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