Chart Patterns Abused
Many people have abused the use of terminology such as double top, double bottom, head & shoulder & triangle...etc. These terms are part of a technical toolkit called Chart Patterns. For example, when Olam failed to rally beyond June 2's high ( $2.38 ) on June 15 ( $2.38 too ). Some people have immediately labeled Olam as having double top. This is not correct !
Chart patterns are pictures of trader's psychology reflected in the price charts that have predictive value. There are two major categories of chart patterns namely "Reversal Patterns" and "Continuation Patterns".
Reversal Patterns are considered "major" patterns because they usually required a longer time to form ( minimum 1~ 3 months, often longer ) and are rare ( at major market top or bottom ). Head & Shoulder, Double Top / Bottom, Triple Top / Bottom, Saurcer & V Spike fall under this category. Any "pattern" that has two "tops" which are only 5 ~ 10 days apart will not be a legitimate double top let alone the importance of volume as a confirmation is normally omitted ( by these people who have labeled it as double top ).
Continuation Patterns can be sub-divided into two categories based on time frame - Intermediate ( typically 1 month, may stretch to 2 ~ 3 months ) & minor ( no more than 3 weeks, typically 1 ~ 2 weeks ). All Triangles ( Symmetrical, Ascending, Descending, Wedges, Broadening ) come under Intermediate whereas Flags & Pennant come under minor. By the way, Flags & Pennant are the MOST reliable patterns of all patterns.
Volume is usually very important as a confirmation to the valid formation. In most cases ( except broadening triangle ), volume diminishes as the pattern takes shape ( For broadening triangle, volume expand as the pattern takes it shape ). Time frame is another vital consideration when validating the pattern. Take triangle as an example, breakout should take place between 2/3 to 3/4 from the 'base' to the 'apex'. Many people try to draw two converging lines on the prices and label them as a triangle even if the prices have reached the apex. This is again not correct ! If there is ever a 'breakout' from such a 'pattern', it is just coincident due to market sentiment. Trust me, you are just lucky, it has nothing to do with the mainstream chart pattern study ! It is more likely to be the breaking of a support / resistance or trendline instead.
Chart pattern is a big topic in technical analysis that is not possible to cover with one post. Some trainers charge a hefty sum for a 3 ~ 6 hours session workshop on this. The above is as much I can cover with one post ....
Chart patterns are pictures of trader's psychology reflected in the price charts that have predictive value. There are two major categories of chart patterns namely "Reversal Patterns" and "Continuation Patterns".
Reversal Patterns are considered "major" patterns because they usually required a longer time to form ( minimum 1~ 3 months, often longer ) and are rare ( at major market top or bottom ). Head & Shoulder, Double Top / Bottom, Triple Top / Bottom, Saurcer & V Spike fall under this category. Any "pattern" that has two "tops" which are only 5 ~ 10 days apart will not be a legitimate double top let alone the importance of volume as a confirmation is normally omitted ( by these people who have labeled it as double top ).
Continuation Patterns can be sub-divided into two categories based on time frame - Intermediate ( typically 1 month, may stretch to 2 ~ 3 months ) & minor ( no more than 3 weeks, typically 1 ~ 2 weeks ). All Triangles ( Symmetrical, Ascending, Descending, Wedges, Broadening ) come under Intermediate whereas Flags & Pennant come under minor. By the way, Flags & Pennant are the MOST reliable patterns of all patterns.
Volume is usually very important as a confirmation to the valid formation. In most cases ( except broadening triangle ), volume diminishes as the pattern takes shape ( For broadening triangle, volume expand as the pattern takes it shape ). Time frame is another vital consideration when validating the pattern. Take triangle as an example, breakout should take place between 2/3 to 3/4 from the 'base' to the 'apex'. Many people try to draw two converging lines on the prices and label them as a triangle even if the prices have reached the apex. This is again not correct ! If there is ever a 'breakout' from such a 'pattern', it is just coincident due to market sentiment. Trust me, you are just lucky, it has nothing to do with the mainstream chart pattern study ! It is more likely to be the breaking of a support / resistance or trendline instead.
Chart pattern is a big topic in technical analysis that is not possible to cover with one post. Some trainers charge a hefty sum for a 3 ~ 6 hours session workshop on this. The above is as much I can cover with one post ....
Labels: Trading Basic
posted by Market Wizards @ June 28, 2009
Comments: 0
