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A method of displaying the open, high, low and close prices for a financial instrument for a specific period.
Bar charts use single, vertical bars to illustrate a stock's price range and opening/closing prices for a designated time period. The bars may illustrate daily, weekly, or monthly periods. For example on a weekly chart, each bar represents one week and on a daily chart, each bar represents one day.
The top of the bar indicates the stock's highest price of the period. The bottom of the bar represents the stock's lowest price for that period. The small perpendicular bar on the left designates the stock's opening price. The one on the right shows the stock's closing price.
The term "bearish" refers to falling stock prices. The implications of a bearish situation may be:
- If you already have a short position you may consider holding or accumulating.
- If you already have a long position you may consider closing it out.
- If you don't have a position you may consider taking a short position.
A term for a rise in a security's price above a resistance level (usually its previous high) or a drop below a support level (usually its previous low).
The price threshold, defined by the pattern, that a stock's price must cross in order to confirm that the pattern has formed.
The term "bullish" refers to rising stock prices. The implications of a bullish situation may be:
- If you already have a short position you may consider closing it out.
- If you already have a long position you may consider holding or accumulating.
- If you don't have a position you may consider taking a long position.
A charting method used to display open, high, low and close prices for a security, Candlesticks were invented by a 17th century Japanese rice broker, Munehisa Homma, who was one of the first Japanese traders to use price history to predict future prices. His trading theories and principles evolved into the candlestick charting techniques used today.
A candlestick uses the top and bottom of its bar to indicate high and low prices of the time frame indicated. The bar is referred to as a "real body" and connects the opening and closing prices. The real body shows the opening and closing prices with a clear, or a dark, rectangle. When the rectangle or real body is clear, it means that the stock closed above its opening price. When the real body is dark, it means that the stock closed below its opening price.
The bars that extends above and below the real body are called the upper shadow and lower shadow respectively.
Trading Considerations
Candlestick patterns can be used alone, but are extremely powerful when used in conjunction with other charting indicators.
Chart Type describes the format of the chart to be presented. A chart is a graphical method of showing where stock prices have been over specific time frames and is used by stock market analysts. A chart has an x-axis (horizontal) and a y-axis (vertical). Typically, the x-axis represents time and the y-axis represents price. There are many different types of charts that can be used to display stock prices. Two such types are a Bar Chart or a Candlestick Chart.
Classic is a term used to refer to a group of patterns that typically have a longer-term horizon (greater than 12 days) and which have distinct price swings such that the price swings form distinctive patterns. The names of classic patterns often reflect the shape of the formation such as the Double Top, Double Bottom, Head and Shoulders Top, Ascending Triangle and so on.
The price of the financial instrument at the close of trading on the day that the event was detected. The close price is set as the last trading price before the exchange or market on which it is traded closes for the day. With after-hours trading, however, the opening price at the start of the next trading day may be different from the closing price the day before.
Confirmation or validation that an event has occurred. Events are first recognized and deemed to have occurred based on the definition of the event type. The date on which an event is "found" is referred to as the "event date". Each event type must pass additional criteria to be considered "confirmed". This provides additional assurance that the event is valid.
The date on which the event meets this additional confirmation criteria is referred to as the "confirmation date". Many events are "confirmed" on the same date that they are "found". In this case, the "event date" is the same as the "confirmation date". However some events are "found" on one date, and then "confirmed" at a later date.
Examples:
Classic Patterns are usually confirmed on the same date that they are found. This type of event can be confirmed using any of three confirmation types. Suppose a Head and Shoulders Top pattern is found on January 1. It is also confirmed on January 1 by meeting the criteria for at least one of the possible confirmation types, such as: the close price penetrated the "neckline" of the pattern. In this case, both the event date and the confirmation date are January 1.
Price Crosses Moving Average events are usually recognized on one date and confirmed on a later date. Suppose that the event was found on February 1 but not confirmed yet. Then on February 4 the moving average turned in the direction of the anticipated price move, thereby confirming the prior event. This event would have an event date of February 1 but a confirmation date of February 4.
The date on which it was confirmed that an event had occurred.
The confirmation type indicates how the event was confirmed to have occurred. Classic Patterns are found or recognized based on the price movements creating a specific formation. The pattern is finally confirmed when the price of the stock breaks through the "breakout price" of the instrument. The breakout price is a price threshold determined by the definition of the pattern type. Valid confirmation types for Classic Pattern events are:
- Confirmed because the Close Price penetrated Breakout Price
- Confirmed because the Price penetrated Breakout Price by 3%
- Confirmed because the Price penetrated Breakout Price by any amount
Price Crosses Moving Average, an indicator, is recognized when the price of the instrument crosses the moving average. However it is not confirmed until the moving average turns in the direction of the anticipated price move, within a specific time period. If the appropriate turn does not occur within the specific time period, the event is considered "not confirmed". Therefore valid confirmation types for Price Crosses Moving Average Indicator events are:
- Undecided. This means that the price crossed the moving average, and confirmation is being watched for.
- Not Confirmed. This means that the price crossed the moving average, however the event has not been confirmed, and confirmation is no longer being watched for.
- Confirmed. This means that the price crossed the moving average, and the event was confirmed by the moving average taking a turn in the direction of the anticipated price move.
Event types not mentioned here are always considered confirmed. They are not considered found unless they pass the additional confirmation criteria as well. Therefore the event date is the same as the confirmation date.
Any form of money that is in public circulation. Currencies are represented as the amount of that currency required to equal one US dollar.
A debenture is an instrument indicating the indebtedness of a company. It is not secured by assets or property, but only the credit of the issuer. Investors should also consider examining technical events for the underlying stock when researching convertible debentures. Technical events may be considered less indicative for non-convertible debentures. Technical events should be used as one piece of additional information within additional research regarding these instruments.
A Doji Line is a type of candlestick line which depicts a situation in which the open and close prices are the same (or almost the same). Different varieties of doji lines (such as a gravestone or long-legged doji) depend on where the open and close are in relation to the entire range. Doji lines are among the most important individual candlestick lines as many times they predict a shift in, or even a reversal of a current trend.
Trading Considerations
Doji lines often predict a shift in, or a reversal of a current trend.
Events have been classified into four categories: Classic Patterns, Short-term Patterns, Indicators and Oscillators.
- Examples of Classic Patterns are Double Tops, Head and Shoulders Bottom, Ascending Continuation Triangle (Bullish).
- Examples of Short-term Patterns are Gap Up, Engulfing Line (Bearish), Island Top.
- Examples of Indicators are Moving Averages, Moving Average Crossovers.
- Examples of Oscillators are the RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence).
The date on which the technical event occurred.
Event Type describes the specific type of event. Examples of Event Types are: Head and Shoulders Bottom, Bearish Engulfing Line, Double Top, Price Crosses Moving Average and Momentum.
The market that performs and tracks the actual trades in equities and other financial instruments. Major exchanges include the New York Stock Exchange (NYSE) and the NASDAQ.
This is a rating applied to each Classic Pattern that represents how a professional Technical Analyst might assess this pattern. The rating ranges from 0 to 100 with 100 representing a "perfect" example of this pattern type.
The price trend leading into an event. The Inbound Trend is important in two ways:
1. The height of the Inbound Trend is an indication of the possible price move away from the breakout price of the event
2. The slope of the Inbound Trend provides an indication of the strength of an event.
A very strongly sloped Inbound Trend (large height, short duration) is a stronger indicator of a reversal than a shallow Inbound Trend (small height, large duration).
The length, in days, of the trend leading into the event.
An index is a grouping of stocks used by the financial markets as a benchmark of performance. Examples of indices follow.
- The Dow Jones Industrial Average(DJIA): A price-weighted index of thirty giants of American Industry. Price-weighted means that higher-priced stocks receive more weighting than lower-priced ones. Examples of stocks in the DJIA are IBM, General Motors, and Microsoft.
- The New York Stock Exchange Composite Index: A price-weighted index made up of all NYSE stocks.
- Standard & Poors 500 Index: A market capitalization weighted index (shares outstanding multiplied by stock price per share).
- The Nasdaq Composite Index: A statistical measure that indicates changes in the Nasdaq Stock Market by measuring all Nasdaq common stocks. It is price-weighted.
Trading Considerations
While one cannot directly trade indices, there is value in reviewing technical events for indices. For example, if there is a bearish event for a technology-based index, an investor might want to rebalance his/her portfolio to protect against bearish price movements in technology-based stocks. Or if a strong bullish pattern appears in a pharmaceutical company, but a pharma-based index shows a bearish event, then an investor may think again about taking a position in the pharmaceutical company since the industry is moving in the opposite direction.
This is a technical event category. Some technical events are based on indicators.
A basic category of business activity. While businesses in the same industry achieve their own unique financial goals, they generally experience the same overall market trends that other businesses within the same industry experience. For example, while Sears and WalMart compete, they are both also hurt by a slow down in consumer spending.
Examples of financial instruments include: stock, index, mutual fund, currency.
The identification used by the exchange for a financial instrument. The symbol is usually a short alphabetic representation of the company name. e.g. MSFT for Microsoft.
The symbol may also include a punctuation mark to identify the type of instrument the symbol represents, such as Security (Preferred Stock, Warrant, Debenture, Right, US Funds, Trust Unit, Index, Mutual Fund or Currency). Symbols are not unique across exchanges. For example the same three letter symbol may be used for two different stocks on the New York Stock Exchange and the Toronto Stock Exchange.
The type of financial instrument. Security and Index are currently available for technical analysis.
A chart that shows a line representing the close price.
A logarithmic price scale shows changes proportionally so that a given vertical distance shows the same percentage change in price, rather than the same absolute change in price (as with a linear scale). For example, the vertical distance between price levels 1 and 10 on a log chart is the same as the distance between price levels 10 and 100 because they both represent a 10-times change in price.
A logarithmic chart may provide some advantage especially when analyzing longer term charts. For this reason, Recognia uses a logarithmic price scale, rather than a linear scale, to identify technical events on weekly price charts.
A large buy or sell early in the trading day of a market in an attempt to affect the price of the security during the day.
A Mutual Fund is a professionally managed investment that pools the capital of thousands of investors to trade in stocks, bonds, options, futures, currencies, or money market securities. Funds have different objectives. They may vary from very aggressive and volatile, to those that only buy blue chip stocks.
Mutual Funds hold a large number of securities and therefore offer investors the opportunity to diversify, as well as the benefits of portfolio management.
A large buy or sell before the close of a market in an attempt to affect the close price of the security.
A rating that represents the "noise" present in the pattern.
Pattern Noise represents the price fluctuation as a result of price moves expected by the pattern and its structure. Most experts believe that too much noise will reduce the significance of a pattern.
Technical events often suggest a particular direction of possible price movement. The three types of opportunities are Bullish, Bearish and Other.
Oscillators are based on mathematical formulas that incorporate historical or recent prices of the stock.
Some short-term patterns provide information that is useful however this information may not specifically suggest possible bullishness or bearishness at first glance. Or it may indeed suggest bullishness or bearishness but only when additional supporting information is considered. This is the "Other" category.
"Other" events are usually short-term patterns that mark the end of an uptrend or the end of a downtrend. The end of an uptrend signals that the prior uptrend is coming to an end and the price may reverse downward or it may move sideways. However the end of an uptrend does not imply that the price is becoming bearish. While the prior uptrend may end with the price reversing downward, it may also end with the price moving sideways. After the price moves sideways it may later continue its upward trend. The converse is true for events signaling the end of a downtrend.
Pattern Types have been grouped into several categories based on their behavior or the method that is used to detect the pattern. Examples of Pattern Categories are Bullish, Bearish, Classic, Short-term, Continuation and Reversal.
The number of days over which the pattern formed. Pattern Duration is equivalent to Pattern Length. In searching for technical events, one may specify the pattern duration in days. Longer duration patterns generally forecast price movement over a longer period of time. For example, a 90 day pattern anticipates price movement over the long term, compared to a shorter-term 30 day pattern.
Pattern Length is equivalent to Pattern Duration.
The specific type of pattern for pattern-based events. Examples of Pattern Types are: Head and Shoulders Bottom, Bearish Engulfing Line, Double Top. Refer to the detailed descriptions of each pattern for specific recommendations for the use of the pattern in trading.
The percentage of the breakout price that the price is expected to move based on this event. To calculate the Possible Target Price multiply the Possible Percentage Price Move by the Breakout Price. Take the result and add for Bottom patterns and subtract for Top patterns from the Breakout Price.
The price range that the instrument is expected to reach. This price range is determined by analyzing the event that has occurred.
A preferred stock is a class of stock entitling the holder to receive a specified dollar value per share upon liquidation of the company, and a fixed dividend paid before the common stock holders. Voting rights are usually limited to special situations such as when a certain number of dividends have been missed.
Investors should also consider examining technical events for the underlying stock when researching convertible preferred shares. Technical events may be considered less indicative for non-convertible preferred shares. Technical events should be used as one piece of additional information within greater research regarding these instruments.
A significant short-term reversal in the price of a financial instrument or of a market in general. Prices for a security may often pullback immediately after a pattern is formed. For example a Double Top is pattern which indicates that the price of a stock is descending. When the price breaks through the confirmation point of this pattern it will often pullback or rise for a few days after the pattern has formed. It will then continue its downward trend.
Relative Strength Index (RSI) is an oscillator that measures a particular stock's current relative strength compared to its own price history. The RSI is plotted on a vertical scale numbered from 0 to 100. A security is considered to be oversold when it falls below 30 and overbought when it rises over 70.
Failure swings occur when in a downtrend the RSI fails to set a new low and then goes on to set a new high or in an uptrend when the RSI fails to set a new high and then goes on to set a new low.
A significant short-term recovery in the price of a financial instrument or of a market in general after a period of decline.
The part of the candlestick that connects the opening and closing prices. The real body shows the opening and closing prices with a clear, or a dark, rectangle. When the rectangle or real body is clear, it means that the stock closed above its opening price. When the real body is dark, it means that the stock closed below its opening price.
A right is an instrument entitling current common stock-holders to purchase additional common shares directly from the company at a specified price within a specified time period. The price upon issue is usually at a discount. Investors should also consider examining technical events for the underlying stock when researching rights. Technical events should be used as one piece of additional information within greater research regarding these instruments.
Standard Industrial Classification (SIC) code. A numbering system established by the U.S. Office of Management and Budget that identifies companies by industry. SIC codes are used to group companies and to promote the comparability of economic factors from various areas of the U.S. economy.
The general name for stocks and shares of all types. A security is a financial instrument that shows that you own shares in a company (by owning stocks), have loaned money to a company, government, or municipality (by investing in bonds), or have rights to future ownership (as with options or warrants).
The bars that extend above and below the real body on a candlestick are called the upper and lower shadows. They indicate the high and low of the price for the period being depicted.
A candlestick with no lower shadow. A bottom reversal signal with confirmation the next trading bar.
A candlestick with no upper shadow. A bullish pattern during a downtrend and a bearish pattern during an uptrend.
Also known as taking a short position this is the process of selling a stock with the hope of buying it back at a lower price. Short sellers believe the price will decline. The uptick rule requires short sellers to sell only on an uptick (the sale must be executed at a price higher than the last trade). This is to prevent short sellers from driving down the price and creating a self-fulfilling prophecy.
Short selling involves borrowing stock (usually from a broker) to sell short and then using margin to finance the borrowing. If the price of the stock in question rises too far, the short seller will receive a margin call and be required to put up more money. A short squeeze occurs when the price advances so fast that short sellers are forced to cover their positions (buy the stock back), which drives prices even higher.
This is a technical event category. Some technical events represent the confirmation that a short-term pattern has formed.
Short-term patterns are based on the shape and relationship of the candlestick(s) or price bar(s) representing one or multiple consecutive trading days. This includes patterns such as the Hanging Man and the Gap Up. The technical event is the confirmation that the pattern has formed in the price bar(s). These technical events are useful for suggesting possible short-term price movement. They are also useful for supporting or refuting the possible price movement suggested by classic patterns. Short-term patterns are often considered as supplementary information.
A candlestick pattern with a long upper shadow, long lower shadow and small real body.
One long shadow represents some form of a reversal. The small body shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session.
Even though the session opened and closed with little change, prices moved significantly higher and lower during the session.
A rating of the symmetry of specific classic patterns. The rating ranges from 0 to 100 with 100 being a perfectly symmetrical pattern. Some experts consider the symmetry of a pattern to be important.
Technical Analysis is the practice of anticipating price changes of a financial instrument by analyzing prior price changes and looking for patterns and relationships in price history.
Technical Events occur when a significant pattern has formed or a significant price activity has occurred in a financial instrument. Technical Events highlight price situations that may be worth considering in researching an investment activity.
Technical Events can be used by investors to make more informed decisions about when to:
- Enter a new position (either a Long position or a Short position);
- Close an existing position;
- Wait for a better time to take action.
Technical Analysis supports and complements additional Investment Research, such as Fundamental Analysis.
Technical Analysis is the quantitative side of investment research. It is distinct from Fundamental Analysis, where investors use company and market information (such as earnings, balance sheet, interest rates etc.) to make investment decisions. In contrast, Technical Analysis is based on patterns and relationships in price history.
When researching warrants, convertible preferred shares or convertible debentures, investors should consider technical analysis for the underlying stock. Technical analysis may be considered less indicative for non-convertible preferred shares and non-convertible debentures. Technical analysis should be used as one piece of additional information within greater research for an instruments.
The occurrence of a specific price situation based on the principles of Technical Analysis. Events usually occur when the price for a financial instrument crosses a critical line or threshold. Examples of technical events include: the confirmation of a price, confirmation that a pattern has formed, or confirmation that the price crossed a specific moving average.
Investors should also consider examining technical events for the underlying stock when researching warrants, convertible preferred shares or convertible debentures. Technical events may be considered less indicative for non-convertible preferred shares and non-convertible debentures. Technical events should be used as one piece of additional information within greater research regarding these instrument.
A line which is constructed by connecting a series of descending peaks or ascending troughs. The more times a trendline has been touched increases the significance of a break in the trendline. A trendline can act as either a support line or a resistance line.
The number of shares, traded during a given period, for a security, an index or an exchange. In this case, the number of shares traded on the day that the event was detected. The analysis of volume is essential in technical analysis. Volume provides evidence of intensity and market consensus for a given price move. As volume often leads price, it is a valuable indicator.
A warrant is an instrument entitling current stock-holders to purchase additional shares at a specified price within a specified time period. Investors should also consider examining technical events for the underlying stock when researching warrants. Technical events should be used as one piece of additional information within additional research regarding these instruments.
Source: http://www.trending123.com/patterns/technical_analysis_glossary.html
