BAR CHART

PATTERNS
 • Define what is meant by “chart patterns”.

• List common characteristics of patterns.

• Discuss opposing viewpoints over whether patterns

exist.

Bar Chart • Describe the influence of computer technology on

price-pattern study.

Patterns • Identify classic chart patterns such as triangles, and

double and triple tops and bottoms.

• Identify rounding chart patterns such as head-and-

shoulders.

• Identify “half-mast” chart patterns such as flags and

pennants.

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CMT1 & CMT2
• There is overlap in the 2017 curriculum.

• CMT1, need to identify patterns.

• CMT2, need to know how to use patterns.

• Compare the patterns.

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What is a Pattern?
• A configuration of price action that is
bounded, above and below, by some form of
either a line or a curve.

• Can be trend lines or support and resistance

zones. Can also be a curve.

• This example is not quite a triangle. Curves fit

better.

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Do Patterns Exist?
• Some academics believe that patterns do not • Patterns result from human behaviour.
exist. They believe that price is completely
random.
• Humans want to see patterns and act on
them. They also see the future as a repetition
• Technical Analysts stand by patterns but are of the past.
not mathematically sophisticated enough to
demonstrate their validity.
• More quantitative study needs to be
performed on various patterns.
• Studies have shown that humans can tell the
difference between random data and valid
price data.

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Pattern Recognition
• Patterns were a form of visual subjective • “Old-Time” Technical Analysts had to rely on
analysis. They are more visual than experience and gut-feel when working with
mathematical. patterns. Today we can use ratios, averages
and spreads.

• Faster access to data means that traders are

looking for patterns in shorter timeframes. • We can now objectively study many aspects
of Technical Analysis.

• Full computer recognition of patterns is still

being developed. • The computer has cleaned up much of the
folklore surrounding Technical Analysis.

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Pullbacks and Throwbacks
• Often when price breaks out of a pattern (or • When the breakout was downwards and
a support/resistance level) price retraces price retraces up to the breakout level, we
back to the breakout level. call that a Pullback.

• When the breakout was upwards and price • Analogy: The market has a rope around the
retraces down to the breakout level, we call price and is pulling it back up.
that a Throwback.

• Analogy: The market is throwing price back

down.

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Components of a Pattern
• Entry into the pattern.
• Support under the pattern.
• Resistance above the pattern.
• Breakout out of the pattern.

• A Throwback is when price exits the pattern

but then retraces back down to the breakout
level.

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Components
• A Pullback is when price exits the pattern
but then retraces back up to the breakout
level.

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Entry and Exits
• Price can only enter a pattern from above or • Enters from above.
from below.

• Enters from below.

• Price can only exit a pattern upwards or
downwards.
• Exits Upward.

• All patterns are described with these four

variables. This allows for statistical analysis. • Exits Downward.

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Pattern Categories
• Continuation patterns are ones which the • Reversal patterns are ones which the
research shows that price has a high research shows that price has a high
probability of exiting the pattern opposite probability of exiting the pattern on the
the entry, in the same direction. same side as the entry, in the opposite
direction.

• If price entered a continuation pattern from

below, the expectation is that it will exit • If price entered a reversal pattern from
upwards. below, the expectation is that it will exit
downwards.

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Pattern Categories
Bearish Continuation Bullish Reversal

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Failures
• All breakouts can fail.

• A breakout is deemed to have failed if it fails

to move at least a certain percentage out of
the pattern.
• Bulkowski uses 20% in his testing.
• Kirkpatrick & Dahlquist use 10%.

• Schwager (1996) suggests that trading failed

patterns is much more profitable.

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Traps
• When the breakouts not only Fail, but it also
bursts through the other side of the pattern.

• Flags typically are a “Continuation” Pattern.

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Classic Patterns
• The following slides are some of the classic • Break Even Failure Rate is considered to be
patterns that every Technical Analyst should 33%.
know. • Two successes at 10% profit each.
• One failure at 20% loss.
• So, 1 failure out of the 3 breakout signals.
• For each we will go over:
• Description of the pattern.
• Performance - from Bulkowski’s research. • Lower than 33% is good.
• Failure rate. How many times price fails to • Higher than 33% is bad.
reach 10% gain, from the breakout, and
reverses to make a 20% loss.

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Double Tops and Double Bottoms
• Consists of three reversal points.
• Two Peaks and a Trough (Double Top).
• Two Troughs and a Peak (Double Bottom).

• Two peaks (or Troughs) must be at, or very

close to, the same price level.

• Volume is not considered.

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Adam & Eve Double Tops & Bottoms
• An Adam is a sharp pointed top or bottom.

• An Eve is a rounded top or bottom.

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Double Tops and Double Bottoms
Traditional Category : Reversal Pattern

Performance : Average (Eve - Eve is best)

Failure Rate : 15-18% (Quite Good)

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Rectangle (Trading Range or Box)
• One of the simplest patterns with strong
support and resistance zones bounding the
price.

• Price typically tests the levels multiple times.

• False breakouts are not predictive of the

direction of the eventual breakout.

• The longer the range, the bigger the move

out.

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Rectangle (Trading Range or Box)
• When price fails to reach the bounds of the
box, it is called a Shortfall.

• Buyers are stronger and are no longer

waiting.

• Highly likely that breakout will occur in

opposite direction. 71%.

• Increasing volume at Breakout improves its

performance.

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Rectangle (Trading Range or Box)
Traditional Category : Reversal or
Continuation

Performance : Very Good

Failure Rate : 19% (Quite Good)

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Trading Rectangles
• Edwards and McGee found that rectangles • It is not recommended to trade between the
are usually continuation patterns. However, bands of the rectangle. Rather focus on the
at market lows, they are more likely to be breakouts.
reversal patterns.

• Targets can be calculated by adding the

• More than 75% of early breakouts are false. height of the rectangle to the breakout price.
• Does give a hint to the final breakout • Upward reached 91%-93%
direction. • Downward reached 65%-77%

• Use Shortfalls as a guide.

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Triple Top & Triple Bottom
• A rectangle with three touches on the
support line (triple bottom) or the resistance
line (triple top).

• Similar results to a Rectangle.

• One more trough and it would have been a
rectangle.

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Triangles
• Support and Resistance are getting closer • “Tension” is building in the market as the
and closer. triangle forms.

• Indicates uncertainty in the market. • The longer the pattern, the greater the
tension as participants wait for a clear
direction.
• One of the best patterns to trade.

• Eventual break out is rapid.

• Many false breakouts as patterns develops.

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Descending Triangles
Horizontal support line and falling resistance
line.
Upward Breakout Performance
- Performance : 29% (Great)
- Failure Rate : 9% (Exceptional)
- Volume during pattern : Rising
- Increasing Breakout Volume : Irrelevant

Downward Breakout Performance

- Performance : 16% (Good)
- Failure Rate : 27% (almost breakeven)
- Volume during pattern : Declining
- Increasing Breakout Volume : Desirable

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Ascending Triangles
Horizontal resistance line and rising support
line.
Upward Breakout Performance
- Performance : 21% (Good)
- Failure Rate : 17% (Good)
- Volume during pattern : Rising
- Increasing Breakout Volume : Desirable

Downward Breakout Performance

- Performance : 19% (Good)
- Failure Rate : 24% (Ok)
- Volume during pattern : Declining
- Increasing Breakout Volume : Irrelevant

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Symmetrical Triangles (Coil or Isosceles)
Falling resistance line and rising support line.
Upward Breakout Performance
- Performance : 25% (Very Good)
- Failure Rate : 15% (Good)
- Volume during pattern : Irrelevant
- Increasing Breakout Volume : Desirable

Downward Breakout Performance

- Performance : 16% (Ok)
- Failure Rate : 24% (Ok)
- Volume during pattern : Rising
- Increasing Breakout Volume : Desirable

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Broadening Patterns
• Very rare and hard to identify.

• Much harder to trade. Lines are separating,

so profits are small after a breakout.

• Only time a broadening pattern is useful is

when it is combined with a symmetrical
triangle as a Diamond Top.

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Trading Triangles
• Looking for breakouts, high trading range • Volume tends to decline through the pattern.
within the triangle, increasing volume on
breakout.
• Gaps are better predictors of performance.

• Seem to work better with small-cap stocks in a

rising market.

• Lots of false breaks. Need to use a filter:

• Percentage band
• Number of days beyond the triangle

• Need to have a close stop.

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Trading Triangles
• Best performance comes from breakouts
that occur 60%-70% from the base to the
cradle.
• In Symmetrical it is 73%-75%

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Triangle Targets
• Measure the vertical distance from the initial
two reversal points in the triangle.

• On breakout, project the same distance from

the breakout.

• This target is reached 67% of the time.

• Triangles are some of the very best patterns.

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Diamond Top
• Less frequent but very profitable.

• Often Trend Lines are parallel, but not required.

• The steeper the trend is on the entry, the

steeper the trend will be on the exit.

• High probability that will breakout down.

• Breakout is usually fast.

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Diamond Top
Downward Breakout Performance
- Performance : 24% (Very Good)
- Failure Rate : 16% (Good)
- Volume during pattern : Declining
- Increasing Breakout Volume : Irrelevant

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Wedge
• A triangle pattern with both lines heading in the
same direction.

• A rising wedge has both lines heading upwards with

the lower line rising faster to meet the upper line.

• The lines will cross in the future.

• Best analogy is a channel that converges.

• Ideally made up of at least five reversals.

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Wedge
• Almost all rising wedges break to the
downside (82%).

• Almost all falling wedges break to the upside

(92%).

• Often (but not always) preceded by an

extreme that is called a climax.

• If no climax, then likely to be a Continuation

pattern.

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Wedge
Rising Wedge Performance
- Performance : Average
- Failure Rate : 6% (Exceptional)
- Volume during pattern : Declining
- Increasing Breakout Volume : Irrelevant
Falling Wedge Performance
- Performance : Average
- Failure Rate : 2% (Exceptional)
- Volume during pattern : Declining
- Increasing Breakout Volume : Irrelevant

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Trading Wedges
• Act immediately on any breakout opposite
to the direction of the wedge.

• Whenever a climax occurs (Adam) look for a

retest (Eve) which results in a Double
Top/Bottom.

• Make sure the wedge is valid before taking

any action.

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Rounded Tops and Bottoms
• Happens when price action reverses slowly
over time.

• Sometimes called :
• Bowls
• Saucer
• Cups (Cup and Handle)

• Poor performance from the patterns. Failure

rate is extremely high.

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Head and Shoulders
• One of the most famous patterns.

• Has statistical significance.

• Rules:
• Made up of three peaks.
• 2nd Peak higher than 1st & 3rd.
• 1st and 3rd do not have to be the same height.
• Peaks are roughly equidistant.
• Two peaks in a shoulder make it a “Complex
Head & Shoulders”.
• Troughs between peaks forms a trendline called
the “neckline”.

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Head and Shoulders
• Rules (continued):
• Neckline can be upwards or downwards.
• Slightly lower right shoulder (higher in
Inverted H&S) improves breakout
performance.
• Volume is usually highest into the Left
Shoulder. It then decreases through the rest
of the pattern.
• Breakout is on a break of the neckline.
• Failure is on a re-break of the neckline.
• Price target is calculated by:
• Measuring Head to neckline.
• Extending from breakout.

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Head and Shoulders
Head and Shoulders Performance
- Performance : 19% (Good)
- Failure Rate : 18% (Good)
- Volume during pattern : Declining
- Increasing Breakout Volume : Irrelevant
Inverted Head & Shoulders Performance
- Performance : 25% (Very Good)
- Failure Rate : 10% (Very Good)
- Volume during pattern : Declining
- Increasing Breakout Volume : Irrelevant

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Trading H&S
• The neckline is the most important feature of
the pattern.

• Always wait for the neckline to be broken.

The pattern could switch to be a descending
triangle.

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Flags and Pennants
• A short channel that usually slopes in the opposite
direction from the trend.

• Usually a Continuation pattern.

• Channel usually only lasts for a few days to weeks.

• Preceded by a steep, sharp price trend.

• Length of the Flagpole can be applied to the break as

a target (Measured Rule).

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Flags and Pennants
Flag Performance
- Performance : (Very Good)
- Failure Rate : 13% (Very Good)
- Volume during pattern : Declining
- Increasing Breakout Volume : Increasing
Pennant Performance
- Performance : (Very Good)
- Failure Rate : 26% (OK)
- Volume during pattern : Declining
- Increasing Breakout Volume : Increasing

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Flags and Pennants
• A Flag or Pennant usually occurs in the
middle of a trend. Because of this we can use
it to project targets.

• Flagpole is measured from last

support/resistance zone.

• Throwbacks and Pullbacks are quite rare.

• A breakout in the opposite direction is a

failure.

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Most Favorable Bullish Bar Chart Pattern
Failure to Percentage Percentage Increasing
Alpha vs. SP Percentage Best Volume
Pattern Reach 10% Gaining over reaching Volume on
500 Throwbacks During
Gain 50% Price Target Breakout

Descending
Triangle, breaking 29% 9% 34% 67% 29% Rising Irrelevant
up

Declining Wedge 25% 2% --- 47% 47% --- ---

Head and
25% 12% 26% 40% 40% Declining Desirable
Shoulders Bottom

Symmetrical
Triangle, breaking 25% 15% 28% 51% 51% Irrelevant Desirable
up

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Most Favorable Bearish Bar Chart Pattern
Failure to Percentage Percentage Increasing
Alpha vs. SP Percentage Best Volume
Pattern Reach 10% Gaining over reaching Volume on
500 Pullbacks During
Gain 50% Price Target Breakout

Diamond Top,
24% 16% 3% 79% 54% Irrelevant Irrelevant
breaking down

Head and
19% 18% 2% 63% 47% Rising Irrelevant
Shoulders Top

Rising Wedge 15% 6% --- 63% 53% Declining ---

Symmetric
Triangle, breaking 16% 24% 4% 57-67% 51% Rising Desirable
down

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 Double Top Double Bottom Adam & Eve Double Top Adam & Eve Double Rectangle Triple Top
Bottom

Triple Bottom Descending Triangle Ascending Triangle Symmetrical Triangle Diamond Top Wedge

Rounded Top Rounded Bottom Head & Shoulders Inverted Head & Flag Pennant
Shoulders

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 • Define what is meant by “chart patterns”.

• List common characteristics of patterns.

• Discuss opposing viewpoints over whether patterns

exist.

Bar Chart • Describe the influence of computer technology on

price-pattern study.

Patterns • Identify classic chart patterns such as triangles, and

double and triple tops and bottoms.

• Identify rounding chart patterns such as head-and-

shoulders.

• Identify “half-mast” chart patterns such as flags and

pennants.

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