Chart patterns Analysis

What are Chart Patterns? 

• Chart Patterns Analysis falls under the category of Technical Analysis. Chart pattern is a term of technical analysis used to analyze a stock's price action according to the shape its price chart creates. Trading by chart patterns is based on the fact that once a chart forms a pattern the short term price action is predictable to an extent. For instance, if a chart creates a "channel" the stock price will be bouncing off the upper and lower boundary until it breaks out. Based on each pattern's rules many different trading strategies can be applied. 

• Chart Patterns are graphical representations of historical stock prices which help to determine current supply and demand forces in a stock.  Chart pattern analysis allows a trader to determine with more accuracy just what the current supply and demand is in a stock.  Chart patterns are graphical representations of historical stock prices which form repeating patterns or shapes, and are commonly used in the stock market.

Chart Patterns Technical Analysis

• Trading with technical analysis requires correctly identifying chart patterns.  Technical analysis is the study of price history to determine future trading opportunities.  Price history in the form of a price chart is the visual representation of where prices have been, where buyers and sellers hide for making profit, and often times the trading psychology and mentality at work in the market. 

• Chart patterns are useful indicators of momentum, support and resistance, and other indications of strength or weakness in a stock.  Chart patterns help traders to determine market direction as well as time entries and exits.  A trader must be able to identify chart patterns properly.  Only then can a trader benefit from chart patterns.

Technical Analysis Theory/ Assumptions

There are three basic assumptions on which technical analysis is based:

1. The futures market discounts everything.

It is believed that the price displayed at the commodity exchange at any given time is the intrinsic value of the commodity based upon the fundamental factors affecting the supply and demand of the product. Therefore, if the fundamentals are already reflected in the price, market action (charts- price, volume, open interest), it is all that which is needed to study forecast future price direction. By not being aware of the fundamental news, he is able to study the fundamentals of the market place by analyzing the charts

2. Prices move in trends

Prices can move in one of three directions, up, down or sideways. Once a trend in any of these directions is in effect it usually will persist. The market trend is simply the direction of market prices, a concept which is absolutely essential to the success of technical analysis. Identifying trends is quite simple; a price chart will usually indicate the prevailing trend as characterized by a series of waves with obvious peaks and troughs. It is the direction of these peaks and troughs that constitutes the market trend.

3. History repeats itself

Technical analysis includes the psychology of the market place. Patterns of human behavior have been identified and categorized for several hundred years and are repetitive in nature. The repetitive nature of the marketplace is illustrated by specific chart patterns which will indicate a continuation of or change in trend.

Types of Chart Patterns

There are two types of patterns within technical analysis, Reversal and Continuation Patterns. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete. Continuation patterns, when they occur, indicate that a price trend is likely to continue. 

• Reversal patterns often take a long time to form on the chart and represent major changes in trend. The larger the pattern, the greater the potential price movement. The height of the pattern measures volatility, while the width measures time required to complete the pattern. (Patterns at market tops are usually more volatile and shorter in time than bottoms.) Some of the common reversal patterns are Double Top, Double Bottom, Head & Shoulders Top, Head & Shoulders Bottom etc.

• Continuation patterns suggest that a market is only pausing for a while before the prevailing trend will resume. Continuation patterns are usually shorter-term in duration than reversal patterns and are often classified as intermediate-term chart patterns. Some of the most common continuation patterns include: flags, ascending and descending triangles, pennants, gaps, and rectangles.

Candlestick Charts


The candlestick charts have become very popular among traders as they compress all important information such as the session's open, high, low, and close into a space-efficient symbol called candlestick. 

One vertical line -- or bar-- represents the trading range for each trading period (i.e., a day, a week, a month, etc.). Viewing one bar alone, it is not significant, however viewing it in relation to other bars (trading periods) occurring before and after, one see how these prices fit into a larger pattern. In this context, a single bar (and the prices of that period) becomes important and can serve as a guide to trading and timing decisions. Whether one uses minute, hour, day, week, month or year futures bar charts depends greatly on the time frame being analyzed (i.e., daily bar charts might provide too much data to analyze a year of activity, and monthly bar charts might not provide enough).

Chart Patterns Futures

Futures and options trading carries significant risk and you can lose some, all or even more than your investment. Chart Patterns Research shows that Chart Patterns have high forecasting probabilities. These chart Patterns are of high significance. The price changes often form meaningful chart patterns that can act as signals in trying to determine possible future trend developments. When to buy and when to sell could very well be the question of all questions when it comes to trading or investing in stocks, futures and options. The answer though, could very well be found in Chart Patterns Analysis. 

Chart Patterns Software's

There are many renowned Charting Software's available in the market for traders like Amibroker, Metastock, Metatrader etc. But the most important point that should be kept in mind is to choose the most effective and reliable Data Service Providers. Parameters such as Quality of Data, Data Accuracy and Integrity, Data Updation & Recoverability, After Sales Support and Stability. Company such as www.rtdsdata.com are pioneer when it comes to maintaining these parameters. Stock Market players should exercise extreme caution while choosing the right Data Service Providers. 

Conclusion

• Chart analysis is the technique of using patterns formed chart to formulate buy and sell signals.
• There are two types of chart patterns: Reversal and Continuation.
• A continuation pattern suggests that the prior trend will continue upon completion of the pattern.
• A reversal pattern suggests that the prior trend will reverse upon completion of the pattern.

In summary, the profitable use of chart patterns is not easy. The potential problems with recognizing and acting upon chart patterns that we have discussed in this chapter highlight the need to know thoroughly what we are doing. There are many variables in price behavior, mostly human, and being human ourselves and subject to the same biases, we must be adaptable and recognize that chart patterns are flexible.It is unlikely that researchers will ever be able to prove definitively that patterns exist because the mathematics are so complicated and because the marketplace is always changing.

Reversal Chart Patterns

What are Reversal Chart Patterns?

Reversal Chart Patterns are patterns which reverses the trend of a stock once the pattern is confirmed. While a continuation pattern suggests that a trend in place will continue in the same direction after a brief pause/correction, a failed continuation pattern may well turn into a reversal pattern. Like their name implies, reversal patterns suggest that one trend is ending and the market is ready to begin another trend in the opposite direction or, perhaps more likely, to move sideways for a while.

Implications of Reversal Chart Patterns

Reversal patterns often take a long time to form on the chart and represent major changes in trend. The larger the pattern, the greater the potential price movement. The height of the pattern measures volatility, while the width measures time required to complete the pattern. (Patterns at market tops are usually more volatile and shorter in time than bottoms.) Remember, a trend must exist for the pattern to be valid, and breaking a major trendline does not necessarily indicate a trend reversal (it might be the beginning of a sideways trend). Some of the more common reversal patterns include head-and-shoulders, double tops and double bottoms and saucers.

Types of reversal Chart Patterns

Reversal Chart Patterns includes - 

Double Tops - A previous high may act as a target for a new move to the upside or as a barrier that an uptrend may not be able to penetrate. If this resistance holds and prices turn back, the price reversal may form a double top and makes that price area a more formidable barrier to exceed in the future. 

Double Bottom - A mirror image of the double top is the double bottom: Prices drop to the vicinity of a previous low and bounce back up from this support zone. This reversal at a former low can make this level an even stronger area of support if it is tested several times. 

M Tops & W Bottom - A close cousin of the double top and double bottom are the M top and W bottom, so-called because of the letters formed when the thrust to a previous high or previous low does not reach the same level as the first high or low. The key that confirms a price reversal is a break above the interim high on the W bottom and a break below the interim low at the M top. The interim highs and lows can often be used to determine where to place entry or exit orders, depending on your market position going into the pattern.

Head & Shoulders Top -  Head and shoulders top is a reversal pattern found in the top of trend, and it detects trend reversals from uptrend to downtrend. It contains three peaks; left shoulder, head and right shoulder. Head is the highest peak among them. There is a neckline connecting the low points of left and right shoulder. Minimum possible price movement equals to the distance from head to neckline of the pattern. 

Head & Shoulder's Bottom - Inverse head and shoulders/head and shoulders bottom pattern is the exact opposite to the head and shoulders top pattern. This pattern consists of three low points; left shoulder, head and right shoulder. Head is the lowest point among these three low points. Minimum possible price movement equals to the distance between head and neckline.

Rising Wedge - 

• A rising wedge is a bearish pattern that signals that the security is likely to head in a downward direction. The trend lines of this pattern converge, with both trend lines slanted in an upward direction. Again, the price movement is bounded by the two converging trend lines. As the price moves towards the apex of the pattern, momentum is weakening. A move below the lower support would be viewed by traders as a reversal in the upward trend. 

• As the strength of the buyers weakens (exhibited by their inability to take the price higher), the sellers start to gain momentum. The pattern is complete, with the sellers taking control of the security, when the price falls below the supporting trendline. 

Falling Wedge - 

• The falling wedge is a generally bullish pattern signaling that one will likely see the price break upwards through the wedge and move into an uptrend. The trend lines of this pattern converge, with both being slanted in a downward direction as the price is trading in a downtrend. Another thing to look at in the falling wedge is that the upper (or resistance) trendline should have a sharper slope than the support level in the wedge construction. When the lower (or support) trendline is clearly flatter as the pattern forms, it signals that selling pressure is waning, as sellers have trouble pushing the price down further each time the security is under pressure.  

• The price movement in the wedge should at minimum test both the support trendline and the resistance trendline twice during the life of the wedge. The more times it tests each level, especially on the resistance end, the higher quality the wedge pattern is thought to be. 

• The buy signal is formed when the price breaks through the upper resistance line. This breakout move should be on heavier volume, but due to the longer-term nature of this pattern, it's important that the price has successive closes above the resistance line. 

Rounded Bottom -  A chart pattern used in technical analysis, which is identified by a series of price movements that, when graphed, form the shape of a "U". Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements. This pattern's time frame can vary from several weeks to several months and is deemed by many traders as a rare occurrence. 

Diamond - A reversal pattern that is relatively rare – or perhaps envisioning it is just more uncommon – is the diamond pattern, formed by a series of prices that rally into a high, drop sharply, then rally again but fall off quickly to leave a more or less isolated pattern at a market extreme. The breakout can produce a sharp turn in prices such as the gap lower move on the chart beside. 

Thank You !

Technical Analysis vs Fundamental Analysis

 We start with a brief outline of the difference between Technical Analysis and Fundamental Analysis

Technical analysis relies on the price of currency pairs to identify trends and measure the price volatility of a given currency. With this information, you’re able to detect the trading signals (when to buy and when to sell). They also focus on volume data. Basically Technical Analysis analyzes the different Chart Patterns and provide forecasting. 

Fundamental analysis takes a different approach. Instead of evaluating the currency pairs, fundamental analysis requires to look at external factors such as the unemployment rate & the current political situation in that country. Politics can have enormous impact on the value of currency and many fortunes have been acquired by relying on the techniques of fundamental analysis. In other words, Fundamental Analysts examine the basics of a company. 

Why it matters?

• Fundamental analysis, like technical analysis, attempts to predict which stocks are valuable and which are not. According to its proponents, fundamental analysis offers a fuller picture of the possible movements of both the stock market and individual stocks because as many elements as possible are investigated. Technical analysis, on the other hand, only looks at past data of stock prices

• While Technical analysis is helpful for making short trades, and Fundamental Analysis is helpful for making longer term investment decisions, some traders employ both methods at the same time. For example, traders might first select a group of stocks that have strong fundamentals, such as high growth rates and increasing earnings. Such stocks might be considered good long-term investments on their fundamentals alone. But by then looking at the technical data, and identifying periods in which those stocks are undervalued, traders can purchase a stock at a bargain price with good odds of the price rising in the near future.

When to use What?

• Both fundamental and technical analysis is effective for Currency(Forex) Trading. It depends on us and our personality that which type of analysis is suitable for us. If one is a long term investor then he should focus on the Fundamental Analysis and if one is a short term investor, then he should focus on Technical Analysis. Both of these two methods of analysis have advantages and disadvantages, but these two methods can be combined to get better results in Forex trading.

• Fundamental analysis can help us to predict the direction of the major price movements. Then, we can confirm the major movement by technical analysis using trend lines, moving averages, breakouts and can also detect buy and sell signals. So, a trader can use fundamental analysis, technical analysis or both in a combination in forex trading. But one should use the method of analysis based on his personality, trading style and expectations.

Conclusion

Both technical analysis and fundamental analysis are helpful ways of evaluating stock data, and determining when the ideal buy and sell points are. When technical and fundamental analysis are combined, however, traders get the benefits of both worlds. And that's the type of trading edge that serious traders should explore.

Combining Technical and Fundamental Analysis

Understanding Technical and Fundamental Analysis

The two disciplines of fundamental and technical analysis are often set against each other and investors may think that they have to make a choice. While technical analysis can be performed on any chart, fundamental analysis, or the study of the actual components of the economy that represents a currency, can be quite a bit more subjective.

Fundamental analysis attempts to determine the value of a share by analyzing a company's financials from its annual report and using qualitative data about the environment in which it operates.  This value is often called intrinsic value.  The simplest form of fundamental analysis is by using fundamental ratios such as the price to earnings ratio or the dividend yield.  

Technical analysis offers a different view of a stock. It is based on the belief that all that is known about a stock is reflected in its price and volume.  The market is made up of a very large number of people who may have very different views on the market, making both long and short term decisions.  The activity of these very large numbers of investors and traders results in different patterns emerging in the market.  Technical analysts attempt to recognize these patterns and take advantage of them when making their investment decisions.

How to Combine Technical and Fundamental Analysis

Fundamental and technical analysis both:

• rely on past and present information
• can add value when it comes to managing risk
• have the same objective of forming an opinion about a stock that will add value to the investment decision making process.

While straight technical analysis is helpful for making short trades, and fundamental analysis is helpful for making longer term investment decisions, some traders employ both methods at the same time. For example, traders might first select a group of stocks that have strong fundamentals, such as high growth rates and increasing earnings. Such stocks might be considered good long-term investments on their fundamentals alone. But by then looking at the technical data, and identifying periods in which those stocks are undervalued, traders can purchase a stock at a bargain price with good odds of the price rising in the near future.

While there are a variety of software packages available to traders, only some of them offer the option of evaluating both technical and fundamental data. Evaluating historical fundamental data can be important, as it allows traders to back test their ideas prior to making any trades.

Both technical analysis and fundamental analysis are helpful ways of evaluating stock data, and determining when the ideal buy and sell points are. When technical and fundamental analysis are combined, however, traders get the benefits of both worlds. And that's the type of trading edge that serious traders should explore.

Thank You !

Continuation Chart Patterns

What are Continuation Charts Patterns?

Continuation patterns indicate a pause in trend, implying that the previous direction will resume after a period of time. We will look at the following patterns: price channels, symmetrical triangles and flags & pennants.A technical analysis pattern that suggests a trend is exhibiting a temporary diversion in behavior, and will eventually continue on its existing trend. Continuation patterns tend to be the most accurate when the trend has existed for around one to three months. 



Significance of Continuation Charts Patterns

• Continuation patterns suggest that a market is only pausing for a while before the prevailing trend will resume. Continuation patterns are usually shorter-term in duration than reversal patterns and are often classified as intermediate-term chart patterns. Some of the most common continuation patterns include: flags, ascending and descending triangles, pennants, gaps, and rectangles.

• Having a good knowledge of continuation chart patterns allows us to speculate positively about the further course of the trend. It allows us to add more to our position. Those who wants to hold on for a longer period are at ease not worrying about temporary pull back. These can be bullish continuation patterns or bearish continuation patterns.

Types of Continuation Charts Patterns

Triangles - are common patterns depicting converging of the price range, with higher lows and lower highs. The converging price action creates a triangle formation. There are three basic types of triangles: symmetric, ascending and descending. For trading purposes, the three types of triangles can be traded similarly. 

• Symmetric - A symmetric triangle can be simply defined as a downward sloping, upper bound and an upward sloping, lower bound in price. 

• Ascending - An ascending triangle can be defined as a horizontal upper bound and upward sloping lower bound. 

• Descending - A descending triangle can be defined as a downward sloping upper bound and horizontal lower bound. 

Flag - The flag pattern forms what looks like a rectangle. The rectangle is formed by two parallel trend lines that act as support and resistance for the price until the price breaks out. In general, the flag will not be perfectly flat but will have its trend lines sloping. In general, the slope of the flag should move in the opposite direction of the initial sharp price movement; so if the initial movement were up, the flag should be downward sloping. 

Pennants - The pennant pattern is identical to the flag pattern in its setup and implications; the only difference is that the consolidation phase of a pennant pattern is characterized by converging trend lines rather than parallel trend lines. 










Rectangles - A Rectangle is a continuation pattern that forms as a trading range during a pause in the trend. The pattern is easily identifiable by two comparable highs and two comparable lows. The highs and lows can be connected to form two parallel lines that make up the top and bottom of a rectangle. Rectangles are sometimes referred to as trading ranges, consolidation zones or congestion areas. 



Conclusion - 


Continuation patterns, which include triangles, flags, pennants and rectangles, provide some logic on what the market may potentially do. Often these patterns are seen mid-trend and indicate a continuation of that trend, once the pattern is complete. In order for the trend to continue, the pattern must breakout in the correct direction. While continuation patterns can help traders make trading decisions, the patterns are not always reliable. Potential problems include a reversal in a trend instead of a continuation, and multiple false breakouts once the pattern is beginning to be established. 

Thank You !