Technical analysis chart patterns

In finance, technical analysis is a technique which uses past market data, primarily volume and prices, to predict future movements of prices. Technical analysis is used on a wide range of financial instruments,including equities, bonds, commodity futures, and currency futures. The underlying logic of technical analysis is simple:
• Supply and demand determine prices;
• Changes in supply and demand cause changes in prices;
• Prices can be projected with charts and other technical tools.

As long as the chart represents the action in a freely traded market, a technical analyst is not required to possess detailed knowledge of that instrument. He does not even need to know the name or type of the security to conduct the analysis. Technical analysis is based on few main assumptions:
• Technical analysts believe that it is unreasonable to assume that investing is the one exception where humans always behave rationally since one's behaviour is influenced by many aspects of life and that market trends and patterns reflect this irrationality;
• Collective knowledge and sentiment is reflected in buying and selling activities of market participants, therefore actions of the traders determine volume and price of a financial instrument.

From the first assumption comes the existence of chart patterns. A chart pattern is a pattern that is formed within a chart when prices are graphed in a candlestick or bar chart and it is believed they represent the irrationality and influence of various aspects in the behaviour of traders. Chart patterns play a large role during
technical analysis of financial instruments. When data is plotted there is usually a pattern of support and resistance levels which naturally occurs and repeats over a period. Chart patterns are used as either reversal or continuation signals.


Quality
Quality is a reading which quanifies a pattern’s trend. It shows how well a price fits in the boundaries of a pattern's support and resistance (green and red lines in Figure 1) and how well it moves from one touch point to another (blue line in Figure 1). Calculations include the symmetry or asymmetry (depending on the pattern at hand) of support and resistance lines, the number of touch points and gaps between them, and a few other factors.

Figure 1. Channel Up pattern with 53% quality and 65% magnitude readings
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Magnitude
Magnitude is a reading which shows expected returns of a financial instrument which has formed a chart pattern.Calculation takes in to account minimum and maximum prices of the pair in chart and historical volatility. This helps to approximate the scale of the pair’s movements and potential returns after the pair breaks the pattern’s boundaries.

Figure1/1 magnitude
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This topic will introduce with main guidelines for patterns which can be found using the Dukascopy trade pattern tool on the JForex trade platform and provide real life examples for those patterns.

Characteristic:

• Price trend . The price trend leading to the channel can be from any direction.
  
• Shape.A pipe tilted up or down, but not horizontal.See rectangle for horizontal channels.
  
• Trend lines.The two trend lines should be parallel or nearly so.Both should tilt upward or both should tilt downward.
  
• Touches.The price should touch each trend line at least twice as distinct peaks or valleys.
  
• Crossing.The price should cross the pattern from trend line to trend line,nearly filling the available space.
  
• Breakout.Occurs when the price closes outside the trend line boundary and can be in any direction.
  

Figure 1. Example of Channel Up pattern
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Figure 2. Example of Channel Down pattern
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Characteristic

• Price trend.Can be any direction leading to the pattern.
  
• Shape.The price follows two down-sloping and converging trend lines
  
• Touches.The price should touch trend lines at least five times to outline a good pattern. That's three touches of one trend line and two of the opposite.
  
• Volume.Trends downward 72% of the time until the breakout.
  
• Breakout.Can be in any direction but is upward 68% of the time.
  
• Confirmation.The pattern is confirmed as a valid one when the price closes outside one of the trend lines.
  

Example of Falling Wedge pattern
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Characteristic

• Price trend.Can be any direction leading to the chart pattern.
  
• Shape.Triangular. Prices move between two converging trend lines.
  
• Trend lines.Two trend lines bound prices; the bottom trend line slopes up and the top one slopes down.
  
• Crossing.The price must cross the pattern from side to side, filling the triangle with price movement, not white space.
  
• Touches.The price must touch each trend line at least twice, forming distinct valleys and peaks.
  
• Volume.Trends downward 86% of the time.
  
• Breakout.Upward 54% of the time and 75% of the way to the triangle apex (upward breakout) and 73% of the way for downward breakouts.
  

Example of Triangle pattern
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Characteristic

• Price trend.Can be any direction leading to the chart pattern.
  
• Shape.Triangular. Prices move between two converging trend lines.
  
• Trend lines.Two trend lines bound prices; the top trend line is horizontal and the bottom one slopes upward.
  
• Crossing.The price must cross the pattern from side to side, filling the triangle with price movement, not white space.
  
• TouchesThe price must touch each trend line at least twice, forming distinct valleys and peaks.
  
• Volume.Trends downward 77% of the time.
  
• Breakout.Can be in any direction but is upward 70% of the time.
  

Example of Ascending Triangle pattern
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Characteristic:

• Price trend.Can be any direction leading to the pattern.
  
• Shape.A price pattern bounded by two trend lines, the bottom one horizontal and the top one sloping downward.
  
• Touches.The price should touch each trend line at least twice as distinct peaks or valleys.
  
• Crossing.This is important:the price must cross the pattern from trend line to trend line, nearly filling the available space. Avoid descending triangles with abundant white space.
  
• Volume.Recedes 83% of the time and gets quite low just before the breakout.
  
• Breakout.Can be in any direction but is downward 64% of the time.
  
• Confirmation.The pattern is confirmed as a valid one when the price closes outside one of the trend lines.
  

Example of Descending Triangle pattern
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Characteristic

• Price trend.Downward leading to the pattern.
  
• Shape.Two distinct valleys that look similar. Eve bottoms are wide and of a more rounded appearance. Adam bottoms are narrow, V-shaped, sometimes with one long price spike. Spikes that appear tend to be numerous and short.
  
• Peak.The rise between bottoms should measure at least 10% of the move leading to the first bottom, but allow variations.
  
• Bottom price.The price variation between bottoms is small, usually between 0% and 6%. The two valleys should appear to bottom near the same price.
  
• Confirmation.The double bottom confirms as a true double bottom once the price closes above the peak between the two valleys.
  
• Volume.Usually higher on the left bottom.
  

Example of Double Bottom pattern
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Characteristic:

• Price trend.Upward leading to the pattern.
  
• Shape.Two distinct tops that look similar. An Eve top is rounded and wide looking, but sometimes has several short spikes poking out. Adam tops are narrow, inverted Vs.
  
• Valley.The valley between the tops should measure at least 10% of the move leading to the first top, but allow variations.
  
• Top price.The variation between price peaks is small, less than 3%.The two tops should appear to peak near the same price.
  
• Confirmation.The double top confirms as a true double top once the price closes below the valley between the two peaks.
  
• Volume.Usually higher on the formation of the left peak.
  

Example of Double Top pattern
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Characteristic:

• Price trend.Downward leading to the pattern but should not drop below the first bottom.
  
• Shape.Three distinct valleys that look similar.
  
• Bottom price.The price variation between bottoms is small such that it appears the three valleys bottom near the same price. Allow variations.
  
• Confirmation.The pattern is confirmed as a true triple bottom once the price closes above the highest peak between the valleys.
  
• Volume.Usually higher on the first bottom than on the last, trending downward 67% of the time, but it may peak beneath each valley.
  

Example of Triple Bottom pattern
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Characteristic:

• Price trend.Upward leading to the pattern.
  
• Shape.Three peaks near the same price with a downward breakout.
  
• Middle peak.Sometimes the middle peak is priced marginally below the other two.
  
• Volume.Trends downward 59% of the time, but is usually high beneath the formation of each peak.
  
• Bear market.More triple tops appear in a bear market than in a bull one.
  
• Confirmation.The pattern becomes valid when the price closes below the lowest valley in the pattern.
  

Example of Triple Top pattern
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Characteristic:

• Price trend.The price trend leading to the pattern can be from any direction.
  
• Shape.Prices have flat tops and flat bottoms, crossing the pattern from side to side following two parallel trend lines.
  
• Trend lines.Two near horizontal trend lines bound the price action.
  
• Touches.The price should touch each trend line at least twice using distinct peaks and valleys.
  
• Volume trend.Trends downward at least 66% of the time.
  
• Breakout.Opposite to the price trend direction 55% of the time.
  

Example of Rectangle pattern
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