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Showing posts with label Chart Patterns. Show all posts
Showing posts with label Chart Patterns. Show all posts

Friday, August 27, 2010

FALLING WEDGE PATTERN – Part 2: Important Characteristics

Go back to Part 1: Falling Wedge Formation

Important Characteristics of Falling Wedge Pattern

Existing Trend:
There should be an established existing trend (either uptrend or downtrend). As mentioned before, Falling Wedge, which has a bullish bias, can be categorised as a reversal or continuation pattern.
As a reversal pattern, Falling Wedge normally occurs after an established downtrend. The slope of Falling Wedge will be downward, which is in the same direction as the prevailing trend.
As a continuation pattern, Falling Wedge occurs after following an uptrend. The slope of Falling Wedge will still be downward, but this slope will be against the prevailing uptrend.

Shape of Falling Wedge:
* There should be at least 4 reversal points to draw two converging lines, i.e. two successively lower peaks (highs) forming a downward sloping upper line and two successively lower troughs (lows) forming a downward sloping lower line. The descending upper line acts as resistance, while the descending lower line as support.
The more times the price tests each level, particularly on the upper side (resistance), the higher quality the wedge pattern is thought to be.
* The upper line (resistance) should have a sharper slope (more negative slope) than the lower line (support). If the lines were extended to the right, both lines would converge and slanted in a downward direction.
* There should be some distance between the two peaks as well as the two troughs.
In other words, prices should increase and hit the descending upper line then decline for at least twice (forming at least two peaks). Prices should drop and hit the descending lower line then bounce up for at least twice (forming at least two troughs).

Volume:
Volume should be diminishing; heavy at the beginning and contracts as the pattern develops.
However, when breakout occurs, there should be a significant increase in volume.
Monitoring the existence of significantly higher volume to confirm a valid breakout for Falling Wedge is more crucial than for Rising Wedge.
Without a significant surge in volume, the upward breakout above the resistance of Falling Wedge would lack conviction and be more vulnerable to failure.

Duration:
This pattern is generally a longer term pattern. It takes from about 3 to 6 months to form.
If the pattern duration is less than 3 weeks, it can be considered as a pennant.

Breakout Direction:
For Falling Wedge, the breakout usually happens to the upside, hence it is considered as a bullish pattern. However, the breakout might also occur to the downside.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches above the upper (resistance), but then it moves back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes ABOVE the upper (resistance) line, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the upper (resistance) line depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Potential Price Target:
For Wedge pattern, there is no price target, as it is difficult to project specific potential price target in this pattern.

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to the breakout level for an immediate test of this new resistance before continuing their moves in the direction of the breakout. (Remember that the support now has turned into new resistance level).
However, the prices should not re-enter the wedge and move outside the opposite line of the breakout line. When this happens, it means the pattern has failed or considered in invalid.

To find out more about other Chart Patterns, please refer to:
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* Understanding Option’s Time Value

Friday, August 20, 2010

FALLING WEDGE – Part 1: Formation

Falling Wedge is generally regarded as a bullish pattern. The breakout usually occurs upwards through the wedge and then move on into upward trend.
Falling Wedge can be categorised as a reversal or continuation pattern.

As a reversal pattern, Falling Wedge normally occurs after an established downtrend. The slope of Falling Wedge will be downward, which is in the same direction as the prevailing trend.

As a continuation pattern, Falling Wedge occurs after following an uptrend. The slope of Falling Wedge will still be downward, but this slope will be against the prevailing uptrend.

Regardless of whether it occurs as reversal or continuation pattern, Falling Wedge is regarded as bullish pattern.

However, Falling Wedge is not seen as a popular pattern, as the failure rate of this pattern is quite high and more difficult to trade.

The Formation of Falling Wedge



Falling Wedge Pattern contains at least two lower highs (peaks) and two lower lows (troughs). When the peak as well as trough points are connected by separate lines and then extended to the right, they would respectively form a descending upper line and a descending lower line, whereby the upper line should have a sharper slope than the lower line. As such, both lines would converge and look slanted in a downward direction, creating a pattern that looks like a Falling Wedge.
In this case, the descending upper line acts as resistance, whereas the descending lower line as support.
When the lower line (support) is noticeably flatter as the pattern develops, it indicates that selling pressure is weakening, as sellers are not really able to push the price down further each time the price is under pressure.

The completion of the pattern occurs when prices break out through the upper line (i.e. breakout to the upside) with a high volume.

Continue to Part 2: Important Characteristics of Falling Wedge pattern.

To find out more about other Chart Patterns, please refer to:
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* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Sunday, June 6, 2010

HEAD AND SHOULDERS BOTTOM PATTERN – Part 2: Important Characteristics

Go back to Part 1: Head & Shoulders Bottom Formation

Important Characteristics of Head & Shoulders Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend prior to the pattern.

Shape of Head & Shoulders Bottom Pattern:
1) Head & Shoulders:
Ideally, the shape Head & Shoulders should be symmetry. The Left & Right Shoulders should bottom at about the same price level. The Left & Right Shoulders should also about the same distance from the Head, which means the time duration to develop the formation between the bottom of Left Shoulder & the Head should be about the same as that between the Head & the bottom of Right Shoulder.

However, in the real world, the Shoulders are rarely perfectly symmetrical. Sometimes, one shoulder is lower than the other, or takes longer time to develop.
In any case, the Left or Right Shoulder should not reach the level of the Head. If it does, the formation is actually not Head & Shoulders Bottom pattern.

When the bottom of the Right Shoulder is higher than the bottom of the Left Shoulder, it may carry a higher chance of larger price increase after the breakout, as it implies more strength & bullish sentiments.

In addition, ideally, the shape Head & Shoulders should also be made up of three downward sharp bottoms. But in real world, the Shoulders can be a bit more rounded / flat.
Also, sometimes in a more complex formation, the pattern could have more than one head and/or more than two shoulders (e.g. 2 Left Shoulders with about the same size and 2 Right Shoulders that are more or less equivalent to the Left Shoulders). This more complex formation is more often seen in the Head & Shoulders Bottom than in the Head & Shoulders Top.

2) Neckline:
The Neckline that connects the two high points in between the Left Shoulder-Head and the Head-Right Shoulder can be horizontal, sloping upwards or downwards, but should not be too steep.
The slope of the Neckline could predict degree of bullishness of the pattern and hence affect the chance of stronger price increase.

A downwards sloping Neckline has a weaker tendency that the price would increase further, as the lower high of the 2nd low point of the Neckline still indicates the strength of bearishness & market weakness, and thus it carries lower chance of stronger price increase.

An upwards sloping Neckline, which rarely happens, is more reliable as a bullish reversal signal, as it may imply stronger bullish sentiments & more rapidly increasing market strength, and hence have a higher chance of stronger price increase.

Duration:
The duration of the formation of the pattern from the start of the development of Left Shoulder to the break of the Neckline can take several months, normally range from 3 to 6 months.
Normally, Head & Shoulders Bottom takes longer time to develop and less volatile in price swing than Head & Shoulders Top.
Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.

Breakout:
Even when the price has increased from bottom of the Right Shoulder, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher than the chances of reversal to take place, as it is normal during a downtrend for the price to test a support level a few times, and then bounce up, and then resume the downtrend again.

Head & Shoulders Bottom pattern is only completed and confirmed when the price increases and closes above the Neckline, which serves as the key resistance level in this pattern.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Neckline resistance, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Head & Shoulders Bottom pattern.

Nevertheless, since this pattern is considered as one of the most reliable pattern and has a relatively high success rate, some aggressive & experienced traders like to enter the market when the price is increasing from the bottom of the Right Shoulder, provided they are sure that a valid Head & Shoulders Bottom is forming. But of course, this trade is much riskier and not recommended for novice traders.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches above the Neckline, but then it moves back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.

A minimum penetration criteria for a breakout should be the price closes ABOVE the Neckline resistance, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Neckline depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Traders / investors should be more cautious if the price keeps hovering around the Neckline without making a decisive break. When this happens, the reversal might never happen and the downtrend is likely to resume.

Volume:
Volume should be diminishing as the pattern is forming.
Volume is the highest during the formation of the Left Shoulder, and then gets lighter as the pattern develops the Head, and should be the lightest during the formation of Right Shoulder, showing an indication that the selling sentiments are getting weaker.
During & after the breakout of the Neckline support, the volume should significantly increase again.

Monitoring volume for Head & Shoulders Bottom is more crucial than in Head & Shoulders Top, as a breakout from the key resistance (i.e. Neckline) accompanied by an expansion in volume may indicate increased buying pressures and a potential change in sentiment from selling to buying. Hence, it may provide higher chances that the pattern is a reversal pattern.

When during the increase from bottom of the Right Shoulder, the price experiences an accelerated increase, perhaps with a gap up or two, accompanied by an expansion in volume, this might give a good sign, as the price increase tends to increase further, and hence it may provide higher chances that the pattern is a bullish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The vertical distance between the bottom of the Head (which serves as the support) and the Neckline (which serves as the key resistance).
2) To compute the potential price target: Add the result to the point where the price finally breaks Neckline.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Example:
Suppose a Head & Shoulders Bottom pattern is forming with the Neckline is sloping upward.
The bottom of the Head is at $50 and the Neckline vertically above it is at $65.
The height of the pattern is therefore 15 (= 65 - 50).
Suppose the Neckline was finally broken at $70.
Hence, the price target would be $85 (= 70 + 15).

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to the Neckline for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has turned into new support level). It is also normally only a minor & short-lived retracement.
If this price return move happens, it could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.
However, when the breakout occurs with a heavy volume, the chance of the price to return to the breakout level before continuing its upward movement will be smaller.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
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Other Learning Resources:
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* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Saturday, May 22, 2010

HEAD AND SHOULDERS BOTTOM PATTERN – Part 1: Formation

Head & Shoulders Bottom Pattern is a bullish reversal pattern that normally forms after an extended downtrend, which marks a shift in trend from bearish to bullish. This pattern is very popular because it is regarded as one of the most reliable of all patterns.
Head and Shoulders Bottom pattern is sometimes referred to as Inverse Head and Shoulders pattern.

The Formation of Head and Shoulders Bottom Pattern



Head and Shoulders Bottom Pattern contains three consecutive, sharp bottoms, whereby the middle bottom is the lowest (Head) and the other two bottoms (left & right bottoms) are higher & roughly equal in size (Left & Right Shoulders).

This pattern forms when the price is in an existing downtrend. The price falls and hits a low then bounce up (forming the Left Shoulder). Afterwards, the price falls to an even lower low and then bounces up again (forming the Head). The Right Shoulder is formed when the price drops again but it does not reach the low of the Head. Instead, the price bounces back up after it has hit about the same price level as the Left Shoulder.
Although the Left & Right Shoulders do not necessarily need to be exactly the same, but it should appear roughly equal to one another.

The important part of this pattern is the Neckline. The Neckline is formed by drawing a line that connects two high points: (1) the high point in between the Left Shoulder & Head, and (2) the high point in between the Head & Right Shoulder.
This Neckline can be horizontal, sloping upwards or downwards.

The pattern is only completed and confirmed when the price increases and closes above the Neckline, which serves as the key resistance level in this pattern.

Although Head & Shoulders Bottom is viewed as a common pattern and quite easy to identify, it’s actually not the case. Therefore, one should pay close attention & take proper steps to analyze the characteristics of Head & Shoulders Bottom in order to minimize / avoid making mistakes in spotting the pattern.
The characteristics of the pattern will be discussed in more detail in the next post.

To be continued to Part 2: Important Characteristics of Head & Shoulders Bottom pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
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Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Saturday, April 17, 2010

HEAD AND SHOULDERS TOP PATTERN – Part 2: Important Characteristics

Go back to Part 1: Head & Shoulders Top Formation

Important Characteristics of Head & Shoulders Top Pattern:

Existing Trend:
There should be an established existing UPWARD trend prior to the pattern.

Shape of Head & Shoulders Top Pattern:
1) Head & Shoulders:
Ideally, the shape Head & Shoulders should be symmetry. The Left & Right Shoulders should peak at about the same price level. The Left & Right Shoulders should also about the same distance from the Head, which means the time duration to develop the formation between the top of Left Shoulder & the Head should be about the same as that between the Head & the top of Right Shoulder.

However, in the real world, the Shoulders are rarely perfectly symmetrical. Sometimes, one shoulder is higher than the other, or takes longer time to develop.
In any case, the Left or Right Shoulder should not reach the level of the Head. If it does, the formation is actually not Head & Shoulders Top pattern.

When the peak of the Right Shoulder is lower than the peak of the Left Shoulder, it may carry a higher chance of larger price decline after the breakout, as it implies more weakness & bearish sentiments.

In addition, ideally, the shape Head & Shoulders should also be made up of three upward sharp peaks. But in real world, the Shoulders can be a bit more rounded / flat.
Also, sometimes in a more complex formation, the pattern could have more than one head and/or more than two shoulders (e.g. 2 Left Shoulders with about the same size and 2 Right Shoulders that are more or less equivalent to the Left Shoulders). Nevertheless, a more complex formation is more often seen in the Head & Shoulders Bottom than in the Head & Shoulders Top.

2) Neckline:
The Neckline that connects the two low points in between the Left Shoulder-Head and the Head-Right Shoulder can be horizontal, sloping upwards or downwards.
The slope of the Neckline could predict degree of bearishness of the pattern and hence affect the chance of severe price decline.

An upwards sloping Neckline has a weaker tendency that the price will decline further, as the higher low of the 2nd low point of the Neckline still indicates the strength of bullishness, and thus it carries lower chance of severe price decline.

A downwards sloping Neckline, which rarely happens, is more reliable as a bearish reversal signal, as it may imply stronger bearish sentiments & more rapidly increasing weakness, and hence have a higher chance of severe price decline.

Duration:
The duration of the formation of the pattern from the start of the development of Left Shoulder to the break of the Neckline can take several months, normally range from 3 to 6 months.

Breakout:
Even when the price has declined from peak of the Right Shoulder, the pattern is not completed yet. The chances that the existing uptrend will continue are still higher than the chances of reversal to take place, as it is normal during an uptrend for the price to test a resistance level a few times, then retreat, and then resume the uptrend again.

Head & Shoulders Top pattern is only completed and confirmed when the price declines and closes below the Neckline, which serves as the key support level in this pattern.

Remember that we should always assume the existing trend (i.e. in this case is uptrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing below the Neckline support, preferably accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Head & Shoulders Top pattern.

Nevertheless, since this pattern is considered as one of the most reliable pattern and has a relatively high success rate, some aggressive & experienced traders like to enter the market when the price is declining from the peak of the Right Shoulder, provided they are sure that a valid Head & Shoulders Top is forming. But of course, this trade is much riskier and not recommended for novice traders.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches below the Neckline, but then it moves back up again & resumes uptrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.

A minimum penetration criteria for a breakout should be the price closes BELOW the Neckline support, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Neckline depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Traders / investors should be more cautious if the price keeps hovering around the Neckline without making a decisive break. When this happens, the reversal might never happen and the uptrend is likely to resume.

Volume:
Volume should be diminishing as the pattern is forming.
Volume is the highest during the formation of the Left Shoulder, and then gets lighter as the pattern develops the Head, and should be the lightest during the formation of Right Shoulder, showing an indication that the buying pressures are getting weaker.
Ideally, during & after the breakout of the Neckline support, the volume should significantly increase again.
When during the decline from peak of the Right Shoulder, the price experiences an accelerated drop, perhaps with a gap down or two, accompanied by an expansion in volume, this might give a good sign, as the price decline tends to drop further, and hence it may provide higher chances that the pattern is a bearish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The vertical distance between the top / peak of the Head (which serves as the resistance) and the Neckline (which serves as the key support).
2) To compute the potential price target: Subtract the result from the point where the price finally breaks Neckline.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Example:
Suppose a Head & Shoulders Top pattern is forming with the Neckline is sloping downward.
The peak of the Head is at $80 and the Neckline vertically under it is at $60.
The height of the pattern is therefore 20 (80 - 60 = 20).
Suppose the Neckline was finally broken at $50.
Hence, the price target would be $30 (50 - 20 = 30).

Return to Breakout Level:
After the breakout occurs, the price may sometimes return to the Neckline for an immediate test of this new resistance level before continuing their moves in the direction of the breakout. (Remember that the support now has turned into new resistance level). It is also normally only a minor & short-lived bounce.
If this price return move happens, it could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.
However, when the breakout occurs with a heavy volume, the chance of the price to return to the breakout level before continuing its downward movement will be smaller.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
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Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Saturday, March 27, 2010

HEAD AND SHOULDERS TOP PATTERN – Part 1: Formation

Head and Shoulders Top is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish. This pattern is very popular because it is regarded as one of the most reliable of all patterns.

The Formation of Head & Shoulders Top Pattern




Head and Shoulders Top Pattern contains three consecutive, sharp peaks / tops, whereby the middle peak is the highest (Head) and the other two peaks (left & right peaks) are lower & roughly equal in size (Left & Right Shoulders).

This pattern forms when the price is in an existing uptrend. The price increases and hits a high then declines (forming the Left Shoulder). Afterwards, the price increases to an even higher high and then declines again (forming the Head). The Right Shoulder is formed when the price rises again but it does not hit the high of the Head. Instead, the price falls back after it has reached about the same price level as the Left Shoulder.
Although the Left & Right Shoulders do not necessarily need to be exactly the same, but it should appear roughly equal to one another.

The important part of this pattern is the Neckline. The Neckline is formed by drawing a line that connects two low points: (1) the low point in between the Left Shoulder & Head, and (2) the low point in between the Head & Right Shoulder.
This Neckline can be horizontal, sloping upwards or downwards.

The pattern is only completed and confirmed when the price decreases and closes below the Neckline, which serves as the key support level in this pattern.

Although Head & Shoulders Top is viewed as a common pattern and quite easy to identify, it’s actually not the case. Therefore, one should pay close attention & take proper steps to analyze the characteristics of Head & Shoulders Top in order to minimize / avoid making mistakes in spotting the pattern.
The characteristics of the pattern will be discussed in more detail in the next post.

Continue to Part 2: Important Characteristics of Head & Shoulders Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* 10 Important Trading Lessons
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Analysis Tool:
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Saturday, November 14, 2009

TRIPLE BOTTOM PATTERN – Part 2: Important Characteristics

Re-visit Part 1: Triple Bottom Formation

Important Characteristics of Triple Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend prior to the pattern.

Shape of Triple Bottom Pattern:
1) The Three Bottoms:
The bottoms should be sharp and distinct / well separated. The price bottoms do not have to be exactly the same, but it should appear reasonably equivalent to each other.
If the last bottom (3rd bottom) is higher than the middle bottom (2nd bottom), there is a relatively higher chance of stronger price increase. A higher bottom in the last bottom might indicate weaker selling pressures, as the sellers attempt to push the price down to the previous low or make a new low but fail, suggesting that the selling pressures might have started to subside.

2) The Two Peaks:
The highs of the peaks can appear more rounded.

Duration:
Triple Bottoms pattern can be considered a long term pattern.
The duration of the formation of the pattern can take several months, normally range from 3 to 6 months, with an average of about 4 months. Normally, the formation of Triple Bottoms should take longer time and less volatile in price swing than Triple Tops. Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.
Basically, the longer the time duration the pattern takes to develop, the more likely the pattern could work out as a reversal pattern or the stronger the price might move once the breakout occurs.

Breakout:
Even when the price has risen from the 3rd bottom, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher than the chances of reversal to take place, as it is normal during a downtrend for the price to test a support level a few times, and then bounce up, and then resume the downtrend again.

Triple Bottom pattern is only completed and confirmed when the price increases and closes above the highest highs of the peaks in between the 3 bottoms, which serves as the key resistance level in this pattern. This highest high is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Confirmation Point, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Triple Bottoms pattern.

In addition, as Triple Bottoms is forming, the formation may also resemble few other patterns. Before the 3rd bottom is formed, the pattern may look like Double Bottoms (reversal pattern). The three equal lows may also be seen in Rectangle pattern (neutral pattern) or Descending Triangle pattern (bearish continuation pattern).
Nevertheless, all these patterns have similar principle to follow, which could help differentiate between the above patterns or avoid jumping the gun: Always wait for the decisive breakout to occur before entering into any trade.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches above the Confirmation Point, but then it moves back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes ABOVE the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Volume should be higher during the formation of the 1st bottom and then get lighter as the pattern develops the subsequent two bottoms, showing an indication that the selling pressures are getting weaker.
The volume may sometimes pick up when the price hits each of the bottoms, but overall, volume tends to be diminishing as the pattern is forming.
During & after the breakout of the Confirmation Point, the volume should significantly increase again.
When during the increase from the 3rd bottom, the price experiences an accelerated rise, perhaps with a gap up or two, accompanied by an expansion in volume, this might give a good sign, as the price increase tends to rise further, and hence it may provide higher chances that the pattern is bullish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The distance between the lowest low of bottoms (which serves as the support) and the highest high of the peaks (i.e. the Confirmation Point, which serves as the key resistance).
2) To compute the potential price target: Add the result to the Confirmation Point (i.e. the highest high of the peaks).

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has become a new support level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Friday, October 16, 2009

TRIPLE BOTTOM PATTERN – Part 1: Formation

Triple Bottom Pattern is a bullish reversal pattern that normally forms after an extended downtrend, which marks a shift in trend from bearish to bullish.

The Formation of Triple Bottom Pattern



Triple Bottom Pattern contains three consecutive, distinct & sharp bottoms at about the same price level, with two moderate peaks in between the bottoms, followed by a breakout through a resistance.
This pattern forms when the price is in an existing downtrend. It occurs when the price drops to a support level (forming the 1st bottom), then increases (forming the 1st trough), and then return to the support level (forming the 2nd bottom), then increase again (forming the 2nd trough), and then drop back to the resistance level again (forming the 3rd bottom), before subsequently increase further.

Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price increases and closes above the highest high of the two peaks, which serves as the key resistance level in this pattern. This highest high point is called the “Confirmation Point”.

This pattern occurs because the sellers attempt to push the price lower, but are not able to do so as they are facing support, which prevents the continuation of the downtrend. After three failed attempts, the sellers in the market exhausted and gave up, and the buyers begin to be more aggressive to take control of the market and drive the price higher, pushing it up into a new uptrend.

To be continued to Part 2: Important Characteristics of Triple Bottom pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Related Topics:
* Free Trading Educational Video: Learn Technical Tips from Dan Gramza
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

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Friday, August 28, 2009

TRIPLE TOP PATTERN – Part 2: Important Characteristics

Go back to Part 1: Triple Top Formation.

Important Characteristics of Triple Top Pattern
Existing Trend:
There should be an established existing UPWARD trend prior to the pattern.

Shape of Triple Top Pattern:
1) The Three Peaks:
The peaks / tops should be sharp and distinct / well separated. The price peaks do not have to be exactly the same, but it should appear reasonably equivalent to each other.
If the last top (3rd peak) is lower than the middle top (2nd peak), there is a relatively higher chance of stronger decline. A lower top in the last peak might indicate weaker buying sentiments, as the buyers attempt to reach the previous high or make a new high but fail, suggesting that the buyers might have been drying up & exhausted.

2) The Two Troughs:
The lows of the troughs can appear more rounded.

Duration:
Triple Tops pattern can be considered a long term pattern.
The duration of the formation of the pattern can take several months, normally range from 3 to 6 months, with an average of about 4 months.
Basically, the longer the time duration the pattern takes to develop, the more likely the pattern could work out as a reversal pattern or the stronger the price might move once the breakout occurs.

Breakout:
Even when the price has declined from the 3rd peak, the pattern is not completed yet. The chances that the existing uptrend will continue are still higher than the chances of reversal to take place, as it is normal during an uptrend for the price to test a resistance level a few times, then retreat, and then resume the uptrend again.

Triple Top pattern is only completed and confirmed when the price declines and closes below the lowest lows of the troughs in between the 3 peaks, which serves as the key support level in this pattern. This lowest low is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is uptrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing below the Confirmation Point, accompanied with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Triple Tops pattern.

In addition, as Triple Tops is forming, the formation may also resemble few other patterns. Before the 3rd peak is formed, the pattern may look like Double Tops (reversal pattern). The three equal highs may also be seen in Rectangle pattern (neutral pattern) or Ascending Triangle pattern (bullish continuation pattern).
Nevertheless, all these patterns have similar principle to follow, which could help differentiate between the above patterns or avoid jumping the gun: Always wait for the decisive breakout to occur before entering into any trade.

Breakout Confirmation:
Sometimes, the price may also make a deceptive/invalid breakout whereby it touches below the Confirmation Point, but then it moves back up again & resumes uptrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes BELOW the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Volume should be higher during the formation of the 1st peak and then get lighter as the pattern develops the subsequent two peaks, showing an indication that the buying pressures are getting weaker.
The volume may sometimes pick up when the price hits each of the peaks, but overall, volume tends to be diminishing as the pattern is forming.
During & after the breakout of the Confirmation Point, the volume should significantly increase again.
When during the decline from the 3rd peak, the price experiences an accelerated drop, perhaps with a gap down or two, accompanied by an expansion in volume, this might give a good sign, as the price decline tends to drop further, and hence it may provide higher chances that the pattern is a bearish reversal pattern.

Potential Price Target:
1) Compute the height of the pattern: The distance between the highest high of peaks (which serves as the resistance) and the lowest low of the troughs (i.e. the Confirmation Point, which serves as the key support).
2) To compute the potential price target: Subtract the result from the Confirmation Point (i.e. the lowest low of the troughs).

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new resistance level before continuing their moves in the direction of the breakout. (Remember that the support now has become a new resistance level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
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Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Sunday, August 16, 2009

TRIPLE TOP PATTERN – Part 1: Formation

Triple Top Pattern is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish.

The Formation of Triple Top Pattern



Triple Top Pattern contains three consecutive, distinct & sharp peaks / tops at about the same price level, with moderate troughs in between the peaks, followed by a breakout through a support.
This pattern forms when the price is in an existing uptrend. It occurs when the price increases to a resistance level (forming the 1st peak), then decline (forming the 1st trough), and then return to the resistance level (forming the 2nd peak), then decline again (forming the 2nd trough), and then return to the resistance level again (forming the 3rd peak), before subsequently decline further.

Although the price peaks do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price declines and closes below the lowest low of the two troughs, which serves as the key support level in this pattern. This lowest point is called the “Confirmation Point”.

This pattern occurs because the buyers attempt to push the price higher, but are not able to do so as they are facing resistance, which prevents the continuation of the uptrend. After three failed attempts, the buyers in the market exhausted and gave up, and the sellers begin to be more aggressive to take control of the market and drive the price lower, sending it down into a new downtrend.

To be continued to Part 2: Important Characteristics of Triple Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Option Greek
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Friday, July 10, 2009

DOUBLE BOTTOM PATTERN – Part 2: Important Characteristics

Go back to Part 1: Double Bottom Formation

Important Characteristics of Double Bottom Pattern

Existing Trend:
There should be an established existing DOWNWARD trend. The downtrend should be fairly long and healthy (at least about 3 to 6 months).

Shape of Double Bottom Pattern:
1) The Two Bottoms:
* The bottoms can be either sharp & narrow (like V) or a bit rounded looking & wider. Ideally, the price bottoms should be the same. However, some difference in the price bottoms is still acceptable.
Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level. The price difference between the two bottoms should be less than 3%.
If the price difference between the two bottoms is more that 3%, the pattern may not be Double Bottom.
* If the low of the 2nd bottom does not hit the low of the 1st bottom, it is less worrying.
However, if low of the 2nd bottom is even lower than the low of the 1st bottom, we should be more cautious, as the probability that the downtrend would resume is still higher.

2) The Peak:
The height of the peak between the two bottoms should be around 10% - 20% from the bottom (It could be even more than 20%, but it should not be less than 10%).
In general, the higher the peak between the two bottoms, the better the performance of the pattern.
If the two bottoms are not exactly the same, the higher bottom should be used as the benchmark for the height measurement.

Duration:
Since Double Bottom is an intermediate to long term reversal pattern, the pattern should not be formed in just a few days.
The duration of time period between the two bottoms may vary from a few weeks to many months (generally about 1 to 3 months). Normally, the formation of Double Bottoms should take longer time and less volatile in price swing than Double Tops. Hence, bottoms tend to be wider (due to longer duration to develop) and flatter (as a result of less volatile price swing) than tops.
Basically, the longer the time duration between the two bottoms, the more likely the pattern could work out as a reversal pattern.
Hence, we should be extra cautious if a pattern only has a few days apart between the two bottoms.

Breakout:
Even when the price has increased from the 2nd bottom, the pattern is not completed yet. The chances that the existing downtrend will continue are still higher that the chances of reversal to take place, as it is normal during an downtrend for the price to test a support level a few times before resuming the downtrend again.

Double Bottom pattern is only completed and confirmed when the price increases and closes above the highest point of the peak in between the 2 bottoms, which serves as the key resistance level in this pattern. This highest point is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is downtrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing above the Confirmation Point, with an increase in volume, in order to avoid jumping the gun and/or prevent deceptive Double Bottoms pattern.

Nevertheless, sometimes the price may also make a deceptive/invalid breakout whereby it touches above the Confirmation Point, but then it goes back down again & resumes downtrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes above the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Usually, volume is lower during the formation of the right bottom than the left bottom, showing an indication that the selling pressures are getting weaker.
In general, volume tends to be diminishing as the pattern is forming. The volume may pick up when the price hits the 2nd bottom, but it is often only a slightly higher than the average volume during the peak.
When the price is breaking out the Confirmation Point, it should happen with an increase in volume.
Monitoring volume for Double Bottoms is more crucial than for Double Tops, as a breakout from the key resistance (i.e. Confirmation Point) accompanied by an expansion in volume may indicate increased buying pressures and a potential change in sentiment from selling to buying. Hence, it may provide higher chances that the pattern is a reversal pattern.
It is even better when the price is rising from the 2nd bottom, the price experiences an accelerated increase, perhaps with a gap up or two.

Potential Price Target:
1) Compute the height of the peak: The distance between the bottom (support) and the Confirmation Point (resistance).
If the two bottoms are not the same, the higher bottom should be used for this calculation.
2) To compute the potential price target: Add the result to the Confirmation Point.

Hence, the above formula implies that the higher the peak between the two bottoms, the larger the potential of the increase.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new support level before continuing their moves in the direction of the breakout. (Remember that the resistance now has become a new support level). This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks
* Understanding Option’s Time Value

Friday, July 3, 2009

Market Analysis Video: Potential Head & Shoulder pattern in the S&P market?

Are we potentially looking at the Head and Shoulder pattern in the S&P market?
Find out the answer in the comprehensive in this video.
Not only you benefit from the current market analysis & tips, but more importantly, learn how to do the analysis itself.
Hope you can learn something from it.
Enjoy! :)

Analysis Tool:
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Related Topics:
* FREE Trading Educational Videos You Should Not Miss
* Learning Candlestick Charts
* Learning Charts Patterns
* Option Greeks
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Saturday, June 27, 2009

DOUBLE BOTTOM PATTERN – Part 1: Formation

Double Bottom Pattern is a bullish reversal pattern that normally forms after an extended downtrend, which marks a shift in trend from bearish to bullish.
Sometimes, this pattern is called “W pattern” because it looks like one.

The Formation of Double Bottom Pattern



Double Bottom Pattern contains two consecutive, distinct bottoms at about the same price level, with a moderate peak between the bottoms.
This pattern forms when the price is in an existing downtrend. It occurs when the price increases to a support level (forming the 1st bottom), then increase (forming the peak), and then return to the support level again (forming the 2nd bottom) before subsequently the price increases further.

The bottoms can be either sharp & narrow or a bit rounded looking & wider.
Although the price bottoms do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price increases and closes above the highest point of the peak in between the 2 bottoms, which serves as the key resistance level in this pattern. This highest point is called the “Confirmation Point”.

Double Bottom Deception
Although Double Bottom is viewed as a common pattern and quite easy to identify, it’s actually not the case. Many people have actually incorrectly identified patterns that look like “W” shape as Double Bottom, but in fact it is not a Double Bottom formation.
Actually, this pattern can be quite difficult to identify correctly. Even when a pattern follows the characteristics of a Double Bottom, the failure rate is still high particularly when one never waits for the breakout. However, one waits for the breakout through the Confirmation Point, the failure rate would be considerably lower.

Therefore, one should pay close attention & take proper steps to analyze the characteristics of Double Bottom in order to minimize / avoid deceptive Double Bottom.
Some important characteristics of a Double Bottom that need to be paid more attention are the duration / time taken to develop the formation, the height of the peak, the volume during the formation of the pattern, and the breakout from the Confirmation Point

All these characteristics will be discussed in more detail in the next post.

To be continued to Part 2: Important Characteristics of Double Bottom pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Option Greeks
* Understanding Implied Volatility (IV)
* Understanding Option’s Time Value

Saturday, May 23, 2009

DOUBLE TOP PATTERN – Part 2: Important Characteristics

Go back to Part 1: Double Top Formation

Important Characteristics of Double Top Pattern

Existing Trend:
There should be an established existing UPWARD trend. The uptrend should be fairly long and healthy (at least about 3 to 6 months). “Healthy” uptrend means the price trend has generally moving upwards with some moderate retracements in between (forming a “stair-step” shape) and should never undergo a retracement in an extended decline.
The longer the price has been in a healthy upward trend, the more likely the pattern to develop into a reversal pattern. If the uptrend is short, the pattern has lower probability to work out, and the upward trend is more likely to continue.

Shape of Double Top Pattern:
1) The Two Peaks:
* The peaks / tops can be either sharp & narrow (like inverted V) or a bit rounded looking & wider. Ideally, the price peaks should be the same. However, some difference in the price peaks is still acceptable.
Although the price peaks do not necessarily need to be exactly the same, but it should appear near the same price level. The price difference between the two peaks should be less than 3%.
* If the high of the 2nd peak does not hit the high of the 1st peak, it is less worrying.
However, if high of the 2nd peak is even higher than the high of the 1st peak, we should be more cautious, as the probability that the uptrend would resume is still higher.

2) The Trough:
The depth of the trough between the two peaks should be around 10% - 20% from the peak (It could be even more than 20%, but it should not be less than 10%).
In general, the deeper the trough between the two peaks, the better the performance of the pattern.
If the two peaks are not exactly the same, the lower peak should be used as the benchmark for the depth measurement.

Duration:
The duration of time period between the two peaks may vary from a few weeks to many months (generally about 1 to 3 months).
Basically, the longer the time duration between the two peaks, the more likely the pattern could work out as a reversal pattern.
However, we should be extra cautious if a pattern only has a few days apart between the two peaks.

Breakout:
Even when the price has declined from the 2nd peak, the pattern is not completed yet. The chances that the existing uptrend will continue are still higher that the chances of reversal to take place, as it is normal during an uptrend for the price to peak at a resistance level a few times, then retreat, and then resume the uptrend again.

Double Top pattern is only completed and confirmed when the price declines and closes below the lowest point of the trough in between the 2 peaks, which serves as the key support level in this pattern. This lowest point is called the “Confirmation Point”.

Remember that we should always assume the existing trend (i.e. in this case is uptrend) is in force unless proven otherwise.
Therefore, it is important to wait for the price to make a decisive breakout by breaking through and closing below the Confirmation Point (preferably with an increase in volume), in order to avoid jumping the gun and/or prevent deceptive Double Tops pattern.

Nevertheless, sometimes the price may also make a deceptive/invalid breakout whereby it touches below the Confirmation Point, but then it moves back up again & resumes uptrend.
One possible way to prevent this is by having certain criteria to confirm if the breakout is a valid one.
A minimum penetration criteria for a breakout should be the price closes below the Confirmation Point, not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the Confirmation Point depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.

Volume:
Usually, volume is lower during the formation of the right peak than the left peak, showing an indication that the demand is drying up.
In general, volume tends to be diminishing as the pattern is forming. The volume may pick up when the price hits the 2nd peak, but it is often only a slightly higher than the average volume during the trough.
During the breakout of the Confirmation Point, the volume should preferably increase again, although not always necessary to be so.
However, when the breakout occurs with high volume, the price decline tends to drop further and it may provide higher chances that the pattern is a reversal pattern.
(It is even better if during the decline from the 2nd peak, the price experiences an accelerated drop, perhaps with a gap down or two).

Potential Price Target:
1) Compute the depth of the trough: The distance between the peak (resistance) and the Confirmation Point (support).
If the two peaks are not the same, the lower peak should be used for this calculation.
2) To compute the potential price target: Subtract the result from the Confirmation Point.

Hence, the above formula implies that the deeper the trough between the two peaks, the larger the potential of the decline.

In general, any price target should only be used as a rough guide. To determine the price target, other factors, such as previous support / resistance levels, Fibonacci retracements, or long-term moving averages, should be considered as well.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new resistance level before continuing their moves in the direction of the breakout. (Remember that the support now has become a new resistance level).
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Saturday, May 9, 2009

DOUBLE TOP PATTERN – Part 1: Formation

Double Tops Pattern is a bearish reversal pattern that normally forms after an extended uptrend, which marks a shift in trend from bullish to bearish.
Sometimes, this pattern is called “M pattern” because it looks like one.

The Formation of Double Top Pattern



Double Top Pattern contains two consecutive, distinct peaks / tops at about the same price level, with a moderate trough between the peaks.
This pattern forms when the price is in an existing uptrend. It occurs when the price increases to a resistance level (forming the 1st peak), then decline (forming the trough), and then return to the resistance level again (forming the 2nd peak) before subsequently decline further.

The peaks / tops can be either sharp & narrow or a bit rounded looking & wider.
Although the price peaks do not necessarily need to be exactly the same, but it should appear near the same price level.

The pattern is completed and confirmed when the price declines and closes below the lowest point of the trough in between the 2 peaks, which serves as the key support level in this pattern. This lowest point is called the “Confirmation Point”.

This pattern occurs because the buyers are trying to push the price higher, but are not able to do so as they are facing resistance, which prevents the continuation of the uptrend. Then they try to make a second attempt to drive the price higher again, but still fail. In the end, the buyers in the market have dried up & exhausted, and the sellers begin to be more aggressive to take control of the market and drive the price lower, sending it down into a new downtrend.

Double Top Deception
Although Double Top is viewed as a common pattern and quite easy to identify, it’s actually not the case. Many people have actually incorrectly identified patterns that look like “M” shape as Double Top, but in fact it is not a Double Top formation.
Actually, this pattern can be quite difficult to identify correctly. Even when a pattern follows the characteristics of a Double Top, the failure rate is still high particularly when one never waits for the breakout. However, one waits for the breakout through the Confirmation Point, the failure rate would be considerably lower.

Therefore, one should pay close attention & take proper steps to analyze the characteristics of Double Top in order to minimize / avoid deceptive Double Top.
Some important characteristics of a Double Top that need to be paid more attention are the duration / time taken to develop the formation, the depth of the trough, the volume during the formation of the pattern, and the breakout from the Confirmation Point

All these characteristics will be discussed in more detail in the next post.

Continue to Part 2: Important Characteristics of Double Top pattern.

To find out more about other Chart Patterns, please refer to:
Learning Charts Patterns

Analysis Tool:
Get Free Trend Analysis for your favorite symbols

Related Topics:
* Learning Candlestick Charts
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2

Useful Learning Resource:
FREE Trading Educational Videos: APPLYING TECHNICAL ANALYSIS ON TODAY’S TRADING by John Murphy
Note:
This video has been available for free for quite some time already, and hence, like what has happened previously, it may not be offered for free anymore anytime soon. So, if you’re interested to learn from it, don’t delay anymore to watch it.

Update as at 22 May 09:
Effective from 18 May 09, the above video is no longer available for free.
Sorry if you've missed this opportunity. However, I'll update you again when there are new free trading educational videos. Hope you won't miss the chance to learn from trading experts for free anymore next time.

Sunday, April 12, 2009

Trading Video: Double Tops and Pivot Points Explained

A number of readers asked me if I’m going to write about reversal patterns (such as Double Tops / Bottoms, Triple Tops / Bottoms, Head & Shoulders Tops / Bottoms, etc.), as so far I only have posts on continuation patterns.
The answer is yes, it’s on my plan. While the articles on reversal patterns are still under preparation (coming soon, I promise), I found a cool trading video, which shares about Double Tops pattern.

Double Tops is one of the most frequently seen and common patterns, which can be traded in different time frames.
This video gives an example on Double Tops pattern under 15-min chart for S&P 500 on 6 Apr 09.
Hope you can learn something from this video.

Note:
Got this video from Trader’s Blog. It’s a great blog.
If you like it, you may want to subscribe to their updates, so that you can receive an alert when there’s new post or video.

Related Topics:
* FREE Trading Educational Videos You Should Not Miss
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* Learning Candlestick Charts

Saturday, February 23, 2008

DESCENDING CHANNEL PATTERN

Descending Channel Pattern is a short-term bearish continuation pattern, whereby the price movement is contained within two parallel descending trend lines and the price is moving lower while bouncing off upper and lower down-trending lines.
Descending Channel pattern is also known as “Bearish Price Channel”.

The Formation of Descending Channel Pattern



Descending Channel Pattern has two parallel trend lines that are sloping downward.
In this case, the descending upper line acts as resistance, while the descending lower line as support.

In general, Price Channel pattern has Main Trend Line (or Primary Trend Line) and Channel Line (or Secondary Trend Line).
The Main Trend Line is the one that determine the trend and slope of the price channel, while the Channel Line is the line that is drawn parallel to the Main Trend Line.

For Descending Channel Pattern, the descending upper line serves as Main Trend Line, and the descending lower line as Channel Line.

To draw the Main Trend Line (descending upper line), there should be at least two consecutively lower peak (high) points to be connected. These two peaks should have some distance. In other words, prices should increase and hit the descending upper line then decline for at least twice (forming at least two peaks).

Likewise, to draw the Channel Line (descending lower line), there should be at least two consecutively lower trough (low) points to be connected. These two troughs should also have some distance. That means prices should drop and hit the descending lower line then bounce up for at least twice (forming at least two troughs).

These two down-trending lines should be parallel or close to parallel, and they can be extended down as well.

In Descending Channel pattern, the price should continue moving lower while bouncing off upper and lower trend lines, until a breakout occurs and either trend line is broken.

As such, one effective way to trade this pattern is by short selling the stock on the upper trend line (resistance level) for short-term trade.
Although it is possible to buy the stock on the lower trend line (support level), this trade may carry more risk because one would be trading against the trend. And trading against the trend will usually be much riskier. (Remember the well-known trading phrase: "The Trend is Your Friend").

Breakout
The breakout from Descending Channel pattern may happen to the upside (i.e. the price penetrates through the upper trend line) or to the downside (i.e. the price penetrates through the lower trend line).

As with the other patterns, the minimum penetration criteria for a breakout should be price closes outside either trend lines, not just an intraday penetration.

A breakout to the upside from Descending Channel that indicates the short-term downtrend might have come to an end, and it provides a technical “Buy” (Bullish) signal.

A breakout to the downside indicates that that a selling intensity has increased, resulting in accelerated price decrease. This provides a technical “Sell” (Bearish) signal.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Topics:
* FREE Trading Videos from Famous Trading Gurus
* Understanding Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)

Monday, February 18, 2008

ASCENDING CHANNEL PATTERN

Ascending Channel Pattern is a short-term bullish continuation pattern, whereby the price movement is contained within two parallel ascending trend lines and the price is moving higher while bouncing off upper and lower up-trending lines.
Ascending Channel pattern is also known as “Bullish Price Channel” or “Rising Channel”.

The Formation of Ascending Channel Pattern



Ascending Channel Pattern has two parallel trend lines that are sloping upward.
In this case, the ascending lower line acts as support, whereas the ascending upper line as resistance.

In general, Price Channel pattern has Main Trend Line (or Primary Trend Line) and Channel Line (or Secondary Trend Line).
The Main Trend Line is the one that determine the trend and slope of the price channel, while the Channel Line is the line that is drawn parallel to the Main Trend Line.

For Ascending Channel Pattern, the ascending lower line serves as Main Trend Line, and the ascending upper line as Channel Line.

To draw the Main Trend Line (ascending lower line), there should be at least two consecutively higher trough (low) points to be connected. These two troughs should have some distance. That means prices should drop and hit the rising lower line then bounce up for at least twice (forming at least two troughs).

Similarly, to draw the Channel Line (ascending upper line), there should be at least two consecutively higher peak (high) points to be connected. These two peaks should also have some distance. In other words, prices should increase and hit the rising upper line then decline for at least twice (forming at least two peaks).

These two up trending lines should be parallel or close to parallel, and they can be extended up as well.

In Ascending Channel pattern, the price should continue moving higher while bouncing off upper and lower trend lines, until a breakout occurs and either trend line is broken.

Therefore, one effective way to trade this pattern is by buying the stock on the lower trend line (support level) for short-term bounce plays.
Although it is possible to short sell the stock on the upper trend line (resistance level), this trade may carry more risk because one would be trading against the trend. And trading against the trend will usually be much riskier. (Remember the well-known trading phrase: "The Trend is Your Friend").

Breakout
The breakout from Ascending Channel pattern may happen to the upside (i.e. the price penetrates through the upper trend line) or to the downside (i.e. the price penetrates through the lower trend line).

As with the other patterns, the minimum penetration criteria for a breakout should be price closes outside either trend lines, not just an intraday penetration.

A breakout to the upside from Ascending Channel indicates that a buying intensity has increased, resulting in accelerated price increase. This provides a technical “Buy” (Bullish) signal.

A breakout to the downside indicates that the short-term uptrend might have come to an end, and it provides a technical “Sell” (Bearish) signal.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Posts:
* FREE Trading Educational Resources You Should Not Miss
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks

Monday, February 11, 2008

RECTANGLE PATTERN – Part 2: Important Characteristics

Go back to Part 1: Rectangle Formation

Important Characteristics of Rectangle Pattern:

Existing Trend:
There should be an established existing trend (either uptrend or downtrend) in order for the pattern to qualify as a continuation pattern.

Shape of Rectangle Pattern:
* There should be at least 4 reversal points to draw two parallel lines, i.e. two equivalent peak (high) points forming a horizontal upper line (resistance) and two equivalent trough (low) points forming a horizontal lower line (support).
* There should be some distance between the two peaks as well as the two troughs
In other words, prices should increase and hit the horizontal upper line then decline for at least twice (forming at least two peaks). Prices should drop and hit the horizontal lower line then bounce up for at least twice (forming at least two troughs).

Volume:
Unlike Triangle pattern whereby volume should be diminishing as the triangle develops, for Rectangle pattern there is no standard pattern for the volume.

Volume could sometimes be contracting as the Rectangle is forming, but it might be fluctuating as well.
The fluctuation can be random, or may also show certain tendency.
For example, volume tends to increase as the price is nearing to resistance (upper line), and decreasing as the price moves toward support (lower line).
When such volume pattern happens, it could offer an indication on the possible breakout direction (in this example, it might break out to the upside).

When breakout occurs, volume should be expanding.

Duration:
On a daily chart, this pattern may take from few weeks to many months to form.
If the pattern duration is less than 3 weeks, it is usually considered as a bullish / bearish flag.

Generally, the longer the duration of the pattern, the more significant the breakout would be.
A 3-month pattern might be expected to meet its breakout’s potential price target.
However, a 6-month pattern is likely to exceed its breakout target.

Breakout Direction:
Breakout from Rectangle pattern can happen in either direction (upside or downside).
Hence, the direction of the breakout can only be determined after the breakout has occurred.

Potential Price Target:
1) Compute the height of the Rectangle: The distance between the upper line (resistance) and lower line (support).
2) To compute the potential price target:
When the breakout is to the upside of the upper line: Add the result to the upper line.
When the breakout is to the downside of the lower line: Subtract the result from the lower line.

Return to Breakout Level:
After the breakout occurs, it is common that prices may return to the breakout level for an immediate test of this new support (when break to the upside) or resistance level (when break to the downside) before continuing their moves in the direction of the breakout.
This could actually offer an opportunity to participate in the breakout with a better reward to risk ratio.

Breakout Confirmation:
* A minimum penetration criteria for a breakout should be price closes outside the upper line (for breakout to the upside) or lower line (for breakout to the downside), not just an intraday penetration.
Some traders may apply certain price criteria (e.g. 3% - 5% break from the upper / lower line depending on the stock’s volatility) or time criteria (e.g. the breakout is sustained for 3 days) to confirm the validity of the breakout.
* If the price returns back inside the Rectangle on a closing price basis, the breakout can be deemed invalid.

To read about other chart patterns, go to: Learning Charts Patterns.

Related Topics:
* FREE Trading Educational Videos on Technical Analysis You Should Not Miss
* Learning Candlestick Charts
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks