By Daryl Guppy
patterns capture the emotions of the market crowd and signal the probability
of action. Some patterns are very reliable and we look at triangles and
bullish flags. They are used to set exact price targets. Some patterns look
impressive, and may have exotic names, but they are not particularly
reliable or useful for making trading decisions. We avoid these patterns.
There are three types of triangle patterns - up sloping, down sloping, and
equilateral or symmetrical. The most useful feature of these patterns is the
way price projections are calculated. This is done by measuring the base of
the triangle and then projecting it upwards, or downwards. This provides a
very precise method of measuring risk and reward as shown.
The upward sloping triangle is a common bullish pattern where short term
resistance is challenged by a short term upward sloping trend line. The up
sloping triangle forms when a horizontal resistance line is intersected by a
rising trend line. This is a strong chart pattern and breakouts present
short term trading opportunities, taking one to five days to reach their
targets. In a bullish market this pattern has around 70% reliability.
The downward sloping triangle is the exact reverse. The same techniques
are used to establish price targets. In a bearish market this pattern also
has around 75% reliability.
An equilateral or symetrical triangle shows market indecision. It is
formed when it is possible to plot two equally valid trend lines moving in
opposite directions. The upper trend line slopes downwards. The lower trend
line slopes upwards, and when combined they form the equilateral triangle.
Two powerful trending forces are equally balanced. This pattern most often
occurs prior to an anticipated news event. This tells the trader there is
indecision in the market. One group of people who hold the stock believe the
news event will be bad for the stock. They want to sell before the news
hits. They set the down trend line. Others believe the news event will be
positive so they want to buy before the news breaks. They set the uptrend
line. The base of this pattern is measured in the same way as for the
previous up sloping and down sloping triangles. The major difference with
this pattern is that the price target is plotted from the point at which the
breakout occurs above the upper or the lower edge of the triangle. In a down
market the pattern often doubles its downside projection target. This
pattern does not offer a strong probability of a price break in one
direction or the other. This pattern is evenly balanced, with a 50% chance
of breaking upwards or onwards.
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