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One of the biggest issues that intraday traders have to deal with these days is high tech trading that is driven by lightning fast execution and analysis capabilities that are driven by computers that typically reside at the exchange and that can see and respond to order flow at a level 99% of all traders could not compete with. Often these algorithms are written by high level mathematics graduates from top institutions and these guys really know how to find and exploit an edge in the market in fast time frames.

Often trading activities like this have high volume and trading activity from big money players, algorithmic traders and high frequency traders. Today I am going to show you solid and proven techniques for exploiting where these traders and other traders get on the wrong side of the market that can help you to effectively trade at a discount due to mispricing associated with these kinds of trading activities.

These mispricing of other traders is a very valuable thing for you to know and understand. In my many years of trading in a live trading environment, I have learned that keeping track of complicated order flow computations can be mentally harrowing for traders. In addition to this, and in order to make best benefit, you need to be able to execute at a level you are not likely able to compete with. Further still, these traders often pay next to nothing in commission and have very large amounts of capital to allocate to these trading operations.

So, the question becomes how does a regular retail trader find a tradable edge in such an environment? The answer is fairly simple but the details of it are what makes all the difference, so take a journey with me into a world that can

•  benefit in the market with a solid edge
  
•  that can be executed
  
•  that a trader can mentally handle and
  
•  benefit from in the moment.
  

This kind of trading is fun and profitable and bypasses trying to be something that you are not; a trading Bot. First and foremost, you want to trade in a market that has consistent potential for gain. This is so important, I cannot stress enough this single decision that many traders often don't really even think about. For this, my first choice will be crude oil futures (though it works in any reasonably volatile market). Why crude oil? Because it moves over a 85 ticks per day ($850 per contract) in general for the day session and has a 10 tick execution structure.

This makes the cost of getting into a trade quite low because the bid/ask spread in this market is $10 where many other markets are $12.50, $31.25 or more. This is crucial to managing costs while still having a large potential for return. Back to that $850 range mentioned above. As of this writing, in each of the last 21 days (approximately a month of trading days), only 3 days did not meet this level of range. This means 81% of the time you move $850. Often it is much larger, but lately, and/or as of this writing, it happens to be a bit low.

This kind of analysis is super simple and can be done on a chart by eye with a range indicator applied in just a few minutes. Another interesting characteristic of this market is something that we call "Stretch". This term was originally coined by renowned trader, Toby Crabel. It is simply how far the market tends to move off the open before the low or high of the day is formed and it goes the $850 we described above in the other direction. This is also like asking the question, "at what point do I know the low or high of the day is in place." If I know the high or low is in, then I can trade for the remainder for the expected range with 81% probability and that is a very valuable thing indeed!

Let's take a closer look. Let's say we are able to fire our trade at $200 off that low or high. Well, if $850 is the minimum expected then that leaves $650 of potential. This happens on many days and, in fact on many days it is much more. Now, you may have noticed at this point we started talking about bots and high level math grads and super fast computers at the exchange etc. But here we are using the same kind of intelligent logic these high level math guys are using, but we are putting it into a scale WE can actually use and benefit from.

And, that is a very nice thing! ? Now that we have a good idea as to the playing field, and a good idea of how the game is played, now what we want to do is figure out a way we can exploit that in such a way that we can be relaxed (not in a state of mental overload), and entirely aware of what the market is trying to do within reasonable limits when we take a trade. In fact, with what I am about to show you, those bot guys just might be on the other (wrong) side of the trade you are taking.

Why? Because I am going to show you another secret; that of exploiting places on your chart where traders are trapped on the wrong side of the market and where you can benefit from that in the general direction of that $850 / 81% expansion!

In order to do that, we are going to look at the Trapped Trader Oscillator that we use in the Oil Trading Room every day. We have turned this level of analysis into an art form there and many traders are learning to do the same every day. So, here I will show you a couple patterns and charts so you can see how this works in a way you can certainly benefit from every day if you put your mind to it!


In the chart below, I have each 30 minute period of the day labeled A, B, C etc. One trade we can look for that was described above is trading away from the test of the range that ends up being the low or high of the day on most days. This often, but does not always occur, somewhere around the completion of the AB periods. This occurs after the market has established the "Stretch" for the day (remember above?).
Now, on this particular day (see below), the market traded through A and B period and then what typically happens is you retrace into the original run up and then the Smart Trapped Trader Oscillator helps us to find the traders who got on the wrong side. We know there is good potential here for range expansion. So, let's take a look!
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Before continuing further, let's cover a simple rule that will make this even clearer: When price is higher and the Trapped Trader Oscillator drops below prior lows, then there are trapped traders are on the wrong side if the market reverses. When this occurs, they are forced out of the market going the wrong way. This tends to propel price action in the direction of your trade. We always trigger into the trade on the background color change on the chart.

So to buy, that is where the pattern exists on the Smart Trapped Trader Oscillator and you get a green price bar and a green background color change, or a red background and a red price bar to sell. Knowing this, let's take an even closer look with a textbook example. Let's take another look at the chart above and the relationship between the Trapped Trader Oscillator and the price action. During the first hour of the day (AB periods) the market had a high and low of 45.53 and 45.15 respectively.

This is a 38 tick range or $380. The market then retraced back into the same low from earlier in B period forming a double bottom (about 7:01 AM). At the same time, the Trapped Trader Oscillator went below the last three prior lows, making it the lowest value of the day.

At this point, the price was 45.27 which is only 12 ticks off the low of the day. If we are expecting 85 ticks minimum with an 81% probability that we discussed above, then we would have 85 minus 12 ticks of potential, or 73 ticks ($730 of potential) with a better than 80% probability. The range promptly expanded up to the C period high or, about 60 ticks from the entry arrow marked on the chart for about $600 in total potential per contract in about 12 minutes.

This set-up doesn't happen exactly this way every day because there are themes and variations of this movement that fall into this general category of trade. We also have other simple statistics that support the trade. 

This general theme of knowing 
a) the range, 
b) the probability and 
c) where the traders are trapped creates ongoing potential throughout the day. We have not expired our entire expected range yet (remember it is 85 ticks?), especially if we get a nice retracement here. 

So, let's take a look at the next alternation:


The next alternation going higher, occurred after the market traded down 25 ticks off the high in period C. At this point, it retraced to 45.72 which was about 60 ticks off the low. If we are expecting a minimum of 85 ticks, then 25 more are expected. In this case, you weigh out as a trader if you want to take the trade based on the risk you are assuming (often we can trade these with about 10-15 ticks of risk on average or less).

So, you take the trade at the arrow, and ride it up into the 85 tick level in D period. Period E was the high of the day and a new trend downward was established following that. So far we have covered two Smart Trapped Trader Oscillator patterns. Now I want to show you a third before telling you where you can learn more about this kind of bot free trading. This next pattern involves a traditional divergence pattern near a high or low that is then followed by the Smart Trapped Trader Oscillator taking out the right hand side of the divergence. That would look like this to sell (see the red down arrow):


So what we have here is the H period high formed a downward pattern on the Smart Trapped Trader Oscillator (note the high of H period is lower as marked by the first slanting magenta line). Then, once you get that pattern, look for the trap. The trap occurs when the Smart Trapped Trader Oscillator goes above the right shoulder of the first pattern. The logic of the trade is as follows: The market was weak at the H high BUT, some guys got all excited and bought too much at J high.

This ended up being the high of the day. The market traded down another 50 ticks ($500 of potential) into the low area on the right side of the chart. Trading with the Smart Trapped Trader Oscillator can be very rewarding and there are other patterns that can be learned and exploited.

THE UPSIDE OF FUTURES

The lure of zero sum markets is based on real advantages over equity markets. The tight spreads, quick FIFO order fills, 24/6 trading hours and low margin requirements make futures trading genuinely attractive. There are also tax advantages, as the reporting is much simpler (no wash sale rule) and taxes are typically less for active traders. No wonder many of the famous ‘market wizards’ made their fortunes in the futures markets, not in stocks.

Richard Dennis, for example, the former ‘Prince of the Pits’ who initiated the great Turtle experiment in the early 1980’s, reportedly turned $400 into several hundred million trading commodities in Chicago. Standing right behind the bold Prince, however, was a shy, bookish mathematician named William Eckhardt. The two men had complementary skills that together gave them a unique tactical and psychological edge over the short-term scalping tactics employed by most traders during that time.

ELUSIVE EDGES
Zero sum markets offer an abundant opportunity flow, but they evolve faster than equity markets, so ‘edges’ become harder to maintain. In a 2003 interview published in Stocks & Commodities magazine Richard Dennis noted that trading futures had become “10 times harder now than it used to be.” To further illustrate this point, Larry Williams won the World Cup Futures Championship in 1987 with an astounding 11,376% annual gain.

Ten years later his daughter Michelle won the same contest with a 1000% gain using the same %R techniques. Over the last decade, however, the best futures traders in this contest generally post annual gains between 200% and 600%; substantially less than the Williams’ family attained. Last year’s winner, Michael Cook, netted 366%. Have the futures markets become even more difficult than they were in 2003? I think the answer is ‘yes.’

To participate in the opportunities they offer today requires significant psychological and technical adjustments on the part of aspiring traders, especially those who come to futures from equities. A quick look back at how these markets have evolved may provide some context as to why.

BACKGROUND B2B IN THE RAW

The commodity options and futures markets in the U.S. were originally developed in the mid-1800’s as a place for agricultural professionals (producers, hedgers and large speculators in butter, eggs and grains) to transact business directly with each other. They were conducted on special octagonal platforms via open outcry. The Chicago Mercantile Exchange building, built in 1885, was the largest commercial building in Chicago at the time and the first to have electric lights; a testament to its economic importance.

Until recently, the futures markets were exclusively B2B (business to business) and they still operate without the dedicated intermediaries that manage order flow for equity trading, i.e., the market makers and specialists whose job it is to interface with a wide variety of buyers and sellers (retail and professional) in order to supply liquidity and dampen volatility. No wonder they lack the orderly demeanor associated with equity bourses such as the NYSE.

Although former floor traders boast that futures markets have historically maintained liquidity during a crisis better than the NYSE, they accomplished this feat in a very raw, in-your-face manner. What’s new is that small speculators like you and I are now able to participate in these professional markets from the comfort of our home office. However, the presence of new participants and the migration to an electronic platform has significantly changed the game.

THE NEW ANONYMITY
Twenty years ago 99% of futures trading was conducted on ‘the floor’ where a typical professional futures trader might execute 60 trades per hour. Last year, however, floor trading accounted for just 1% of the total futures volume. If you ask a seasoned floor trader about screen trading, most will tell you that it has made their lives more difficult and less profitable. Previously, they were able to see, hear and feel information about the counterparties to their trades, as well as observe the behavior of certain key individuals in the ‘pit.’ In today’s electronic marketplace, however, the players are anonymous.

The counterparty to your last trade could be a private trader like you, or a robot, or a housewife in Japan, or a trader at a fund in Connecticut, or a teenager with a trading app on his phone. (Imagine for a moment that you could actually know.) From a simple business school perspective, participating in a continuous auction conducted by anonymous buyers and sellers raises the following concern: “How does one conduct a profitable trading business when one doesn't know the identity or motivation of the person selling to you or the person you are selling to?” One answer is to simply apply a mechanical method. Richard Dennis succeeded in large part because he partnered with a mathematician and today most math Ph.D.’s are hired by the financial industry.

To research non-discretionary mathematical trading methods further read Trade like a Casino by Richard Weissman. Most traders in zero sum markets, however, are discretionary. Discretionary trading relies on one’s ability to make rational buy and sell decisions in real time, based on one’s assessment of market context and conditions. The more discretionary your method, the more vulnerable you will be to ‘The Game.’

THE GAME TRADING THE TRADER
While electronic platforms supposedly level the playing field, they actually give new advantages to the larger participants, and to those capable of building trading bots that can identify and exploit certain very short-term advantages in price action. If you come to these specialized, professional markets from equities, as most aspiring traders do, you will inadvertently bring attitudes, rules, techniques and behavior that are maladaptive within this ecosystem and make you vulnerable to exploitation. Specifically, it’s now common practice for certain players to manipulate price action in a way that induces smaller fish to execute a low-odds entry… and then squeezes them into liquidation (a stop out). (See Fig. A).

As you may have noticed, however, that almost immediately after this ‘wash and rinse’ event, the market will often reverse and resume trading in the original direction. Indeed, zero sum markets operate on principles that are generally the opposite of what you have been taught in books and courses about equity trading. Accordingly, most of what you know and trust about how markets work will be used against you in this environment.

That’s because coming from equities, your mindset and your behavior are predictable. In fact, the more carefully you follow those rules and procedures, the easier it will be for the zero sum ‘natives’ to locate your stops and your Uncle Point (the point of maximum pain). This information will enable these more experienced traders to squeeze you into liquidation. Bottomline, these folks are not trading “the market,” they are trading you. In summary, contrary to what you might read in industry promotional material, the modern zero sum universe is ruled by a rather perverse and paradoxical principle: In zero sum markets, the more you try to be the good and responsible trader you have been trained to be, the more punishment you will receive.

THE COST OUT OF SYNC

If you are not prepared to think and behave opposite to what works in equities you will often find yourself out of sync with these markets. Since making this shift is difficult to do, the most common psychological effect is a gradual decrease in one’s adherence to a defined trading plan (which doesn’t seem to be working anyway) and an increase in experimentation with alternative strategies. This exacerbates any tendencies you may have to make up stuff on the fly. Or it may have the opposite effect and foster a paralysis of analysis, so you remain on the sidelines or hide out in the Simulator. In the end, however, the psychological effects of being out of sync with the market (too many losses) can wear you down.

THE DOUBLE BIND
For the vast majority, trading these markets eventually becomes a struggle in contradiction: an imperative to put on risk and an equal aversion to losing. The state of self-contradiction will cost you dearly in this game. If doubts and fears are your constant companions, you will hesitate when you need to be bold and act boldly when you should hesitate.

If you are like most private traders your experience with futures has been mean reverting (like the market itself):

•  You have good days/weeks followed closely by bad days/weeks;
  
•  You've enjoyed fantastic run ups and given it all back (more than once);
  
•  You over-trade and/or you under-trade;  You risk too much and/or you hide out in SIM;
  
•  You constantly try new things and/or you are paralyzed by over-analysis. You have probably been ready to give up, but you can't give up. You have re-funded your account several times. Your family secretly thinks you're crazy and you sometimes agree, but on the other hand, success feels like it's just around the corner. This is the double bind that keeps you awake at night.
  

IS IT ME OR THE MARKET
The majority of aspiring traders in zero sum markets fail rather quickly. Those who survive the initial shake out are incredibly persistent, but my research data also show no correlation between the number of years one has been trading zero sum markets and one's profitability. Indeed, despite above average intelligence and a lot of hard work, despite previous business success, despite sophisticated software, despite instant access to price data and news, and despite mentoring by successful, charismatic traders... many zero sum ‘survivors’ are stuck at breakeven. Simply spending more time at your screens isn't likely to yield the results you want. In moments of introspection you naturally wonder whether there's something wrong with you.

You've researched trading psychology in order to formulate a plausible self-diagnosis. You ask yourself questions such as:

•  Am I sabotaging myself due to unconscious programming and limiting beliefs? (Maybe I should try NLP.)
  
•  Am I afraid of success even though I've been successful in business? (Maybe I should try hypnosis.)
  
•  Am I just not smart enough, quick enough, young enough to make this work? (Maybe I should take smart pills.)
  
•  And for Pete's sake, why can't I control my impulses and emotions like a normal person.
  

GOING FOR THE BREAKTHROUGH
Naturally, you are looking for a breakthrough, but in my view, an heroic, all-in, walk-on-hot-coals Tony Robbins style effort is unlikely to do much good. Why? To paraphrase Einstein, one can't solve a trading problem with the same level of thinking that created it. Most individual (retail) traders in zero sum markets can’t solve the market riddle because they operate within a paradigm derived from the respected rules of traditional technical analysis tailored to the equity market. This makes it impossible to recognize the actual rules of the zero sum game, let alone win it.

MAKE THE MINDSHIFT
To succeed in zero sum markets requires a mindshift. Let’s examine some of the ‘non-standard’ technical features of this market and what you can do to avoid getting fooled by the games.

MEAN REVERSION
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Regardless of timeframe, zero sum markets are like an alternative universe where the normal laws of physics are suspended, and mostly work in reverse. Instead of Gravity, Momentum and the Pursuit of Gains, one finds a world ruled by the Law of Mean Reversion and the Pursuit of Stops. This is the most important Mindshift you need to make. It’s the opposite of Newton’s first law (objects in motion tend to stay in motion); in this world objects in motion tend to reverse.

Trends do happen, but they don’t necessarily persist and breakouts often fail. The trend-following Turtles generally had only 4-5 profitable months per year. The rest of the time their job was to not lose too much money in the chop. Zero sum markets are psychologically challenging because they demand an extraordinary ability to “go with the (order) flow,” which changes direction frequently and retraces more deeply than equity traders expect.

The 61.8% Fibonacci retracement level, for example, is consistently violated in the futures markets… by just enough to stop out equity-trained pullback traders before the trend resumes. In equities, breakouts after a consolidation (e.g., a cup and handle pattern) usually work, at least in bull markets. Trading breakouts in zero sum markets, however, is semi-suicidal. One reason is that zero sum markets price-in news events very quickly and that sets the stage for almost immediate mean reversion.

While the novice trader is looking for a way to get in after believing that a new trend is now confirmed by the breakout, professionals are looking for an opportunity to fade this price action and run the breakout trader’s stop. Gotcha! Those with a rigid mentality, strong opinions and a stubborn need to be right have little chance of long-term success in markets that change their mind so often.

Anecdotally, this may be why doctors generally have difficulty trading futures even though they are smart, while pilots and others accustomed to making many mid-course corrections tend to do better. Trading these whippy markets requires flexibility and discipline in equal measure, a fairly rare combination. FYI… my AWARE® Trader Personality Profile, available for free on my website, will give you information about your trader temperament. To get full value, I recommend requesting a free 15 minute consultation on the results.

TIME COMPRESSION / PRICE EXPANSION
Like the twin jaws of a vise grip, zero sum markets apply pressure to participants in two ways: time compression and price expansion. These forces work together to elicit liquidation on the part of smaller traders. To prosper in this environment you have to learn to use these two key processes to your advantage. You want to be the squeezer, not the one being squeezed.

TIME PIVOTS
There is an intraday (day session) Time Pivot cycle that can turn a simple day session into a much more dramatic 5-act squeeze play:
1. The Open (i.e., the Opening Range);
2. The Morning Reversal;
3. The Mid-day Consolidation;
4. The Afternoon Reversal; and
5. The Close.

Each of these ‘acts’ has a beginning, middle and an ending, which represent opportunities to profit or opportunities to get squeezed. Trading the Open, however, where you are often dealing with gaps, half-gaps, opening ranges, etc., is the trickiest part of the day and is a specialized art. The ‘opening range’ is defined according to the time frame you trade. It could be the height of the first 1 minute bar or the range of the first hour.

If you are not familiar with the various opening range plays (setups), then wait before getting involved. Look for the Reversals 30-60 minutes after the open and before the close. They usually occur a few minutes on either side of the hour or the half hour and they are not the same every day. They are probable, but not reliable. In other words, don’t over-anticipate them. The above list is the general Time Pivot pattern in the index futures, but the pattern is likely to be different in other markets.

What’s important is that you research the time patterns in the market you trade. When the time tide shifts, do your best to recognize it, don’t fight it. If you can do this, they provide some of the best trading opportunities because these reversals seem to come from nowhere and catch many traders wrong-footed. That’s a squeeze that you want to avoid, and hopefully capitalize on.

DANGER OR DINNER
Time feels compressed in zero sum markets because price action is expanded, especially around these time pivots. The extreme leverage in zero sum markets generates intense pops and drops. It is difficult, however, to filter signal from noise because the magnitude of price action does not necessarily signify a valid trend change. Sudden moves of magnitude do catch our attention at the level of the deep brain, however.

We spent millions of years as hunter gatherers when sudden moves in the environment meant either danger or opportunity. It’s very difficult to turn those reactive circuits off because they stimulate dopamine, a very powerful motivator. You see a wide bar, and a part of your brain sees either danger or dinner. This leads to quick exits or to chasing (buying high and selling low), which is the bane of most novice futures traders. We chase because it’s human nature to assume that the fast move is meaningful; the start of something (objects in motion…). If you buy high or sell low in zero sum markets, however, you are taking a high risk entry.

Sharp spikes are much more likely to be the end of something (exhaustion) and result in mean reversion rather than in continuation. Instead of chasing, aspiring traders must come to terms with the fact that a sharp move means you have probably missed out. If you chase because you have a Fear Of Missing Out (FOMO), it will be an adverse influence on your P&L. At the end of this report you will find an offer that can help reduce that behavior. Suggestion: Develop a method based on low volatility entries (like John Carter’s famous squeeze entry). Because our brain is calibrated to notice sudden moves, it takes some training to recognize moments of equilibrium in the market as significant, but they can be very useful.

CHART EXAMPLES

Here are some examples of the differences in the two environments (equities & zero sum) with screenshots to illustrate the points. :

THREE KEY STEPS
Follow these three steps to adapt to this new environment. Step 1. Understand the new game (yes, they intend to fool you.) Step 2. Stop making costly errors due to chasing or other exploitable behaviors. In other words, clean up your act. Practice new behaviors that are exactly the opposite of how your gut and your previous training urge you to behave. Step 3. Develop a trading method (mechanical or discretionary) that takes advantage of the predictable behavioral patterns generated by the mistakes of less skillful traders. That will quickly put you on the winning side of the game.

ACCELERATE THE MINDSHIFT!
You now understand more about the nature of the zero sum game. Are you ready to integrate this knowledge into your actual trading? Simply reading about it won’t necessarily make the lasting changes you want, nor will it make them as quickly as you might like. Here’s the most powerful way to catalyze the mindshift required to trade these markets.

What is the [You must be registered and logged in to see this link.] characteristic of great traders? In his book Trading in the Zone, Mark Douglas says simply, “Great traders are not afraid.” I would go one step further. I’ve worked with some of the best traders in the business. I’m talking about guys with unlimited capital, trading six markets at the same time. The one thing that differentiates them is that they are POSITIVE about everything that happens to them and everything they do. This POSITIVE attitude enables them to think clearly, take losses in stride and not be ego-inflated by their wins.

POSITIVE TRADING PSYCHOLOGY: WHY IT WORKS I’m 100% certain that they are not positive merely because they are winning; they win because they are positive to begin with. There is ample evidence from my field of specialization (clinical psychology) and sports psychology to back up this assertion. Most aspiring traders, on the other hand, fall into the double negative trap (not losing, not being wrong, not missing out, not leaving money on the table, etc.), but in real life and in trading two Negatives never makes a Positive. Instead, that subtle, creeping negative attitude actually confuses and demoralizes the brain and most traders don’t realize how negative they have become.

THE NEGATIVITY TRAP
There’s a simple reason traders fall into the Negativity Trap: the human brain is hardwired to pay the most attention to bad news. It increases our odds of survival. Do you remember the joyous moments in trading as vividly as the painful ones? Probably not. And even though you may know intellectually that trading is a probabilistic undertaking and losses cannot be avoided, a critical part of your brain absolutely hopes/believes otherwise.

Indeed, there is a part of your brain (the amygdala) that I call the Risk Manager, that frets about every single loss… and that’s a problem. You will find it difficult to take losses in stride because your Risk Manager’s Prime Directive is to keep you and your family safe and secure. A failure to bring home the “bacon,” or losing the bacon you already had, is something the Risk Manager takes very seriously.

You see, survival isn’t merely an ‘option,’ it’s an imperative, so the attitudes and behaviors that bear directly upon our survival are not controlled by our conscious thoughts, which are variable, but by our instincts, which are invariably reliable. But instincts are narrowly focused all-or-nothing reactions. Because financial losses (of any size) threaten our basic sense of security, they are closely scrutinized by the Risk Manager.

In fact, your brain is programmed to feel the pain of financial loss acutely, so that it has a better chance of avoiding it next time. This can make trading feel like “death by a thousand cuts.” And because the Risk Manager in the brain cannot actually count, I’ve literally seen multi-millionaire traders agonize over a $100 loss!

I’m not making this up. Research studies indicate that financial losses have about 2.5 times the emotional impact compared to the pleasure that comes from winning the same amount of money. This built-in imbalance has huge consequences for your trading. To meet the challenge of zero sum markets successfully, it is imperative that you cultivate a mindset that can quickly rebound from losses, so they don’t create a self-fulfilling cycle of negativity.

Ever seen such Profits? Then you should check the [You must be registered and logged in to see this link.] Forex trader at this unique platform where you can find the top 10 all in once place.

MACD is an acronym for Moving Average Convergence Divergence. This tool is used to identify moving averages that are indicating a new trend, whether it’s bullish or bearish. After all, our [You must be registered and logged in to see this link.] priority in trading is being able to find a trend, because that is where the most money is made.
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With an MACD chart, you will usually see three numbers that are used for its settings.The first is the number of periods that is used to calculate the faster moving average.The second is the number of periods that are used in the slower moving average.And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.

For example, if you were to see “12,26,9” as the MACD parameters (which is usually the default setting for most charting packages), this is how you would interpret it:

• The 12 represents the previous 12 bars of the faster moving average.
  
• The 26 represents the previous 26 bars of the slower moving average.
  
• The 9 represents the previous 9 bars of the difference between the two moving averages. This is plotted by vertical lines called a histogram (The blue lines in the chart above).
  

There is a common misconception when it comes to the lines of the MACD. The two lines that are drawn are NOT moving averages of the price. Instead, they are the moving averages of the DIFFERENCE between two moving averages.In our example above, the faster moving average is the moving average of the difference
between the 12 and 26 period moving averages. The slower moving average plots the average of the previous MACD line. Once again, from our example above, this would be a 9 period moving average.

This means that we are taking the average of the last 9 periods of the faster MACD line, and plotting it as our “slower” moving average. What this does is it smoothes out the original line even more, which gives us a more accurate line.

The histogram simply plots the difference between the fast and slow moving average. If you look at our original chart, you can see that as the two moving averages separate, the histogram gets bigger. This is called divergence, because the faster moving average is “diverging” or moving away from the slower moving average.

As the moving averages get closer to each other, the histogram gets smaller. This is called convergence because the faster moving average is “converging” or getting closer to the slower moving average. And that, my friend, is how you get the name, Moving Average Convergence Divergence! Whew, we need to crack our knuckles after that one!

Broadening Top is a rally to a new high, weakness to an intermediate support level, a second rally to a
higher high on increased volume and decline through the intermediate support level, a third rally to a higher
high on strong volume followed by a eventual collapse.

Because Broadening Tops are very large reversal patterns, the technical implications are usually extreme. The measured target is derived by subtracting the height of the pattern from the eventual breakout level pattern from the eventual breakout level.
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• Unlike most consolidation patterns, broadening tops feature increasing wide ranges and greater
volatility as time passes.
• Volume increases as the share prices rises. Normally this is bullish but rallies prove very short-lived
and declines "take-out" previous support levels.
• Broadening formations are only found in topping formations because they are the product of
unrealistic expectations on the part of bullish investors.
• Downside breakouts often lead to small 2-3% declines followed by an immediate test of the breakout
level. If the stock closes above this level (now resistance) for any reason the pattern becomes invalid.

Whereas some technical patterns are characterized by consensus and a general lack of volatility, the same cannot be said about the broadening top. These patterns always feature indecision and extreme volatility. When one looks at the pattern the resemblance to a megaphone is striking. The stock makes a series of higher highs and lower lows. Normally as time passes and more information is disseminated, investors come to consensus and volatility slows but just the opposite is true of broadening tops.

There are distinct parts of every broadening top formation. The first of three small tops (top [You must be registered and logged in to see this link.]) occurs after a spectacular run to new high on increasing volume. Generally, this advance will be the result of better than expected earnings, a new product and/or a barrage of Wall Street recommendations. However, as
the stock surges to new highs sellers also step-up selling efforts and it is not long before the stock settles back to a prior support level (a).

After several sessions of slower trade more positive news pushes the stock to yet another new high on increased volume (top [You must be registered and logged in to see this link.]). The increased volume should be a sign that bullish consensus is building but once again the stock falters, falling to a relative new low (b) just days after making a new high. Although the news flow is still very positive, rumors begin to circulate that some institutions and insiders are beginning to liquidate positions.

It is at this time that there is a full scale defense of the stock by bullish investors. Wall Street firms make new recommendations with lofty price targets and once again, the stock begins to move higher. Although volume is strong, it is noticeably less than the prior rallies. The stock moves to third new high (top [You must be registered and logged in to see this link.]) in as many attempts. All of the news is positive. The company may be raising guidance, setting a stock split or talking about the outlook for new products. The prospects seem bright but even as the stock is making a new high, there is skepticism among some investors.

Days later the stock begins to falter on increased volume but no specific news. Several days later the stock is collapsing and support at the most recent low is in jeopardy. There is news that a large shareholder has filed to sell stock, bullish investors panic. Weeks later the stock sinks back to the longer-term support level.

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Triple Top is a pattern very similar to the Double Top -- only there are three distinctive tops rather than two. A triple top formation is a distinct chart pattern characterized by a rally to a new high followed by a moderate pullback and a second rally to test the new high. As the stock rallies to make the second peak (top) sellers overwhelm buyers and the stock price falters again This process is repeated a third time but buyers finally submit, support levels are broken and a massive decline ensues.

The technical target for Triple tops is derived by subtracting the point difference between the top [You must be registered and logged in to see this link.] and the reaction low from the breakout level. After the third top has been created, the breakout level is the low created between tops [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.]. No triple top formation is complete until the stock falls through this point.

• For a valid triple top volume should decline on rallies toward tops [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.] and increase into
weakness. These volume trends confirm that distribution is taking place into strength.
• Although the lows made during the trough between tops [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.] will often exceed the reaction low,
such price action is not necessary during the formation of a triple top.
• No triple top is truly complete until the stock in question closes below the lows made during the
trough between tops [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.].
• Downside breakouts often lead to small 2-3% declines followed by an immediate test of the breakout
level. If the stock closes above this level (now resistance) for any reason the pattern becomes invalid.
Triple Tops occur largely for two reasons. First, those investors that purchased the stock "correctly" (at lower prices) use good news to liquidate their position. In this sense the triple top is a distribution pattern because smart buyers are distributing stock.Second, those investors that purchased the stock "wrongly" on the good news refuse to exit their positions until they can do so without suffering a loss.

Triple tops occur after extended rallies leading to new highs. As the "story" of the stock becomes more widely accepted investors are willing to pay increasingly exorbitant prices but at some point those investors that purchased the stock at lower levels feel the urge to take profits.Normally, the bulk of these sellers will use a positive news event such as an earnings report, analyst upgrade or stock split announcement to begin unwinding long positions. This selling pressure on good news creates resistance, prices begin to fall (top [You must be registered and logged in to see this link.]).

This first top will normally be sufficient to force many of the more speculative investors from the stock. As they sell the price of the stock falls further but many investors will not sell regardless of how far the price falls because they refuse to take a loss.After several sessions of poor price performance the stock will begin to stabilize creating what technical traders call a reaction low because this move lower was a reaction to the news events of top [You must be registered and logged in to see this link.]. Slowly the stock begins to move higher.In most cases this advance will occur because the actual fundamental news remains positive. As the stock rises volume slows and investors that did not sell or bought at the first top get ready to exit positions into further strength.

As the stock approaches the prior high volume surges and new buyers begin to talk about the continued bright fundamental prospects -- it looks as though new highs are imminent. It is at that moment that all of the investors that want to sell existing positions begin selling. Volume surges and the stock soon retreats (top [You must be registered and logged in to see this link.]). On the chart two equal peaks are created and recent buyers begin to realize that resistance at these levels is formidable. Selling begins and the stock moves lower on increased volume as recent buyers panic.

In most cases the stock will actually fall through the reaction low, setting-up a perfect double top pattern but as this key support level is violated, selling does not intensify, in fact, a rally quickly ensues as short sellers begin to cover positions.Against the backdrop of more positive news and short covering the stock quickly moves toward the old high. Volume is light but there is continued talk of bright fundamental prospects and new highs. As the stock reaches the prior tops volume accelerates and a distinct third "top" is created (top [You must be registered and logged in to see this link.]).

The failure to move through formidable resistance helps to reinvigorate bearish investors and for the first time, the stock's valuation is questioned in the media. The stock price begins to plummet, recent buyers begin selling at any cost. The stock falls through the lows set at the trough between top [You must be registered and logged in to see this link.] and top [You must be registered and logged in to see this link.]. The triple top is complete. In many cases double top formations lead to important declines because two separate sets of buyers have been disappointed at distinct levels, the tops and the reaction lows. These levels become formidable resistance.

A triple top is considered to be a variation of the head and shoulders top. Often the only thing that differentiates a triple top from a head and shoulders top is the fact that the three peaks that make up the triple top are more or less at the same level.The head and shoulders top displays a higher peak - the "head" - between the two shoulders.

What does a triple top look like?

As shown below, the triple top pattern is comprised of three sharp peaks, all at the same level. A triple top occurs when prices are in an uptrend. Prices rise to a resistance level, retreat, return to the resistance level again, retreat, and finally,return to that resistance level for a third time before declining. In a classic triple top, the decline following the third peak marks the beginning of a downtrend.

What are the details that I should pay attention to in the triple top?
1. Duration of the Pattern
This pattern can take upwards of several months to form.The three highs do not need to be equally spaced from one another.
2. Need for an Uptrend
The triple top is a reversal pattern marking the transition period between an uptrend and a downtrend in prices. It is crucial to the existence of this pattern that it begin with an uptrend of stock prices.
3. Decisive Breakout
Investors are advised to wait for prices to make a definitive break below the confirmation point of a triple top pattern. If prices do not fall below the confirmation point after the third peak is reached, the pattern is not a triple top.
4. Volume
It is typical to see volume diminish as the pattern progresses. This should change, however, when breakout occurs. A valid breakout should be accompanied by a burst in volume.
5. Rally after Breakout
A high percentage of triple tops have rallies back to the point of the breakdown more often than not.

Are there variations in the pattern that I should know about?
1. Hybrid Variation
There is a hybrid variation that appears to be a cross between a double and triple top. The middle peak is slightly lower than the left and right peaks. This is still a valid reversal pattern.
2. Fourth Peak
It is possible for the pattern to display a fourth peak before reversal occurs.

Triple Bottom formation is the mirror image of the Triple Top. After an extended decline to new lows a stock puts-in a bottom on massive volume and a moderate rally ensues. After several sessions (sometimes weeks) the stock drifts back to test the first bottom and once again buyers push the stock higher. This process is repeated a third time before buyers finally overwhelm sellers and the stock moves significantly higher.

The technical target for a triple bottom formation is derived by adding the difference between bottom [You must be registered and logged in to see this link.] the reaction high to the new breakout level. After the third bottom has been created, the new breakout level is the peak achieved between bottoms [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.]. No double bottom formation is complete until the stock rallies through this level.
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• For triple bottoms volume must increase as the stock moves toward the bottom of the pattern.
Increased volume at the bottom of the pattern suggests that accumulation is taking place.
• No triple bottom pattern is truly valid until the stock moves above the peak established between
bottoms [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.].
• Upside breakouts through the reaction high often lead to small 2-3% advances followed by an
immediate test of the breakout level. If the stock closes below this level (now support) for any reason
the pattern becomes invalid.
• Technical targets are implied but they are by no means assured. Targets are guideposts only.

Whereas triple tops are all about distribution, the Triple Bottom is about accumulation. After an extended decline characterized by aggressive short-selling and valuation concerns, value-oriented investors with longer-term time horizons begin to take positions in the stock. They understand that the only way to build a large position in a stock that they like is to do so when selling predominates. It is their willingness to buy the stock when all of the news is bad that creates a clear support level, the first bottom (bottom [You must be registered and logged in to see this link.]). This presence of large buyers in the face of bad fundamental news will normally be sufficient to force many professional short sellers (bears) to cover positions.
This coupled with buying from longer-term value investors may be enough to rejuvenate investors that recently purchased the stock at higher levels -- they may even rationalize that the "market" is finally beginning to realize that the current weakness is without merit and a few bullish speculators may be enticed to take new long positions.

Unfortunately, after several sessions of positive price action buying pressures are exhausted and the stock once again begins to falter. The positive price reaction to the decline that formed bottom#1 is complete. Technical traders call this the reaction high. Amid continued negative fundamental news, short sellers return and bullish speculators decide to take profits. What begins as modest selling quickly becomes a route. As the stock approaches bottom [You must be registered and logged in to see this link.] volumes remains light and in many cases the stock will actually fall through the previous low on very light volume.

It is at this point in time that pessimism is greatest, there seems to be no legitimate reason to continue holding the stock.Novice short sellers add new short positions and beleaguered bulls who purchased the stock at much higher levels begin to surrender in anticipation of a new leg lower. However the expected big decline does materialize because longer-term investors continue to buy the dips in price. A new rally begins as short sellers are forced to buy stock to cover short positions. As a second bottom (bottom [You must be registered and logged in to see this link.]) begins to take shape the pace of short covering accelerates and the stock quickly rallies toward the reaction high. Although the rally is sharp, volume remains light.

It is at this point that a new wave of bad news hits the stock price. Bearish investors feel vindicated and the stock slumps back toward bottoms [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.]. It is at this point in time that pessimism is greatest, there seems to be no legitimate reason to continue holding the stock. New short sellers add short positions and beleaguered bulls that purchased the stock at much higher levels finally capitulate, volume swells but oddly, support at bottoms [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.] holds. Professional short sellers start to sense that the "jig is up", the stock is not going down.

The price begins to stabilize and a third bottom (bottom [You must be registered and logged in to see this link.]) becomes apparent. Suddenly, the flow of news becomes less pessimistic, short sellers begin to panic and a massive rally ensues. The stock rallies through the peak set between bottoms [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.]. On the chart three equal bottoms are created, the triple bottom is in place. In many cases triple bottoms lead to important rallies because a vital support level has been established at both the bottoms and the reaction high.

A triple bottom pattern displays three distinct minor lows at approximately the same price level. The triple bottom is considered to be a variation of the head and shoulders bottom. Like that pattern, the triple bottom is a reversal pattern.The only thing which differentiates a triple bottom from a head and shoulders bottom is the lack of a "head" between the two shoulders. The triple bottom illustrates a downtrend in the process of becoming an uptrend. It is, therefore, vital to the validity of the pattern that it commence with prices moving in a downtrend.

What does a triple bottom look like?

As illustrated above, the triple bottom pattern is composed of three sharp lows, all at about the same price level. Prices fall to a support level, rise, fall to that support level again, rise, and finally fall, returning to the support level for a third time before beginning an upward climb. In the classic triple bottom, the upward movement in the price marks the beginning of an uptrend.

What are the details that I should pay attention to in the triple bottom?

1. Duration of the Pattern
The average formation takes approximately four months to develop. The triple bottom is one of the longer patterns to develop.
2. Need for a Downtrend
The triple bottom is a reversal pattern. This means it is essential to the validity of the pattern that it begin with a downward trend in a stock's price.
3. Decisive Breakout
Because a triple bottom can be confused with many other patterns as it is developing, experts advise that investors wait for a valid breakout through the confirmation point before deciding whether the pattern is a true triple bottom.
4. Volume
As discussed, it is typical to see volume diminish as the pattern progresses. This should change, however, when breakout occurs. A valid breakout should be accompanied by a burst in volume. Certain experts are less concerned by seeing a steadily diminishing trend in volume as the pattern progresses through its three lows.
5. Pullback after Breakout
It is very common in the triple bottom to see a pullback after the breakout. Bulkowski estimates that 70% of triple bottoms will throw back to the breakout price.

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Double Top formation is a distinct chart pattern characterized by a rally to a new high followed by a moderate pullback and a second rally to test the new high. As the stock rallies to make the second peak (top) sellers overwhelm buyers and the stock price collapses. Several weeks later the stock moves to test prior support levels.
The technical target for double tops is derived by subtracting the point difference between the top#1 and the reaction low from the breakout level. After the second top has been created, the breakout level is the reaction low. No double top formation is complete until the stock falls through this level.

• For a valid double top formation it is important that volume decline significantly as the stock moves
toward a test of the first top and accelerate as price begins to decline.
• No double top is truly complete until a breakout below the reaction low occurs.
• Downside breakouts often lead to small 2-3% declines followed by an immediate test of the breakout
level. If the stock closes above this level (now resistance) for any reason the pattern becomes invalid.

Getting caught in a stock at the high is never much fun but it happens. The double top pattern occurs because most investors that buy a stock "wrong" will refuse to exit until they can do so without suffering a loss. Double tops occur after extended rallies leading to new highs. As the "story" of the stock becomes more widely accepted investors are willing to pay increasingly exorbitant prices but
one day investors find the price is simply too high, the stock puts-in a top and prices begin to fall (top [You must be registered and logged in to see this link.]).

This first top will normally be sufficient to force many of the more speculative investors from the stock. As they sell the price of the stock falls further but many investors will not sell regardless of how far the price falls because they refuse to take a loss.After several sessions (sometimes weeks) of poor price performance the stock will begin to stabilize (reaction low) then gradually move higher. In most cases this advance will occur because of some fundamental factor like an upcoming analysts meeting, earnings report or stock split.

As the stock rises volume slows and investors who bought at the first top get ready to exit positions into further strength.As the stock approaches the prior high volume surges and new buyers begin to talk about bright fundamental prospects. It is at that moment that all of the investors who purchased positions at the prior high begin selling. Volume surges and the stock soon retreats (top [You must be registered and logged in to see this link.]). On the chart two equal peaks are created, the double top is in place. In many cases double top formations lead to important declines because two separate sets of investors have been disappointed at a particular level.

A double top occurs when prices form two distinct peaks on a chart. A double top is only complete, however, when prices decline below the lowest low - the "valley floor" - of the pattern.The double top is a reversal pattern of an upward trend in a stock's price. The double top marks an uptrend in the process of
becoming a downtrend.Sometimes called an "M" formation because of the pattern it creates on the chart, the double top is one of the most frequently seen and common of the patterns. Because they seem to be so easy to identify, the double top should be approached with caution by the investor.

Bulkowski estimates the double top has a failure rate of 65%.3 If an investor waits for the breakout, however, the failure rate declines to 17%.What are the details that I should pay attention to in the double top?
1. Uptrend Preceding Double Top
As mentioned previously, the double top is a reversal formation. It begins with prices in an uptrend. Analysts focus on specific characteristics of that uptrend when searching for a valid double top. The trend upwards should be fairly long and healthy. If the uptrend is short, the double top may not hold and the uptrend will continue.
2. Time between Tops
Analysts pay close attention to the "size" of the pattern - the duration of the interval between the two tops. Generally, the longer the time between the two tops, the more important the pattern as a good reversal. Analysts suggest that investors should look for patterns where at least one month elapses between the peaks. It is not unusual for a few months to pass between the dates of the two tops.
3. Decline from First Top
This element is even more significant to the validity of a double top than volume. He argues the decline in price that occurs between the two peaks should be consequential, amounting to approximately 20% of the price. The deeper the trough between the two tops, the better the performance of the pattern.
4. Volume
Volume tends to be heaviest during the first peak, lighter on the second. It is common to see volume pick up again at the time of breakout.
5. Decisive Breakout
The technical odds usually favor the continuation of the present trend. This means that it is perfectly normal market action for prices on an uptrend to peak at a resistance level a couple of times, retreat, and then resume that uptrend. It is a challenge for the analyst to determine whether the decline from a peak is the indication of the development of a valid double top or simply a temporary setback in the progression of a continuing uptrend.Many experts maintain that an investor should wait for a decisive breakout, confirmed by high volume.
6. Pullback after Breakout
A pullback after the breakout is usual for a double top. Bulkowski argues that the higher the volume on the breakout, the higher the likelihood of a pullback. "When everyone sells their shares soon after a breakout, what is left is an unbalance of buying demand (since the sellers have all sold), so the price rises and pulls back to the confirmation point."

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Double Bottom formation is in many ways the mirror image of the Double Top. After an extended decline to new lows a stock puts-in a bottom on massive volume and a moderate rally ensues. After several sessions (sometimes weeks) the stock drifts back to test the first bottom but this time buying accelerates and another rally occurs.
Technical target is derived by adding the difference between bottom [You must be registered and logged in to see this link.] and the reaction high to the new breakout level.After the second bottom has been created, the new breakout level is the reaction high. No double bottom formation iscomplete until the stock rallies through this level.

• For double bottoms volume must increase as the stock moves toward the first and second bottoms. In
many cases, volume will actually be higher at the first bottom because this is where value-oriented
investors first take positions.
• No double bottom pattern is truly valid until the stock moves through the reaction high.
• Upside breakouts through the reaction high often lead to small 2-3% advances followed by an
immediate test of the breakout level. If the stock closes below this level (now support) for any reason
the pattern becomes invalid.
• Technical targets are implied but they are by no means assured. Targets are guideposts only.
Double Tops are all about distribution, Double Bottom is about accumulation. After an extended decline characterized by aggressive short-selling and valuation concerns, value-oriented investors with longer-term time horizons begin to take positions in the stock. They understand that the only way to build a large position in a stock that they like is to do so when selling predominates. It is their willingness to buy the stock when all of the news is bad that creates a clear support level, the first bottom (bottom [You must be registered and logged in to see this link.]).

This first part of the pattern will normally be sufficient to force many professional short sellers (bears) to cover positions. This coupled with buying from longer-term value investors may be enough to rejuvenate investors that recently purchased the stock at higher levels -- they may even rationalize that the "market" is finally beginning to realize that the current weakness is without merit a few bullish speculators may be enticed to take new long positions. Unfortunately, after several sessions of positive price action buying pressures are exhausted and the stock once again begins to falter. The reaction to the decline that formed bottom [You must be registered and logged in to see this link.] is complete. Technical traders call this the reaction high.

Sensing easy profits, short sellers return and bullish speculators decide to take profits, modest selling becomes a route. As the stock approaches bottom [You must be registered and logged in to see this link.] volume remains light and in many cases the stock will actually fall through the previous low on very light volume. It is at this point in time that pessimism is greatest, there seems to be no legitimate reason to continue holding the stock. Novice short sellers add new short positions and beleaguered bulls who purchased the stock at much higher levels begin to surrender in
anticipation of a new leg lower. However the expected big decline never materializes, selling pressures have been exhausted and this is when professional short sellers realize the "jig is up".

It is the new buying by bearish investors to cover short positions to capture profits and the continued accumulation by longerterm investors that helps the stock stabilize. As a second bottom (bottom [You must be registered and logged in to see this link.]) begins to take shape the pace of short covering accelerates and a new group of bullish speculators take long positions, the rally explodes. On the chart two equal bottoms are created, the double bottom is in place. In many cases double bottoms lead to important rallies because a vital support level has been established.

Double bottom occurs when prices form two distinct lows on a chart. A double bottom is only complete, however, when prices rise above the high end of the point that formed the second low.The double bottom is a reversal pattern of a downward trend in a stock's price. The double bottom marks a downtrend in the
process of becoming an uptrend.Double bottoms are often seen and are considered to be among the most common of the patterns. Because they seem to be so easy to identify, the double bottom should be approached with caution by the investor.

The double bottom is a "much misunderstood formation." Many investors assume that, because the double bottom is such a common pattern, it is consistently reliable. This is not the case. Bulkowski estimates the double bottom has a failure rate of 64%, which he terms surprisingly high. If an investor waits for a valid breakout, however, the failure rate declines to 3%.The double bottom is a pattern, therefore, that requires close study for correct identification.

What are the details that I should pay attention to in the double bottom?

1. Downtrend Preceding Double Bottom.As mentioned previously, the double bottom is a reversal formation. It begins with prices in a downtrend. Bulkowski cautions that on their way down, prices should not drift below the left low of the pattern.

2. Time between Bottoms.Analysts pay close attention to the "size" of the pattern - the duration of the interval between the two lows. Generally, the longer the time between the two lows, the more important the pattern as a good reversal. Analysts suggest that investors should look for patterns where at least one month elapses between the bottoms. It is not unusual for a few months to pass between the dates of the two bottoms.

3. Increase from First Low.Some analysts argue the increase in price that occurs between the two bottoms should be consequential, amounting to approximately 20% of the price. Other analysts are not so definite or demanding concerning the price increase. For some, an increase of at least 10% is adequate.

4. Volume.As mentioned previously, volume tends to be heaviest during the first low, lighter on the second. It is common to see volume pick up again at the time of breakout.

5. Decisive Breakout.It is a challenge for the analyst to determine whether the rise from the bottom is the indication of the development of a valid double bottom or simply a temporary setback in the progression of a continuing downtrend. Analysts, therefore, advise cautious investors to wait for the price to rise back up and break through the confirmation point before relying on the validity of the pattern. Many experts will maintain that an investor should wait for a decisive breakout, confirmed by high volume.

6. Pullback after Breakout.A pullback after the breakout is usual for a double bottom. Bulkowski estimates that in 68% of double bottom patterns, price will throwback to the breakout price.Are there variations in the pattern that I should know about?

1. Two Lows at Different Levels.Sometimes the two lows comprising a double bottom are not at exactly the same price level. This does not necessarily render the pattern invalid. Analysts advise that if the second low varies in price from the first low by more than 3% or 4%,the pattern may not be a double bottom.

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Cup With Handle is a rally to a new high, a decline of 20 -50 percent over 8 - 12 weeks, a rally falling just short of the new high level, a second decline of 8 - 20 percent over 1 - 4 weeks followed by a breakout to fresh new highs on strong volume. The technical target for a cup with handle pattern is derived by adding the height of the "cup" portion of the pattern to the eventual breakout from the "handle" portion of the pattern.

• Cup with handle patterns are very similar to double top patterns with the exception being that selling
does accelerate after the formation of the second top, instead the stock consolidates and eventually
pushes beyond overhead resistance on strong volume.
• Generally, most cup with handle patterns are completed over the course of 9 -16 weeks and involve
two separate pullbacks of 20 - 50 percent (cup portion) and 8 -20 percent (handle portion).
• Upside breakout from the handle portion of the pattern should occur on strong volume. This increase
in volume verifies that selling pressures have been satiated.
• Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level.
If the stock closes below this level (now support) for any reason the pattern becomes invalid.

Like most technical patterns, the Cup With Handle pattern is really little more than a variation of another technical pattern. In this case that pattern is the Double Top. The pattern begins after a well-liked stock rallies to a new high following a positive fundamental development. As the stock surges investors feel increasingly comfortable paying higher prices but there comes a point when the "story" of the stock fails to convert new believers. Slowly, the stock begins to drift lower as those seeking to lock-in profits outnumber those intrigued by the story. Although most of the fundamental news is still positive, many investors begin to question if the stock really is worth the prevailing market price and over time a substantial decline begins. This process creates an important technical peak top [You must be registered and logged in to see this link.].

As the stock nears a twenty percent decline from the recent highs (this decline could reach fifty percent in bear markets) buyers begin to reassert themselves and the stock stabilizes and a reaction low occurs. From this point forward, the bias begins to tilt gradually higher. During this phase the stock may be the subject of positive Wall Street analyst comments, a new product announcement or legal victory. As the rally gains steam sentiment improves dramatically and new buyers begin to talk about certain new highs but those that purchased the stock at or near top [You must be registered and logged in to see this link.] get ready to sell.

These investors may have been waiting as long at 12 weeks for an opportunity to sell their positions without incurring a loss and they are not dissuaded by all of the new found bullish talk. Just short of the old highs at top [You must be registered and logged in to see this link.] aggressive selling begins on no specific news but in reality some investors that bought near top [You must be registered and logged in to see this link.] have already begun to sell. The stock begins to work significantly lower on increased volume creating a second, well defined top - top [You must be registered and logged in to see this link.]. This large U-shaped pattern may look like a typical double top but for the purposes of this pattern, it is called the cup.

Noting key resistance at top [You must be registered and logged in to see this link.] and top [You must be registered and logged in to see this link.], speculators begin to initiate short positions. From a technical perspective, this is a very important part of the pattern. If the stock gains downside momentum and volume continues to increase, this could very easily become a double top but as the price works lower, volume slows, sellers seem to be losing the upper hand. At this point more positive fundamental news is released and the stock price rallies. With selling pressures satiated and the flow of fundamental news decidedly bullish volume increases dramatically and the stock works toward a fresh new high.

This very small U-shaped pullback is called the handle.Speculators become frantic, they must cover short positions to cut losses but the supply of stock for sale has been significantly curtailed because investors that bought at top#1 have liquidated positions.
The next session Wall Street analysts make positive comments and the stock surges to a new high on dramatically increased volume. Weeks later the stock trades at substantial new highs.
The Cup with Handle is a bullish continuation pattern that marks a consolidation period followed by a breakout.
As its name implies, there are two parts to the pattern: the cup and the handle. The cup forms after an advance and looks like a bowl or rounding bottom. As the cup is completed, a trading range develops on the right hand side and the handle is formed. A subsequent breakout from the handle's trading range signals a continuation of the prior advance.

1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation or the less upside potential.

2. Cup: The cup should be "U" shaped and resemble a bowl or rounding bottom. A "V" shaped bottom would be considered too sharp of a reversal to qualify. The softer "U" shape ensures that the cup is a consolidation pattern with valid support at the bottom of the "U". The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.

3. Cup Depth: Ideally, the depth of the cup should retrace 1/3 or less of the previous advance. However, with volatile markets and over-reactions, the retracement could range from 1/3 to 1/2. In extreme situations, the maximum retracement could be 2/3.

4. Handle: After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times just a short pullback. The handle represents the final consolidation/pullback before the big breakout and can retrace up to 1/3 of the cup's advance, but usually not more. The smaller the retracement is, the more bullish the formation and significant the breakout. Sometimes it is prudent to wait for a break above the resistance line established by the highs of the cup.

5. Duration: The cup can extend from 1 to 6 months, sometimes longer on weekly charts. The handle can be from 1 week to many weeks and ideally completes within 1-4 weeks.

6. Volume: There should be a substantial increase in volume on the breakout above the handle's resistance.

7. Target: The projected advance after breakout can be estimated by measuring the distance from the right peak of the cup to the bottom of the cup.
As with most chart patterns, it is more important to capture the essence of the pattern than the particulars. The cup is a bowl-shaped consolidation and the handle is a short pullback followed by a breakout with expanding volume. A cup retracement of 62% may not fit the pattern requirements, but a particular stock's pattern may still capture the essence of the Cup with Handle.

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Rectangle is a rally to a relative new high, pullback to an intermediate support level, a second rally to test the new high, a second pullback to intermediate support, a third rally to test the new high level followed by an upside breakout on strong volume. The technical target for a rectangle is derived by adding the point difference between top#1 and the reaction low to the new breakout level.

• Rectangles are continuation patterns and that means they typically represent little more than a brief period
of consolidation in a strong trend. Although we have written about a rectangle in an uptrend, these patterns
are just as likely to occur in downtrends.
• Rectangles are usually 4 - 6 weeks in duration and always feature very well-defined support and resistance
levels characterized by horizontal lines.
• During the rectangle phase, supply and demand is said to be near equilibrium as buyers catch their breath
and attempt to digest the most recent trending period.
• Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level. If the
stock closes below this level (now support) for any reason the pattern becomes invalid.Rectangle may seem to be little more than another variation of the Double Top pattern but while the two technical formations do share some important characteristics, the Double Top is a reversal pattern while the rectangle is continuation pattern.

Rectangles almost always take shape after a stock has been trending strongly and typical last 4 -
6 weeks in duration. Although the fundamental news that gave birth to the strong trend is still valid, investors need an opportunity to digest the recent move. The stock falls into a "holding pattern" delineated by near horizontal support and resistance zones.

During this phase both support and demand are roughly in equilibrium. Buyers may still like the stock but they are not willing to "chase" the price significantly higher. Thus they choose to take profits into strength to a certain level and become aggressive buyers on a pullback to a certain level. The pattern begins when a well-liked stock moves to a new high on strong volume. As the "story" of the stock becomes more widely accepted investors are willing to pay increasingly exorbitant prices but one day investors find the price is simply too high, the stock puts-in a top and prices begin to fall ([You must be registered and logged in to see this link.]).

This first top will normally be sufficient to force many of the more speculative investors from the stock. As they sell the price of the stock falls further but many investors will not sell regardless of how far the price falls because they refuse to take a loss. After several sessions (sometimes weeks) of poor price performance the stock will begin to stabilize (reaction low) then gradually move higher. In most cases this second advance will occur because of some fundamental factor like a positive fundamental development. As the stock rises volume slows and investors who bought at the first top get ready to exit positions into further strength.

This selling pressure creates a surge in volume and the stock soon retreats (top [You must be registered and logged in to see this link.]). As the second top is created,sentiment turns more bearish. Although the flow of news is still positive, pundits begin to talk about rich valuations and buyers step back. At this time speculators begin to add short positions, sensing that a larger decline is about to unfold. The stock works gradually lower and volume begins to accelerate. In short order the stock is once again testing the reaction low and sentiment is bearish but somehow, the stock manages to hold that key support level and work modestly higher on stronger volume.

A subtle rally begins but speculators continue to add short positions because sentiment remains poor. Days later a positive fundamental development occurs and the stock begins to move toward tops [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.] on heavy volume. The next session Wall Street analysts make positive comments and the stock surges through what had been key resistance at the old highs. Speculators begin to panic and their short covering during a period when supply of stock is limited leads to further gains. A new trending phase begins and the stock moves to substantial new highs in the weeks ahead.

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.There are many similarities between the rectangle and the symmetrical triangle. While both are usually continuation patterns, they can also mark trend significant tops and bottoms. As with the symmetrical triangle, the rectangle pattern is not complete until a breakout has occurred. Sometimes clues can be found, but the direction of the breakout is usually not
determinable beforehand.

1. Trend: To qualify as a continuation pattern, a prior trend should exist. Ideally, the trend should be a few months old and not too mature. The more mature the trend, the less chance that the pattern marks a continuation.

2. 4 points: At least two equivalent reaction highs are required to form the upper resistance line and two equivalent reaction lows to form the lower support line. They do not have to be exactly equal, but should be within a reasonable proximity.Although not a prerequisite, it is preferable that the highs and lows alternate.

3. Volume: As opposed to the symmetrical triangle, rectangles do not exhibit standard volume patterns. Sometimes volume will decline as the pattern develops. Other times volume will gyrate as the prices bounce between support and resistance.Rarely will volume increase as the pattern matures. If volume declines, it is best to look for an expansion on the breakout for confirmation. If volume gyrates, it is best to assess which movements (advances to resistance or declines to support) are receiving the most volume. This type of volume assessment could offer an indication on the direction of the future breakout.

4. Duration: Rectangles can extend for a few weeks or many months. If the pattern is less than 3 weeks, it is usually considered a flag, also a continuation pattern. Ideally, rectangles will develop over a 3-month period. Generally, the longer the pattern, the more significant the breakout. A 3-month pattern might be expected to fulfill its breakout projection.However, a 6-month pattern might be expected to exceed its breakout target.

5. Breakout Direction: The direction of the next significant move can only be determined after the breakout has occurred.As with the symmetrical triangle, rectangles are neutral patterns that are dependent on the direction of the future breakout.Volume patterns can sometimes offer clues, but there is no confirmation until an actual break above resistance or break below support.

6. Breakout Confirmation: For a breakout to be considered valid, it should be on a closing basis. Some traders apply a filter to price (3%), time (3 days) or volume (expansion) for confirmation.

7. Return to Breakout: A basic tenet of technical analysis is that broken support turns into potential resistance and visa versa. After a break above resistance (below support), there is sometimes a return to test this newfound support level (resistance level). (For more detail, see this article on support and resistance.) A return to or near the original breakout level can offer a second chance to participate.

8. Target: The estimated move is found by measuring the height of the rectangle and applying it to the breakout.Rectangles represent a trading range that pits the bulls against the bears. As the price nears support, buyers step in and push the price higher. As the price nears resistance, bears take over and force the price lower. Nimble traders sometimes play these bounces by buying near support and selling near resistance. One group (bulls or bears) will exhaust itself and a winner will emerge when there is a breakout. Again, it is important to remember that rectangles have a neutral bias. Even though clues can sometimes be gleaned from volume patterns, the actual price action depicts a market in conflict. Only until the price breaks above resistance or below support will it be clear which group has won the battle.

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Ascending and descending triangles are also referred to as "right-angle" triangles. Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.
Descending triangles are generally considered bearish. From a time perspective, triangles are usually considered to be
intermediate patterns. Usually, it takes longer than a month to form a triangle. Seldom will a triangle last longer than three
months.

What does a descending triangle look like?


Converging trendlines of support and resistance gives this pattern its distinctive shape. Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart.
A descending triangle, like the other two triangles, features two converging trendlines. In this "flat-bottom" triangle, the bottom trendline is horizontal and the top trendline slopes downward. The pattern illustrates lows occurring at a constant price level, with highs moving constantly lower.

What are the details that I should pay attention to in a descending triangle pattern?

1. Occurrence of a Breakout - Technical analysts pay close attention to how long the triangle takes to develop to its apex.The general rule is that prices should break out -and clearly penetrate one of the trendlines - somewhere between threequarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the triangle. To take the measurement, begin by drawing the two converging trendlines. Measure the length of the triangle from its base to the apex. Next, plot the distance along the horizontal width of the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution. Typically if prices don't breakout of the trendlines before that point, the triangle "begins to lose its potency" and prices will simply drift out beyond the apex with no surge in either direction.

2. Price Action - With its "flat-bottomed" shape, the descending triangle indicates that sellers are more aggressive than buyers. The pattern typically emerges when buyers feel that the stock is overvalued and decide that the fair value is at a specific lower level. These buyers are prepared to purchase the stock if it hits that specific price level. The floor does not hold because demand wanes - possibly buyers have run out of money or interest in the stock. Once the downside breakout occurs, the stock price continues to fall.

3. Measuring the Triangle - To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation. To calculate the minimum price objective, calculate the "height" of the formation at its widest part - the "base" of the triangle. The height is equally determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline. Both these points will be located on the far left of the formation. Next, locate the "apex" of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs and subtract it from the apex price if the triangle experiences a downside breakout.

4. Duration of the Triangle - As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.

5. Forecasting Implications - The descending triangle is considered to be bearish. Bulkowski, however, warns that only 55% of developing descending triangles actually prove to be bearish. However, if investors wait for a valid breakout, then the success rate increases to 96%. Statistics compiled by Bulkowski show that descending triangles are less likely to hit their target prices than ascending ones. According to Edwards and Magee, volume confirmation is more important for ascending triangles than descending ones.

6. Shape of Descending Triangle - Prices should rise to hit the upper trendline at least twice (two highs), then fall away.Prices should fall to the lower trendline at least twice (two lows), then rise. The horizontal bottom trendline need not be completely horizontal but it often is and, in any event, it should be close to horizontal.

7. Volume - The descending triangle, volume tends to be slightly higher on dips and lighter on bounces.11

8. Premature or False Breakouts - Triangles are among the patterns most susceptible to this phenomenon. Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so thin as the triangle formation progresses to the apex, it takes very little activity to bring about an erratic and false movement in price, taking the price outside of the trendlines.

Descending Triangle is a decline to a new low on news followed by a kick back rally to an intermediate resistance level, a second decline to test the recent low followed by a second rally toward but not through intermediate resistance and finally a decline to fresh new lows on strong volume.
The technical target for a descending triangle is derived by measuring the vertical height of the triangle and applying this length to the new breakout level.

• Descending triangles are among the most reliable of all technical patterns because both supply and
demand are easily defined.
• The defining characteristic of descending right angle triangles is the pattern of declining highs and a
series of equal lows. This combination of points can be connected to form a right angle triangle. If a
stock violates any part of the triangle during its formation the pattern it should be considered void and
trading positions should be abandoned.
• Triangles are about indecision and as such volume should slow noticeably as the pattern is being
constructed. It is most important that volume surge as the stock declines through the reaction low.
This tells the technical trader that demand has been absorbed and the next leg of the bear phase is
about to begin.
• Downside breakouts often lead to small 2-3% declines followed by an immediate test of the breakout
level. If the stock closes above this level (now resistance) for any reason the pattern becomes invalid.

Descending Triangle is a mirror image of the Ascending Triangle. Like the ascending triangle, the pattern consists of a right angle triangle formation that follows a lengthy trending period. In the case of the descending triangle, the pattern takes shape after a period in which the stock in question has fallen from favor. This fall from grace may be the result of an earnings warning, product delay, lawsuit or negative guidance from management but it is fairly certain that the root of the price weakness is poorer fundamentals.

For weeks the stock trends lower with no bottom in sight. Wall Street analysts become extremely bearish and the stock looks like a lost cause but as a fresh new low is created, buyers suddenly emerge. In most cases this initial buying will come from serious long term investors (smart money) that feel the stock is reasonably priced. These investors have strong hands and all things being equal, they will hold the stock but they are not willing to pay prices in excess of what they feel to be fair value. In short, they look at the position as a work in progress, since the near term fundamental outlook is poor they see no need to "chase" the stock higher.

This initial round of buying by longer-term investors creates a short term bottom (bottom [You must be registered and logged in to see this link.]). As days pass some
professional traders start to realize that there are strong bids for the stock at bottom#1 and the technical and emotional selling that had plagued the stock subsides. Slowly the stock begins to move higher. Although this advance may be aided by positive Wall Street analyst comments or more favorable news flows, volume remains exceptionally light. The stock continues to move higher until there is another negative fundamental development.

At that point sellers return and a reaction high is established. As we will see, this point is vital in the classification of this pattern. The continued negative fundamental news and poor sentiment for the stock lead to more aggressive selling and once again the stock drifts back to the bottom#1 level. Given the negative sentiment a decline through that level seems assured but longer-term buyers renew their efforts, volume increases and the stock holds the most recent lows, establishing bottom#2. With two solid bottoms (support) now in place a new group of buyers enter the picture.

Sensing that the buying is entrenched speculators begin to buy new positions in anticipation of a big move higher -- the only problem is the longer-term buyers are not willing to chase the stock. As the price rallies, volume slows significantly, in fact, so slow is volume that the stock fails to move beyond the reaction high. Buyers relent and price begins to falter.
Within a few days the stock is trading back near the level of bottom [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.]. Speculators begin adding new long
positions in anticipation of a rally but the selling continues. Just as longer-term buyers are getting ready to buy a new
negative fundamental development occurs and the stock opens dramatically lower, falling well below the levels of bottom [You must be registered and logged in to see this link.] and [You must be registered and logged in to see this link.].

This breakout leads speculators to panic and sell existing long positions for a loss. Longer-term investors are also forced to rethink their strategy in light of the news and some liquidation begins creating a huge imbalance between supply and demand. A new leg lower unfolds. Weeks later the stock trades significantly lower.

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Ascending and descending triangles are also referred to as "right-angle" triangles.Generally, a triangle pattern is considered to be a continuation or consolidation pattern. Sometimes, however, the formation marks a reversal of a trend.
Symmetrical triangles are generally considered neutral, ascending triangles are bullish, and descending triangles are bearish. From a time perspective, triangles are usually considered to be intermediate patterns. Usually, it takes longer than a month to form a triangle. Seldom will a triangle last longer than three months. If a triangle pattern does take longer than three months to complete,the formation will take on major trend significance.


What does an ascending triangle look like?

Converging trendlines of support and resistance give all three patterns their distinctive shape. Buyers and sellers find
themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart.
As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the "apex," located at the right of the chart. The "base" of the triangle is the vertical line at the left of the chart which measures the vertical height of the pattern.

An ascending triangle - the "flat-top" triangle - also shows two converging trendlines. In this case, however, the lower
trendline is rising and the upper trendline is horizontal. This pattern occurs because the lows are moving increasingly higher but the highs are maintaining a constant price level.

What are the details that I should pay attention to in an ascending triangle pattern?

1. Occurrence of a Breakout - Technical analysts pay close attention to how long the triangle takes to develop to its apex.The general rule, as explained by Murphy, is that price breakout clearly penetrate one of the trendlines - somewhere between three-quarters and two-thirds of the horizontal width of the formation. The break out, in other words, should occur well before the pattern reaches the apex of the triangle. To take the measurement, begin by drawing the two converging trendlines. Measure the length of the triangle from its base to the apex. Next, plot the distance along the horizontal width of the pattern where the breakout should take place. If prices remain within the trendlines beyond the three-quarters point of the triangle, technical analysts will approach the triangle with caution.

2. Price Action - With its "flat-topped" shape, the ascending triangle indicates that buyers are more aggressive than sellers. The ascending triangle forms because of a supply of shares available at a fixed price. When the supply depletes, the shares quickly breakout from the flat-topped trendline and move higher.

3. Measuring the Triangle - To project the minimum short-term price objective of a triangle, an investor must wait until the price has broken through the trendline. When the price breaks through the trendline, the investor then knows whether the pattern is a consolidation or a reversal formation. To calculate the minimum price objective, calculate the "height" of the formation at its widest part - the "base" of the triangle. The height is determined by projecting a vertical line from the first point of contact with the trendline on the left of the chart to the next point of contact with the opposite trendline. In other words, measure from the highest high point on one trendline to the lowest low point on the opposite trendline.

Both these points will be located on the far left of the formation.Next, locate the "apex" of the triangle (the point where the trendlines converge). Take the result of the measurement of the height of the triangle and add it to the price marked by the apex of the triangle if an upside breakout occurs, or subtract it from the apex price if the triangle experiences a downside breakout.

4. Duration of the Triangle - As mentioned before, the triangle is a relatively short-term pattern. It may take up to one month to form and it usually forms in less than three months.

5. Forecasting Implications - The ascending triangle is considered to be bullish. Typically, that breakout should be
accompanied by a noticeable surge in volume.

6. Shape of Ascending Triangle - Prices should rise to hit the upper trendline at least twice (two highs), then fall away.Prices should fall to the lower trendline at least twice (two lows), then rise. The horizontal top trendline need not be completely horizontal but it often is and, in any event, it should be close to horizontal.

7. Volume - Murphy advises that in the ascending triangle, volume tends to be slightly higher on bounces and lighter on dips.

8. Premature or False Breakouts - Because the pattern can be either a reversal or continuation pattern, investors are particularly susceptible to false moves or, at the very least, confused by them. In addition, because volume becomes so thin as the triangle formation progresses to the apex, it takes very little activity to bring about an erratic and false movement in price, taking the price outside of the trendlines.

To avoid taking an inadvisable position in a stock, some investors advise waiting a few days to determine whether the
breakout is a valid one. Typically, a false move corrects itself within a week or so. The pattern immediately will be suspicious without an accompanying high volume breakout. If there's no pick up in volume around the breakout, investors should be wary.

Ascending triangle is rally to a new high followed by a pull back to an intermediate support level, a second rally to test the first peak followed by a second decline to a level higher than the intermediate term support level and finally a rally to fresh new highs on strong volume.The technical target is derived by measuring the vertical height of the triangle and applying this length to the new breakout level.

• Ascending triangles are among the most reliable of all technical patterns because both supply and
demand are easily defined.
• The defining characteristic of ascending triangles is the pattern of rising lows and a series of equal
highs. This combination of points can be connected to form a right angle triangle. If a stock violates
any part of the triangle during its formation the pattern it should be considered void and trading
positions should be abandoned.
• Triangles are about indecision and as such volume should slow noticeably as the pattern is being
constructed. It is most important that volume surge as the stock rallies through the reaction high. This
tells the technical trader that supply has been absorbed, short covering is rampant and the next leg of
the bull phase is about to begin.
• Upside breakouts often lead to small 2-3% rallies followed by an immediate test of the breakout level.
If the stock closes below this level (now support) for any reason the pattern becomes invalid.

This pattern typically occur after a stock has had a strong move higher due to a positive fundamental development.
Investors come to believe that much higher stock prices are justified given the improved fundamental outlook but a large portion of investors that were smart enough to have bought the stock at much lower prices disagree. These "smart money"investors consider the extreme optimism as little more than an opportunity to liquidate positions. Using fundamental metrics, they set a price to sell their large blocks of stock and wait. In effect, they are beginning a distribution process based on their interpretation of fair value. The first step in the distribution process occurs after one particularly bullish fundamental development. The stock surges to a new high and Wall Street analysts begin pounding the table with new "buy" recommendations.

The increased volume is a perfect opportunity for the smart money to liquidate positions. They begin selling and the rally is stopped in its tracks creating a small top (top [You must be registered and logged in to see this link.]). As buyers realize that there is plenty of supply at this level prices begin to falter and in short order the stock trades back to a previous intermediate term support level. Because this low is the reaction to the previous rally to new highs, it is often called the reaction low. In this very limited sense, ascending triangles are very much like double and triple tops -- rising demand meets entrenched supply. In fact, because the fundamental news is so strong Wall Street analysts dismiss the weakness as simple profit taking and a new rally soon begins.

On strong volume the stock surges toward the recent high where it is once again rebuffed by aggressive sellers (top [You must be registered and logged in to see this link.]). It is at this point that speculators recognize a trend and they begin adding new short positions just beneath the recent high. This added selling pressure should push the stock significantly lower but bullish enthusiasm is rampant. The stock does move lower but the pull back is subdued, in fact, the stock does not reach the reaction low set in the aftermath of the first move to new highs.

Days later another positive development occurs and the stock begins moving toward the recent high on very strong
volume. Speculators step-up and add to their short positions but the supply of stock from smart money investors is being satiated. It soon becomes clear that buyers are going to win this battle because sellers are running out of stock to sell. As the stock pierces what had been strong resistance a strange dynamic occurs, those traders that had been selling the stock short at the recent high are motivated to cover short positions to cut losses -- thereby creating increased demand for the stock at a time when supply has been severely curtailed.

Against this backdrop ongoing bullish enthusiasm leads to a spectacular price breakout on strong volume. Very soon after the breakout several fundamental analysts make positive comments, aggravating the imbalance between supply and demand. Weeks later the stock surges to a substantial new high. In this rare instance smart money investors are trumped by ongoing bullish fervor and the level that had been resistance becomes important support.