by 3 people |
Patterns for Profit
Whether you are options trading, investing in shares, or just have an interest in the Share Market, you may have noticed movements or patterns that particular stocks seem to make on their stock chart.
We call these Chart Patterns
Statistically, individual patterns represent a high chance of the stock price moving in a certain direction.
By identifying these patterns and knowing how to trade them, you will find your trading opportunities less restricted, offering you much faster results.
There are so many different types of chart patterns acknowledged by technical analysts it can be mind boggling!
Several of these patterns tend to repeat themselves quite frequently, and these are the ones we will focus on here.
By identifying these patterns and knowing how to trade them, you will find your trading opportunities less restricted, offering you much faster results.
There are so many different types of chart patterns acknowledged by technical analysts it can be mind boggling!
Several of these patterns tend to repeat themselves quite frequently, and these are the ones we will focus on here.
Firstly though, Lets Just Touch on Technical Analysis
Technical Analysis involves charting or graphing a shares trading history.
Using different tools, such as trendlines & support and resistance, we can analyse the supply and demand of a stock. All the information we need to do this is found in the stock's chart.
In basic terms, as technical analysts we study the prices and volume of a stock. These two combined form patterns we can identify on the stock chart, and they offer signals of possible future movements.
Professional options traders make many of their decisions using technical analysis and just a few simple patterns.
Using different tools, such as trendlines & support and resistance, we can analyse the supply and demand of a stock. All the information we need to do this is found in the stock's chart.
In basic terms, as technical analysts we study the prices and volume of a stock. These two combined form patterns we can identify on the stock chart, and they offer signals of possible future movements.
Professional options traders make many of their decisions using technical analysis and just a few simple patterns.
Let me explain how you can make money with Options Trading, regardless of which direction the market is moving in.
Presented by Jules Dawson
curated content from YouTube
So Let's look at some Chart Patterns
1) CHANNELS
Upper and lower trend lines are not always parallel, however when they are it is called a Channel.
Since stocks tend to bounce off trend lines, when caught between two of them such as an upper and lower trend line, the chart will often follow a channel.
How do Channels work?
Stock prices move up because there is more demand from buyers than there is supply of stock from those wanting to sell.
Likewise, stock prices fall when there is more supply than demand.
If enough people believe the price will bounce off a lower trend line they will generate demand. That demand will cause the price to bounce. It is all about sentiment.
Channels represent a tug of war between buyers and sellers.
Accumulation Channels or up sloping channels mean the buyers are winning. They are Bullish.
Distribution Channels or down channels mean the sellers are winning the war. They are Bearish.
Since stocks tend to bounce off trend lines, when caught between two of them such as an upper and lower trend line, the chart will often follow a channel.
How do Channels work?
Stock prices move up because there is more demand from buyers than there is supply of stock from those wanting to sell.
Likewise, stock prices fall when there is more supply than demand.
If enough people believe the price will bounce off a lower trend line they will generate demand. That demand will cause the price to bounce. It is all about sentiment.
Channels represent a tug of war between buyers and sellers.
Accumulation Channels or up sloping channels mean the buyers are winning. They are Bullish.
Distribution Channels or down channels mean the sellers are winning the war. They are Bearish.
Distribution Channel
Since the price can't stay in a channel forever, it has to break out eventually. As a trader, that is when we become interested.
2) THE MEGAPHONE
When trend lines are broadening we have what analysts call a Megaphone, or broadening formation.
How does a Megaphone work?
A broadening formation has an upper and lower trend line that act as support and resistance. With each bounce off support we see a stronger rally to a new high, or a steeper fall when the price hits resistance.
This price movement suggests growing disagreement between buyers and sellers. It's like everyone is shouting all at once. It represents indecision and extreme volatility. This is normally not a good sign.
How does a Megaphone work?
A broadening formation has an upper and lower trend line that act as support and resistance. With each bounce off support we see a stronger rally to a new high, or a steeper fall when the price hits resistance.
This price movement suggests growing disagreement between buyers and sellers. It's like everyone is shouting all at once. It represents indecision and extreme volatility. This is normally not a good sign.
The Megaphone
When a Megaphone occurs at the top of an uptrend it normally signifies a change of trend. They can be found anywhere on the chart, although rarely at the bottom of a down trend.
Broadening formations at the top of an uptrend are generally a product of unrealistic expectations on the part of the bullish investor.
Broadening formations at the top of an uptrend are generally a product of unrealistic expectations on the part of the bullish investor.
3) TRIANGLES
Triangles are one of the most well known and widely used pattern.
These formations represent a trend continuation or possible reversal depending on their pattern and where they are situated in the longer term trend.
How do Triangles work?
When trend lines are narrowing we have a triangle formation. Much the opposite to a Megaphone, the price movement bounces between the trend lines until it is 'squeezed' or consolidated before it breaks out.
Triangles are generally looked at as a continuation pattern.
There are three different triangles -
These formations represent a trend continuation or possible reversal depending on their pattern and where they are situated in the longer term trend.
How do Triangles work?
When trend lines are narrowing we have a triangle formation. Much the opposite to a Megaphone, the price movement bounces between the trend lines until it is 'squeezed' or consolidated before it breaks out.
Triangles are generally looked at as a continuation pattern.
There are three different triangles -
A) Ascending Triangles
Ascending triangles have a horizontal resistance line and a rising support line or trend line. It looks like the buyers are stronger than the sellers.
Ascending triangles are considered bullish and most reliable when found in an uptrend.
The resistance level is tested over and over, with volume diminishing throughout the formation of the ascending triangle.
Eventually the market resolves itself in the direction of the trend.
This is reflected in the increasing levels of volume.
Ascending triangles are considered bullish and most reliable when found in an uptrend.
The resistance level is tested over and over, with volume diminishing throughout the formation of the ascending triangle.
Eventually the market resolves itself in the direction of the trend.
This is reflected in the increasing levels of volume.
Ascending Triangle
B) Descending Triangles
Descending triangles have a horizontal support line and a falling resistance or trend line. It looks like the sellers are dominating.
These triangles are considered bearish and most reliable when found in a down trend. They indicate a high probability of the price breaking out and down in continuation.
This time it is the support level that is tested over and over, again with volume weakening during the formation or consolidation of the pattern.
Again the market eventually resolves itself in the direction of the existing trend, and the price breaks out and down with higher volume levels.
These triangles are considered bearish and most reliable when found in a down trend. They indicate a high probability of the price breaking out and down in continuation.
This time it is the support level that is tested over and over, again with volume weakening during the formation or consolidation of the pattern.
Again the market eventually resolves itself in the direction of the existing trend, and the price breaks out and down with higher volume levels.
Descending Triangle
As dependable as these two triangle patterns are, there are times when the break out may be in the opposite direction indicating a change of trend. This is why we must wait for confirmation and not use them to predict the price movement.
C) Symmetrical Triangles
Symmetrical triangles have sloping support and resistance lines, hence their name. It is harder to predict who will win this war.
Similarities exist between all three triangle patterns, as in the testing of support and resistance, and decreasing volume until the break out. However, the end result with the symmetrical triangle could go up, down or sideways.
This triangle usually signifies a continuation pattern, however it can appear as a reversal pattern during important market changes.
One thing to consider is the duration of the pattern formation. The longer the symmetrical triangle takes to form, the greater the probability it may indicate a reversal of a trend.
With this in mind though, it is still mostly considered to indicate a continuation of the trend.
Similarities exist between all three triangle patterns, as in the testing of support and resistance, and decreasing volume until the break out. However, the end result with the symmetrical triangle could go up, down or sideways.
This triangle usually signifies a continuation pattern, however it can appear as a reversal pattern during important market changes.
One thing to consider is the duration of the pattern formation. The longer the symmetrical triangle takes to form, the greater the probability it may indicate a reversal of a trend.
With this in mind though, it is still mostly considered to indicate a continuation of the trend.
Symmetrical Triangle
4) THE HEAD AND SHOULDERS TOP
As the name suggests, The Head and Shoulders Top, has a peak or high 'the head', accompanied by two lower highs, resembling the 'shoulders'.
Usually found at the top of an uptrend, this is also known as a reversal pattern with a bearish outlook.
How does The Head and Shoulders Top work?
A classic example of the pattern has three sharp points or peaks and is a symmetrical pattern. However there can be many variations of the formation such as rounded shoulders and they may not match in width.
> The first peak (the left shoulder) is formed when the price in an up trending stock, hits a high and falls back.
> The second peak is formed when prices rise to an even higher high and fall back again.
> The third peak (the right shoulder) is formed when prices again rise but cannot break the resistance level of the left shoulder. Prices fall once more.
Usually found at the top of an uptrend, this is also known as a reversal pattern with a bearish outlook.
How does The Head and Shoulders Top work?
A classic example of the pattern has three sharp points or peaks and is a symmetrical pattern. However there can be many variations of the formation such as rounded shoulders and they may not match in width.
> The first peak (the left shoulder) is formed when the price in an up trending stock, hits a high and falls back.
> The second peak is formed when prices rise to an even higher high and fall back again.
> The third peak (the right shoulder) is formed when prices again rise but cannot break the resistance level of the left shoulder. Prices fall once more.
The Head and Shoulders Top
The key element of this chart pattern is the neckline.
The neckline is made when drawing a trend line below the low point of each shoulder creating a support line. This does not have to be exactly horizontal, it can be sloping a little.
The Head and Shoulders pattern is not validated until the price movement falls and closes BELOW this neckline support level.
The neckline is made when drawing a trend line below the low point of each shoulder creating a support line. This does not have to be exactly horizontal, it can be sloping a little.
The Head and Shoulders pattern is not validated until the price movement falls and closes BELOW this neckline support level.
5) THE DOUBLE TOP
A Double Top is made up of two peaks and a valley. When found
at the top of an uptrend it indicates a probable move down. The Double Top is generally known as a reversal pattern and is considered to be a bearish signal.
How does a Double Top work?
Generally found at the top of an uptrend, the price hits a peak and then falls to form the 'valley'. This leaves an unbalance of buyer demand, so the price then climbs back towards the previous resistance before falling again.
The Double Top pattern is not confirmed however until the stock price drops below the lowest low, or the support line of the valley. This can signal the beginning of a change of trend.
at the top of an uptrend it indicates a probable move down. The Double Top is generally known as a reversal pattern and is considered to be a bearish signal.
How does a Double Top work?
Generally found at the top of an uptrend, the price hits a peak and then falls to form the 'valley'. This leaves an unbalance of buyer demand, so the price then climbs back towards the previous resistance before falling again.
The Double Top pattern is not confirmed however until the stock price drops below the lowest low, or the support line of the valley. This can signal the beginning of a change of trend.
The Double Top
Note that the two peaks do not have to be at the exact same price point, and can take days, weeks or months to form.
Be wary when the formation occurs over a very short period of time however, as the peaks may just be forming normal resistance. The longer the time frame between the peaks, the more importance the pattern has as a reversal signal.
Be wary when the formation occurs over a very short period of time however, as the peaks may just be forming normal resistance. The longer the time frame between the peaks, the more importance the pattern has as a reversal signal.
All these patterns are used to confirm a continuation of trend or a change of trend, however they are not a GUARANTEE this will
Purely recognising a particular pattern does not give you enough information to jump in and start trading with.
For instance just because a chart looks as if a double top is forming does not mean the price will fall below the valley! You may be merely looking at a countertrend.
Boy I wish someone had have given ME that information when I first started trading!
I have certain rules that I adhere to when trading Chart Patterns. I learnt them the hard way early in my trading career whereas you will certainly have a big head start if you put them into action.
There are many different ways to trade chart patterns and most traders use numerous technical indicators to confirm them.
Each pattern has a statistical measure for the length and duration of the price direction and a lot of traders have their 'price targets' calculated before they enter a trade.
My approach is far more simplistic and much easier to implement. Learn more about my trading system.
For instance just because a chart looks as if a double top is forming does not mean the price will fall below the valley! You may be merely looking at a countertrend.
Boy I wish someone had have given ME that information when I first started trading!
I have certain rules that I adhere to when trading Chart Patterns. I learnt them the hard way early in my trading career whereas you will certainly have a big head start if you put them into action.
There are many different ways to trade chart patterns and most traders use numerous technical indicators to confirm them.
Each pattern has a statistical measure for the length and duration of the price direction and a lot of traders have their 'price targets' calculated before they enter a trade.
My approach is far more simplistic and much easier to implement. Learn more about my trading system.
"Today's preparation determines tomorrow's achievement."
Additional Information.
Educational Material
- More on Options Strategies
- How the application of Options Trading to a long term share strategy can earn money as an extra income.
- Patterns For Profit Course
- A homestudy DVD series focussed on mastering Chart Patterns and EXACTLY how to trade them.
Recommended reading from Amazon
Getting Started in Technical Analysis (Getting Started In.....)
Explaining the science behind technical analysis.
Amazon Price: $13.57 (as of 01/01/2010) 
The New Market Wizards: Conversations with America's Top Traders
Trading secrets of the worlds most profitable traders.
Amazon Price: $12.23 (as of 01/01/2010)
The Secret (Extended Edition)
This DVD will change the way you think about the way you think!
Amazon Price: $17.49 (as of 01/01/2010)
New Guestbook
submit
-
Reply
- custom-made custom-made Feb 22, 2008 @ 12:13 pm
- This lense looks great. I gave you 5 stars.
Lots of great information there.
After all that hard work take a break, and stop by to get a snack at my lense.
http://www.squidoo.com/pancakepuff
by Jules_Dawson
Hi there,
I'm Jules and I am a full time investor and educator. My 'work' takes up an average of only 6 hours a week and my income is derived through... (more)
I'm Jules and I am a full time investor and educator. My 'work' takes up an average of only 6 hours a week and my income is derived through... (more)
Explore related pages
Options Trading: How to Make Money with Call Options- It doesn't take a genius to work out that you can make money on the stock market...
Trading vs Investing- This lens is created to allow you some general information for you to explore th...
Candlestick Trading For Maximum Profits- The web is so full of offers to "make you rich" that most people are n...
Currency Converter- For quick Currency Conversion, please use our FREE Currency Converter. Protect...
Jim Cramer on Stocks- Jim Cramer, Jim Cramer, and more Jim Cramer - need I say more? Booyah!
Warren Buffett aka the Oracle of Omaha aka the Sage of Omaha- Warren Buffett aka The Oracle of Omaha aka the Sage of Omaha, is currently the s...
.jpg)
