CHART PATTERNS

Introduction to Technical Analysis

Table of Contents

Risk Warning ......................................................................................................................................................2

CHART PATTERNS EXPLAINED: ...........................................................................................................................3

Introduction ...................................................................................................................................................3
Why do chart Patterns Occur? ......................................................................................................................3
Long-Term Patterns (LT) ................................................................................................................................4
Short-Term Patterns (ST) ...............................................................................................................................5
Short-Term vs Long-Term: Which is better? .................................................................................................6
Continuation, Reversal, Bullish or Bearish? ..................................................................................................6
Pattern Confirmation ....................................................................................................................................7

LONG-TERM PATTERNS (LT):..............................................................................................................................8

Continuation Patterns ...................................................................................................................................8
Reversal Patterns...........................................................................................................................................9
What they Really Look Like .........................................................................................................................10
LT Patterns: Final Pointers ...........................................................................................................................10

SHORT-TERM PATTERNS (ST): ..........................................................................................................................11

Bar Charts vs Candlesticks ...........................................................................................................................11
Single Bar Patterns ......................................................................................................................................12
Multi-Bar Patterns .......................................................................................................................................13
Rejection Spikes...........................................................................................................................................14
Lower timeframes = More signals false signals! (Potentially) ....................................................................14

ST Patterns: Summary ......................................................................................................................................15

REDUCE YOUR LEARNING CURVE: ...................................................................................................................15

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Introduction to Technical Analysis

Risk Warning
Trading in the Foreign Exchange and CFDs market involves a significant and substantial risk of loss and may not
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income, personal circumstances, trading knowledge, and financial resources. Only true discretionary income
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Thank you for downloading this Trading Guide. This is the third of a 4-part series to introduce you to
Technical Analysis. Each part has a video and accompanying trading guide which you can view below.

Part 1: Trends
Part 2: Support & Resistance
Part 3: Chart Patterns
Part 4: TA Techniques Combined
Part5: Trading Technically (Bonus Video)

MT4 Tips & Tricks

By Matt Simpson
Copyright @ 2013 TF GLOBAL MARKETS (AUST) PTY LTD
All Rights Reserved

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 CHART PATTERNS
Introduction to Technical Analysis

CHART PATTERNS EXPLAINED:

Introduction

Out of all the topics within this series, this is by far the hardest one to fit into one topic. If anything this should be
split into two topics but then we have to remember this is an introductory guide.

It was not until I came to write this section and host the webinars that I realised how many intricacies and areas of
judgement I make using these patterns. There are many textbooks and websites that will bog you down with exotic
names and fancy patterns which provide little, if any, practical use for day-to-day analysis and trading. Therefor I
have tried to avoid this road, and instead provide the basics along with the ‘what you really need to know tips’ to
make any use of the most basic patterns.

I have split it into 2 main sections by their style: Long-term patterns; short-term patterns; Both styles possess their
own strengths and, weaknesses, require different approaches yet at the same time, complement each other as
though they were always meant to be.

If you have to take one piece of advice from this guide please take the following:

You will significantly increase the usability of each style by combining the two together.

Many try to master one style and use them in isolation (as I did) but they will create independent problems for your
analysis and trading. By blending the two together you will create a more structured and comprehensive view of
price.

Combine these two styles of patterns recognition with trends, support and resistance and you will never look at a
price chart the same way again.

Why do chart Patterns Occur?

The concept is similar to support & resistance: At any one time market participants have one of three choices - to
buy, sell or stand aside. As this ratio between the three groups change over time, so does the supply and demand for
any given market. As this force changes, so does price. This is all based upon participants (and groups of) opinions of
where price ‘should’ be.

As the battle towards the ‘correct’ market price unfolds we see trends and oscillations develop, which when
combined form familiar patterns.

If we can identify familiar patterns, technical analysts believe that [to a certain degree] price can become
predictable.

The collective individuals within any market constantly changes, along with personal opinions of where price ‘should
be’, or why they should move in the first place.

Regardless… a Technical Analyst always takes comfort in the fact that history does repeat itself as long as prices are
always governed by supply and demand.

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Introduction to Technical Analysis
Long-Term Patterns (LT)

I refer to long-term patterns as those which take several (and usually much more) bars of data to create and they are
also commonly referred to as Western Chart Patterns.

They are not related to the trading timeframe they are seen on, as LT patterns can be seen on any timeframe.
However a rule of thumb is that the higher the timeframe you see a chart pattern it is generally consideredto be
more relable, and the lower the timeframe tends to generate more fale signals.

You can see the same (or similar) patterns on a 1-minute chart which may only take 5 minutes to create, whilst also
seeing patterns which last years or decades on the Monthly timeframes.

Below is an example of a Double Bottom pattern which took 18 bars to create. I have hidden the timeframes as it is
irrelevant – this could be a 1 minute chart or a 1 day chart, but the concept is the same.

LT Patterns Provide
- Structure (Once combined with trends and S/R)
- Future Direction
- Price Objectives (Targets)

Examples:
- Double Bottom (pictured), Triple Bottom, Double Top, Triple Top,
- Wedge, Head & Shoulders,
- Symmetrical Triangle, Ascending Triangle, Descending Triangle,
- Pennant, Flag

Structure:
If we are familiar with these patterns and can identify the potential for one
to appear, then it helps us gauge very roughly at what stage of the pattern
we are at. In turn this either helps us to anticipate the breakout of a pattern
to build our trading plan, or avoid jumping in too early.

Potential Future direction:

Once a pattern is confirmed, regardless of whether it is a continuation or
reversal pattern, we then have a directional bias for price to continue
trading.

Profit Objectives:
Once we have profit objectives (or targets) defined we can then see if these
overlap areas of S/R to build a stronger case for price reaching or reacting at
these levels.

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Introduction to Technical Analysis
Short-Term Patterns (ST)

Short-term patterns can be produced from a single bar of data or more and require
either Bar Charts or Candlestick charts to identify them. As with LT patterns they appear
on all trading timeframes and generally considered to generate more reliable signals the
higher the timeframe.

Short-Term Patterns (ST)

For example, a ST pattern can be made up from 1-3 bars of data, and may form on any
tradable timeframes such as 1 minute, 1 hour, 1 day or 1 week etc.

ST Provide
- Signs of potential strength or weakness
- Entry Signals
- Exit Signals
- Trade Management

Signs of potential strength and weakness:

You may be monitoring a trend and trying to identify the end of phase 2 or the
beginning of phase 1. Some candle formations would suggest a turning point.
However the key with ST candles is to blend them form trends, support and
resistance to make them higher probability.

Entry signals:
Some patterns are ideal for generating a buy or sell signals.
However the trick here is to identify a trend and areas of support or resistance
which the before

Trade Management:
When you are in a trade and price is unfolding can adjust your stoploss to suit
the price action. For example if you see long candles form in favour of your
trade, you can use the highs or lows of these candles to trail your stop behind.

You could also move your stop loss if a candle formation appear which may
threaten the trade you are in. This would be a defensive move.

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Introduction to Technical Analysis
Short-Term vs Long-Term: Which is better?

Many Analysts or Traders prefer to specialise in one form of analysis.

However I believe that by using the two in tandem you will achieve a
much more comprehensive picture as their strengths and weaknesses
complement each other very well.

For example, whilst LT patterns project future direction and price

targets, they can be particularly tricky to time your entrance to a
trade whilst maintaining a decent reward/risk ratio. And whilst ST
patterns generate great timing for entry signals, they do not provide
you with a profit objective, or much future direction beyond the
candles you are currently looking at.

For those reasons I would strongly urge you to combine the two for a
fuller picture of what price is telling you.

Continuation, Reversal, Bullish or Bearish?

As the name implies, continuation patterns assume a breakout of the pattern in the same direction in which it
entered the pattern. Reversal patterns however break out of the pattern in the opposite direction to which it
entered the pattern.

Bullish patterns appear during an uptrend and bearish

patterns appear during downtrends.

However a ‘Bearish Reversal’ will be seen during a bullish

trend, as it is suggesting we are about to change form
bullish to bearish. So a bullish reversal will appear during
a downtrend

Trends and Patterns:

Refer to lesson one TRENDS to learn how to identify a
trend.

- Once a trend has been established (or at least a

suspected trend) you are statistically more likely to
find a continuation pattern on a timeframe below
the one you have identified a trend on.
- Whilst every trend will have a reversal at some point,
remember that you are statistically less likely to
identify the end of a trend.
- Seek reversal signals on lower timeframes that trade
in the direction of the higer timeframe.

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Introduction to Technical Analysis

Pattern Confirmation

So how do we confirm a pattern? There are several methods and it is down to personal preference as to how you
decide to confirm your patterns. However please be warned that the word ‘confirmation’ can be a little misleading
as just because we confirm a pattern it does not guarantee that the pattern will be fulfilled. Confirmation simply
means ‘a point on the chart in which we assume, when crossed, the pattern may reach a target’.

A pattern can be confirmed, only to see price reverse and trade back into the suspected pattern to make it a ‘failed
pattern’. Each pattern has a breakout line which is similar to drawing a trendline or S/R level.

Breakout: We simply require price to cross the line. This

is an ideal method if you want to set pending orders to
catch the breakout. However price can (and does) return
back over the breakout line to invalidate the pattern.

Close: We want to see price close a bar over the line to

confirm the signal. This provides extra confidence and
reduces the chances of it being a failed signal, however
you also risk missing the move and for price to take off
without you.

Multiple Closes: Some analysts use 2 or 3 closes to

confirm the pattern. Whilst this provides even greater
confidence you again risk the chance of missing the
move for it to be profitable enough (for your reward/risk
ratio)
Throwback: A throwback is my preferred style if trading
the pattern. This is where price breakouts out or closes
to confirm the pattern, but then returns to the breakout
line. If this level then holds as either support or
resistance it can provide an excellent entry with greater
confidence and precision to achieve a much better
reward/risk ratio. However the downside to this
approach is you are much more likely to repeatedly miss
moves if it doesn’t quite return to the breakout line.

I would not say that one method is not particularly

better than the other, but it is important to use a
method which suits your trading style and personality.
For example an aggressive day-trader who must be in
the markets as much as possible may not have the
patience to wait for a throwback (in fear of missing out)
so a breakout approach may be better. Similarly and End
of Day trader with more patience may be better suited
to the throwback.

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Introduction to Technical Analysis

LONG-TERM PATTERNS (LT):

Continuation Patterns

Whilst LT patterns (Western Patterns) look simple in textbooks Breakouts can….

and hindsight they are by no means easy to trade. The following - Be clean and swift (no looking back)
pictures are here merely to show you the ideal structure and - Retrace to the breakout area (throwback)
methods of projecting targets. Real price charts are never this - Completely fail and trade back inside of the
pretty – the key is to observe the relationships between the swing breakout line to invalidate the pattern
points on the charts.
Targets:
For example in an uptrend you would observe the HH and HL - Usually the same distance from the depth
(lesson 1) but in a chart pattern you would also observe that these of the pattern itself
swing points are contracting over time (getting closer together) - Price doesn’t necessarily have to get there
in a straight line
The key to continuation patterns is to use the higher timeframe to
identify the trend (lesson 1) and seek continuation patterns on the
lower timeframes.

TRIANGLES
Whilst triangles have a tendency to be continuation patterns they are not always. For example an ascending triangle
really only consists of higher lows forming beneath resistance. Neither of these lines need be accurate, and if the
lower line breaks first it still counts as a triangle just not a continuation pattern under those circumstances…
However they do provide excellent directional trade plans if and when confirmed, with price objectives.

A symmetrical triangle is simply when the two ‘lines’ contract (or the upper and lower swing points come closer
together).

PENNANTS / FLAGS
By far the messiest and difficult of continuation patterns to
trade. Personally I use them purely for observation and to
judge ‘phase 2’ (retracements) before a supposed
resumption of a trend.

Typically you measure the run into the ‘flag’ and project this
for you target. Please take this last point with several barrels
of salt – to me they just highlight retracements.

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Introduction to Technical Analysis
Reversal Patterns

I am sure you have heard of the saying ‘buy low and sell high’. It sounds simple enough but attempting to do this is
far harder than it sounds. I have observed how the majority of newer traders become fixated with trading reversals
in an attempt to get into that ‘trade of a lifetime’ before everyone else. I have also observed how these same traders
tend to lack the ability to stay in a trade once they have entered. This may be because they traded against a string
trend, or the occasion they are in profit they move their SL too soon, so get stopped out anyway.

If you must trade reversal, always refer to the trend and trade reversal patterns that bring you back to the dominant
trend. For example, if: Daily is bullish (phase one); Hourly is bullish but phase 2 (retracement); Seek bullish reversal
patterns to trade on hourly chart, to trade in the direction of the daily bullish trend.

Wedges
- After a strong trend the swings begin to
contract and often in defined cycles
- The catch the market out and can move very
fast when the realisation kicks in the trend is
over
- Similar to a broken trendline; Can provide
good opportunities to enter a trade if market
re-test the broken trendline
- Do not necessarily have to obey trendlines.
Observe the relationship between the swings
to visualise the balance between buyers,
sellers and on-participants is changing.
Double/Triple Tops and Bottoms
- Can be difficult to trade because (like
flags/pennants) they are often very
messy
- Good for observational purposes and
targets
- Act as a good warning that trend is
losing strength (due to the lower
high/low)
- Easier to enter after a breakout

Head and Shoulders (Inverted H&S on market bottoms)

- Generally better when the RS (right Shoulder) is smaller than LS.
- Similar to wedges make excellent trading opportunities if market
retests the broken trendline (neckline)
- Break outs can be very strong and fast, particularly in stock/Index
markets after a bullish trend when the markets panic and offload
- This can make them difficult to enter on the breakout or get a
decent entry price (due to slippage and price gaps etc.)
- I prefer to confirm patterns then look for suitable retracement
before entering in direction of the breakout.

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Introduction to Technical Analysis
What they Really Look Like

Triple Top:
Lots of noise around the support line and the
breakout was hard and fast which made it difficult
to enter. However it provided a strong bearish trend
to trade on lower timframes after the breakout.

Triangles:
Lots of noise around resistance lines, but noticed
how their lows were being formed as new buyers
came in to push prices up (eventually)

Bullish Wedge:
Notice how price oscillates as the swing points
converge. They also increase in timing before the
eventual breakout.

LT Patterns: Final Pointers

Patterns fail! Like any technique, nothing in this game is guaranteed. They provide a guide to potential future price
direction and targets whilst also aiding our trading plans – that is all…

- Easier to spot after the event… but you can still build a plan around them after the breakout.
- Textbook patterns usually too good to be true
- Need not be neat and tidy
- Observe the relationship between the swings and ‘join the dots’.
- Generally more reliable the higher the timeframe they appear
- Look at the bigger picture: Zooming out and using bar charts can help to identify these patterns easier
- Use multiple timeframes with trends, support and resistance to filter higher probability patterns

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Introduction to Technical Analysis

SHORT-TERM PATTERNS (ST):

Bar Charts vs Candlesticks

Japanese Candlesticks have been used by traders since the 1700s and very popular amongst Forex Traders. When
you consider there are many patterns varying from 1 candle to several candles, by the time you start mixing
combinations you literally have hundreds of patterns names to learn. My advice here is that by learning the names of
all of the patterns will not necessarily make a better trader. In fact the opposite is probably true…

Bar charts are the Western equivalent and created using exactly the same information: OHLC (Open, High, Low, and
Close). However their interpretation is slightly different.

Bar Charts: Focus on the relationship between the highs and lows of the current bar compared to the previous bar.
Candlesticks: Focus on the relationship between the bodies and Wicks.

Seeing as both candlesticks and bars use the same information to construct them (OHLC) you can indeed mix both
forms of analysis. However seeing as Candlesticks are visually easier to interpret, many use Candlestick as the
preferred method to use both forms of analysis.

*** Warning ***

I genuinely believe using Candlesticks or Bar Chart in isolation to be a dangerous way to analyse or trade. This is
because they only really pay attention to current price action, which can have the consequence of jumping in to
lower probability trades, or getting very confused about the potential direction of price.

However they do help fine-tune the picture after you have identified trend, S/R and LT chart patterns. ST Patterns
really are the last thing I look at as part of my analysis.

Also as this is an Introductory guide to TA I will focus on a select few patterns which incidentally are the only ones I
really pay any attention to for my own trading.

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Introduction to Technical Analysis
Single Bar Patterns

Doji’s: Are simply candles which

open and close at approximately the
same level. Every single one of these
Doji’s to the right has specific name,
however knowing these names will
not really help you.
Doji Warning: Whilst they can be useful to warn of a sideways correction or
What you need to focus on is the
reversal to a trend, they can also signify low liquidity in a market. You will
relationship between the length of
typically see lots of these patterns form during bank holidays, or between
the wicks (or rejection areas) and
market open or close times, particuarly on the lower timeframes.
the body (the open and the close).

Bullish Hammer: Hanging Man:

Some Doji’s require an established Not quite as reliable a
trend to identify what it is. On the Bullish Hammer
left we have a Bullish Hammer, as however it does
we were within a downtrend and highlight a weakness in
this reversed higher. However this the preceding trend and
same pattern is called something indecision at the
different during an uptrend… (see supposed top.
Hanging Man)

Inverted Hammer: Shooting Star:

Not as reliable as Hammers because The bearish equivalent
whilst bulls did attempt to push to a Bullish Hammer,
price higher the session still closed the session has seen a
nearer to the lows. However it does failed attempt to keep
suggest bearish sentiment is prices higher and price
changing and losing momentum. has lost most (and
sometimes more) than
initial gains. This is a
blow for the bulls…

Engulfing Candles / Outside Bars: Inside Bars:

The direction (or colour) they close Similar to Doji’s they
on dictates if it is a bullish or bearish can provide doubt to
sign. Unfortunately they rarely the preciding trend. The
provide good entry signals as they closing direction (up or
are took large but they can signify down) dictates their
an important change in the bullish or bearish bias.
sentiment. They are to Engulfing
Bars as Inverted
Hammers are to
Hammers – not quite as
significant, but
noteworthy.

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Multi-Bar Patterns

Multi-bar candles (usually 2-3 bar patterns, but can be more) are generally more reliable than single bar patterns.
And as per usual, the higher the timeframe they appear on, the higher the reliability of the pattern can assumed to
be. There are a plethora of multi-bar patterns however I will only cover the ones I tend to use the most frequently as
I have found them to be more reliable.

Morning Star Reversal (Bullish) Evening Star Reversals (Bearish)

I frequently see and use this pattern Notice how this 3-candle pattern
as I find it one of the more reliable comprises of a Doji followed by an
candle patterns. The 3rd bullish Engulfing Candle.
candle is required to close above
50% of the bearish candle’s body;
however I also use the height of the
overall pattern as extra
confirmation.

Bullish Piercing Line Dark Cloud Cover

Traditionally a bullish close 50% of The bearish equivalent to the bullish
the body of the previous bearish piercing line and similar to ‘train
candle is required and it would be tracks’ in bar charts. Traditionally the
within a downtrend for it to be taken bearish candle would have to open
seriously. The height of the candles higher than the bullish candle closed
(volatility) defines if it is a trading to be a genuine pattern. However as
opportunity, or merely a sign of FX is less prone to gaps I personally
change in sentiment. ignore this rule.

Bullish/Bearish Engulfing (Outside Inside Bar

Bar) Inside bars (in my opinion) are no
These provide excellent changes in reason to enter a trade but merely
sentiment. However they are less highlight momentum from the
useful for entering an actual trade previous candle/s is waning. The size
due to the size of the bars. Either of the body is not important – here
enter a trade on a retracement we are looking for the high-low to be
within the engulfing candle, or trade within the range of the previous
on a smaller timeframe in direction bar’s high-low. The closing
of the engulfing candle. price/colour dictates if they are
bullish or bearish, but ideally a
bullish inside day appears during a
downtrend (and visa-versa) for any
real meaning.

Again this really is a whirlwind tour of patterns, however I assure you that I only use these ST patterns alongside LT
patterns. That is all I require. Forget the names – concentrate on what impact the relationship between the high-low
and open-close has on preciding candles. Withthis information alone you will create your own patterns and meaning
which is more worthy than the textbook names which you get sold to you on the street.

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Rejection Spikes

When you see long wicks (or spikes) they

can signify aggressive buying or selling at
a specific level, and suggests a reversal
away from this level.

If these spikes appear around significant

levels of S/R then they are deemed as
more reliable.

If you identify a trend with a rejection

spike which respects a level of support or
resistance, you have a higher probability
trading opportunity.

Lower timeframes = More signals false signals! (Potentially)

Candlestick patterns, like most forms of analysis, are

generally more reliable the higher the timeframe they
are seen on.

To the right is the EURJPY on the 5 minute chart and it

contains 7 reversal formations, which is one for every
single price swing between bullish and bearish.

If you were to enter after each reversal you would

have lost money, or been lucky to break even on any
single trade.

It is also a reminder not to use ST patterns in isolation

as you will always be looking to enter low probability
trades.

Notice you are also trading within a Bearish Wedge Pattern which may have paid to wait until price broke out of,
before looking for a trading opportunity.

If you see a Bullish Hammer on the Monthly Chart, which rejects a level of support and is also in line with a trend,
this is much more reliable than the 7 reversal candles seen on the 5 minute chart above!

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ST Patterns: Summary

- Can be subjective, but easier to identify than Long-Term Patterns

- Many traders place too much emphasis on Short-Term patterns
- Provide more false signals on lower timeframes
- Must be combined with other forms of analysis to filter false signals
- Learning the names of exotically named patterns does NOT make you a better trader
- The LAST part of the puzzle
- Whilst they can be seen at market turns, trend traders would be wiser to trade reversal patterns that take
you back in line with the dominant trend

Focus on:
- Wickes, Bodies and Candle Range
- Relationship between these
- How they integrate with preceding candles
- How they integrate with other forms of analysis

REDUCE YOUR LEARNING CURVE:

I hope you have enjoyed this series and found it of benefit. Whilst I would like to think you are now expert analysts
just from reading this series, like anything in life, it will take time to master which will require practice and
experimentation - however a great way of speeding up the process is to watch others perform analysis.

Trader’s Corner FaceBook Twitter RSS

I would highly encourage you to subscribe to the ThinkForex YouTube channel and attend our weekly webinars as
they included the methods used throughout the series.

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