COMMODITY CHART PATTERNS FUTURE CHART PATTERNS
Trading and Analysis
In contrast to a fundamental trader who looks to news and myriad supply/demand data as trading inputs, a technical trader gets information directly from the market itself by looking at one picture—a price chart. And, technicians operate on the assumption that past price movement can predict the future direction of prices.
Technicians believe that history tends to repeat itself. Thus, technical buying and selling often creates a self-fulfilling prophecy. So, whether you are a technical trader or not you must be aware of the power and influence of technicians when trading or investing in the futures markets. Technicians create opportunities.
Technical analysis is an art not a science. Consider two people looking at the same painting. Each may see or interpret the painting as having two very different meanings or messages. In the case of charts, you can think of the market as the artist and each technician as a critic. Unlike fundamentalists who pick and choose the inputs and data that they deem as critical, all technicians look at the same picture, the same snapshot, the same chart at all times.
Technicians rely on three basic types of charts:
The line chart plots market closing prices. This chart provides an excellent picture of long-term trends. However, the trading range during a time period is often important information for a technical analyst, so line charts are rarely used for in-depth technical analysis.
:::::> Chart Formations
:::::> Bar Charts
Show price movements over consecutive time periods. One vertical line -- or bar-- represents the trading range for each trading period (i.e., a day, a week, a month, etc.). Viewing one bar alone, it is not significant, however viewing it in relation to other bars (trading periods) occurring before and after, one see how these prices fit into a larger pattern. In this context, a single bar (and the prices of that period) becomes important and can serve as a guide to trading and timing decisions. Whether one uses minute, hour, day, week, month or year futures bar charts depends greatly on the time frame being analyzed (i.e., daily bar charts might provide too much data to analyze a year of activity, and monthly bar charts might not provide enough).
There are hills and valleys, patterns, shapes and curves that develop over time on a chart and which are found to have predictive value for future market direction. Patterns can either indicate a reversal or a continuation of an existing trend.
Reversal patterns often take a long time to form on the chart and represent major changes in trend. The larger the chart pattern, the greater the potential price movement. The height of the pattern measures volatility, while the width measures time required in completing the pattern. (Patterns at market tops are usually more volatile and shorter in time than bottoms.) Remember, a trend must exist for the pattern to be valid, and breaking a major trend line does not necessarily indicate a trend reversal (it might be the beginning of a sideways trend). Some of the more common reversal patterns include head-and-shoulders, double tops and double bottoms and saucers.
Continuation patterns suggest that a market is only pausing for a while before the prevailing trend will resume. Continuation patterns are usually shorter-term in duration than reversal patterns and are often classified as intermediate-term chart patterns. Some of the most common continuation patterns include: flags, ascending and descending triangles, pennants, gaps, and rectangles.
I've found that these patterns are great representations of mathematical indicators. Their signals often coincide with momentum and trend indicators. These patterns have the same predictive value within a chart of any time frame.
:::::> Head and Shoulders
Is a reversal pattern, which consists of three price peaks, the middle being the largest. Its potential in the opposite direction is measured by the distance from top of middle (head) to the base (neckline). This price distance is extrapolated from neckline at the point of breakout.
:::::> Double tops and double bottoms
Are reversal patterns, which consists of two peaks with a price valley. To confirm pattern, prices must form a pullback (decline below and close below previously established low). To predict move size, measure height from high to low and project under belt line (Vice versa for double bottom)
:::::> Flags and pennants
Are continuation patterns, which generally pause in fast, or almost vertical, price movement. Flags are in the shape of a parallelogram, while pennants are very short triangles.
:::::> Broadening Wedge
A reversal pattern usually found at trend peaks rather than lows.
Can be continuation and reversal patterns, this usually determined by the direction which they point. Confirmation is at breakout, and the strongest signals are when breakout occurs between 1/2 and 3/4 the triangle length.
:::::> Ascending triangles
If the slope is upward, it is bullish - chart above
If the descending slope is downward - It is bearish - chart above
:::::> Symmetrical triangles
Means both triangle sides are approx. the same size and angle; it is a neutral indicator.
Are reversal patterns, which are slow and rounding in form (generally at the end of a move). No clear breakout signals occur because it is so slow; no clear Support / Resistance areas are found either. This pattern can last a long time. Be on the lookout for any trending activity.
:::::>V Top Formation
Are continuation patterns which begin as initial reversals in the trend. V direction is opposite main trend. If it is a right triangle, the market will breakout on the horizontal side of the triangle.
Are areas in charts where no trading occurs and are usually continuation patterns.
:::::> Runaway gaps
Have strong fundamentals behind move, are not quickly filled - view chart above.
:::::> Exhaustion gaps
Is usually the largest gap, usually filled, and have blow-off characteristics - view chart above.
:::::> Breakaway gaps
Are at end of price pattern or when breaking major support (or resistance), and are usually filled - view chart above