be found using the Dukascopy trade pattern tool on the JForex trade platform and provide real life examples for those patterns. Note: All patterns are from the JForex trading platform one-hour charts of various currency pairs and are used purely for illustrative purposes for this document. Characteristics and discussion of the patterns come from the books and website of Thomas N. Bulkowski.
1. Channels
The price trend leading to the channel can be from any direction. A pipe tilted up or down, but not horizontal.
See rectangle for horizontal channels.
The two trend lines should be parallel or nearly so. Both should tilt upward or both should tilt downward.
The price should touch each trend line at least twice as distinct peaks or valleys.
The price should cross the pattern from trend line to trend line, nearly filling the available space.
Occurs when the price closes outside the trend line boundary and can be in any direction.
Figure 2. Example of Channel Up pattern
Figure 3. Example of Channel Down pattern
PATTERNS
200 bar SMA
PATTERNS
Figure 4. Example of Rising Wedge pattern
2. Rising Wedge
Can be any direction leading to the pattern. A narrowing and rising triangle shape.
The price bounces between two up-sloping and converging trend lines.
The price should touch trend lines at least five times to outline a good pattern. That's three touches of one trend line and two of the opposite.
Trends downward at least 74% of the time until the breakout. Can be in any direction but is downward 69% of the time.
The pattern is confirmed as a valid one when the price closes outside one of the trend lines.
PATTERNS
Figure 5. Example of Falling Wedge pattern
3. Falling Wedge
Can be any direction leading to the pattern.
The price follows two down-sloping and converging trend lines. The price should touch trend lines at least five times to outline a good pattern. That's three touches of one trend line and two of the opposite.
Trends downward 72% of the time until the breakout. Can be in any direction but is upward 68% of the time.
The pattern is confirmed as a valid one when the price closes outside one of the trend lines.
PATTERNS
Figure 6. Example of Triangle pattern
4. Triangle
Can be any direction leading to the chart pattern.
Triangular. Prices move between two converging trend lines. Two trend lines bound prices; the bottom trend line slopes up and the top one slopes down.
The price must cross the pattern from side to side, filling the triangle with price movement, not white space.
The price must touch each trend line at least twice, forming distinct valleys and peaks.
Trends downward 86% of the time.
PATTERNS
Figure 7. Example of Ascending Triangle pattern
5. Ascending Triangle
Can be any direction leading to the chart pattern.
Triangular. Prices move between two converging trend lines.
Two trend lines bound prices; the top trend line is horizontal and the bottom one slopes upward.
The price must cross the pattern from side to side, filling the triangle with price movement, not white space.
The price must touch each trend line at least twice, forming distinct valleys and peaks.
Trends downward 77% of the time.
PATTERNS
Figure 8. Example of Descending Triangle pattern
6. Descending Triangle
Can be any direction leading to the pattern.
A price pattern bounded by two trend lines, the bottom one horizontal and the top one sloping downward.
The price should touch each trend line at least twice as distinct peaks or valleys.
the price must cross the pattern from trend line to trend line, nearly filling the available space. Avoid descending triangles with abundant white space.
Recedes 83% of the time and gets quite low just before the breakout. Can be in any direction but is downward 64% of the time.
The pattern is confirmed as a valid one when the price closes outside one of the trend lines.
PATTERNS
Figure 9. Example of Double Bottom pattern
7. Double Bottom
Downward leading to the pattern.
Two distinct valleys that look similar. Eve bottoms are wide and of a more rounded appearance. Adam bottoms are narrow, V-shaped, sometimes with one long price spike. Spikes that appear tend to be numerous and short.
The rise between bottoms should measure at least 10% of the move leading to the first bottom, but allow variations.
The price variation between bottoms is small, usually between 0% and 6%. The two valleys should appear to bottom near the same price.
The double bottom confirms as a true double bottom once the price closes above the peak between the two valleys.
PATTERNS
Figure 10. Example of Double Top pattern
8. Double Top
Upward leading to the pattern.
Two distinct tops that look similar. An Eve top is rounded and wide looking, but sometimes has several short spikes poking out. Adam tops are narrow, inverted Vs.
The valley between the tops should measure at least 10% of the move leading to the first top, but allow variations.
The variation between price peaks is small, less than 3%. The two tops should appear to peak near the same price.
The double top confirms as a true double top once the price closes below the valley between the two peaks.
PATTERNS
Figure 11. Example of Triple Bottom pattern
9. Triple Bottom
Downward leading to the pattern but should not drop below the first bottom.
Three distinct valleys that look similar.
The price variation between bottoms is small such that it appears the three valleys bottom near the same price. Allow variations.
The pattern is confirmed as a true triple bottom once the price closes above the highest peak between the valleys.
PATTERNS
Figure 12. Example of Triple Top pattern
10. Triple Top
Upward leading to the pattern.
Three peaks near the same price with a downward breakout.
Sometimes the middle peak is priced marginally below the other two.
Trends downward 59% of the time, but is usually high beneath the formation of each peak.
More triple tops appear in a bear market than in a bull one.
The pattern becomes valid when the price closes below the lowest valley in the pattern.
PATTERNS
Figure 13. Example of Rectangle pattern
11. Rectangle
The price trend leading to the pattern can be from any direction.
Prices have flat tops and flat bottoms, crossing the pattern from side to side following two parallel trend lines.
Two near horizontal trend lines bound the price action.
The price should touch each trend line at least twice using distinct peaks and valleys.
Trends downward at least 66% of the time.
NAVIGATION IN THE TRADE PATTERN WIDGET
Navigation
Navigation
in the
in the
Dukascopy
Dukascopy
Trade pattern
Trade pattern
widget
widget
This section provides guidelines
on how to use the Dukascopy
trade pattern widget on the
JForex trade platform.
General guidelines
Figure 14. Default window of the Dukascopy trade pattern widget on the JForex trade pattern
NAVIGATION IN THE TRADE PATTERN WIDGET
Design customisation
Figure 15. The Dukascopy trade pattern widget's design customisation window
First, the design customisation window can be opened by pressing the icon which can be found in the tool’s upper right corner. It will open the window which can be seen in Figure 15. In this window you will be able to customise: • Widget Title checkbox – turns on/off text on the top left corner of the tool; • Font drop down list allows you to choose font and colour of the text used
in the widget (Dialog font and yellow colour by default);
Once you have customised the design of the tool to suit your needs, you can confirm the changes made by pressing the icon which can be found on the top right corner of the tool as well. Then you will be redirected back to the main window of the tool (Figure 14) which now will have the design features you selected.
NAVIGATION IN THE TRADE PATTERN WIDGET
Functionality customisation
NAVIGATION IN THE TRADE PATTERN WIDGET
Second, the functional customisation window can be opened by pressing the icon which can be found in the tool's upper right corner. It will open the window which can be seen in Figure 16. In this window you will be able to customise:
• “Detect patterns by” allows you to choose between two options:
• Closing price – a pattern of support and resistance levels will be searched by the closing price of each bar. Based on the assumption that closing prices reflect the most information about a financial instrument and that movements in the bar (high and low prices) are irrelevant.
• High/low – a pattern of support and resistance levels will be searched by the high and low prices of bars. Based on the assumption that not closing prices, but price movements in the bar (high and low prices), reflect the most about what's underlying a financial instrument.
• Quality (a detailed description can be found in the second part of this document); • Magnitude (a detailed description can be found in the second part of this document);
• Patterns you wish to search for (a detailed description can be found in the third part of this document).
NAVIGATION IN THE TRADE PATTERN WIDGET
Figure 17. The Dukascopy trade pattern widget result drop down list
Finding the pattern
Once you have customised your widget tool for personal use you can start searching for patterns which you are interested in. A search will start in the tool's main window which can be seen in Figure 14. At first you are faced with three search options under “Scan mode”:
• All pairs – this is the mode which is turned on by default once you open the tool. It will scan all the currency pairs (despite what pair or chart you are currently in) for currently emerging patterns in (an example of a drop down list of findings can be seen in Figure 17). • Current pair – this tool will scan the current pair’s chart for currently emerging patterns. • Current pair history – this tool will show all the patterns that have ever emerged in the
NAVIGATION IN THE TRADE PATTERN WIDGET
Your search results, despite what search option you have chosen, will be shown in the “Found patterns” drop down list. An example of results under “all pairs” can be seen in Figure 14. Results in this drop down list can be arranged using several options (“Sort by”):
• Time – patterns in the list will be arranged according to the date when they started;
• Size – patterns in the list will be arranged according to how many bars create a pattern;
• Quality – patterns in the list will be arranged according to their quality rating (detailed description of what is a pattern's quality can be found on the page number 5);
• Magnitude – patterns in the list will be arranged according to their magnitude rating (a detailed description of what is a pattern’s magnitude can be found on
);
• Instrument – patterns in the list will be alphabetically arranged according to the instrument's name (AUD/CAD at the top, XAU/USD at the bottom of the list). • Period – patterns in the list will be arranged according to the time frame of the
chart (patterns on 10 sec. charts will be at the top, patterns on monthly charts will be at the bottom of the list).
the page number 5
After you choose the pattern, the button will open the chart you selected from the list. From there you can carry out analysis and plan your trades.
1) Encyclopedia of Chart Patterns. SECOND EDITION. Thomas N. Bulkowski. ISBN-13 978-0-471-66826-8; ISBN-10 0-471-66826-5 2) Personal website of Thomas N. Bulkowski (http://thepatternsite.com/)
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