Case study .. Bollinger Band buy signal

Using Technical Patterns to Spot Money-Doubling Trades

Here are a few of the classic chart patterns and technical analysis tools that lead us to triple-digit winners over and over again:

Bear Flag: A sharp, strong volume decline on a negative fundamental development and several days of sideways-to-higher price action on much weaker volume followed by a second, sharp decline to new lows on strong volume. The vertical downtrend that precedes a flag may occur because of buyers' reactions to an unfavorable company announcement, such as a court case, or a sudden and unexpected departure of a CEO. The sharp price decrease is sometimes referred to as the “flagpole” or “mast.”
Bearish Pennant: A sharp, strong volume decline on a negative fundamental development and several days of narrowing price consolidation on much weaker volume followed by a second, sharp decline to new lows on strong volume.
Breakout: A period where a stock's value increases. Typically immediately follows a consolidation.
Bull Flag: A sharp, strong volume rally on a positive fundamental development, and several days of sideways-to-lower price action. The vertical uptrend that precedes a flag may occur because of buyers' reactions to a favorable company earnings announcement, or a new product launch. The sharp price increase is sometimes referred to as the “flagpole” or “mast.”
Bullish Continuation Wedge: A bullish Continuation Wedge consists of two converging trend lines. The trend lines are slanted downward. Unlike the Triangles where the apex is pointed to the right, the apex of this pattern is slanted downwards at an angle. This is because prices edge steadily lower in a converging pattern i.e. there are lower highs and lower lows. A bullish signal occurs when prices break above the upper trend line.
Over the weeks or months that this pattern forms, the trend appears downward, but the long-term range is still upward. Volume should diminish as the pattern forms.
Bullish Pennant: A sharp, strong volume rally on a positive fundamental development, and several days of narrowing price consolidation on much weaker volume, followed by a second sharp rally to new highs on strong volume.
Candlestick: A charting method used to display open, high, low and closing prices for a security, it uses the top and bottom of its bar to indicate high and low prices of the time frame indicated.
Consolidation: A period where a stock's value declines.
Cup and Handle:  Similar in appearance to Rounded Bottoms, this pattern includes an elongated U-shape. However, the pattern also includes a short period of consolidation of 1–2 weeks in duration, which tends to be down-trending. The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.
Diamond Patterns: These patterns usually form over several months in very active markets. Volume remains high during the formation of this pattern.
Diamond Bottom:  This pattern occurs because prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward until they break upward through the diamond formation.
Head and Shoulders Top: An extremely popular pattern among investors because it's one of the most reliable of all formations. It also appears to be an easy one to spot. Novice investors often make the mistake of seeing Head and Shoulders everywhere. Seasoned technical analysts will tell you that it is tough to spot the real occurrences.
The classic Head and Shoulders Top looks like a human head with shoulders on either side of the head. A perfect example of the pattern has three sharp high points, created by three successive rallies in the price of the financial instrument.
The first point—the left shoulder—occurs as the price of the financial instrument in a rising market hits a high and then falls back. The second point—the head—happens when prices rise to an even higher high and then fall back again. The third point—the right shoulder—occurs when prices rise again but don't hit the high of the head. Prices then fall back again once they have hit the high of the right shoulder. The shoulders are definitely lower than the head and, in a classic formation, are often roughly equal to one another.
A key element of the pattern is the neckline. The neckline is formed by drawing a line connecting two low price points of the formation. The pattern is complete when the support provided by the neckline is broken to the downside on a closing basis.
Megaphone Bottom: Also known as a Broadening Bottom, it is considered a bullish signal, indicating that the current downtrend may reverse to form a new uptrend. This rare formation can be recognized by the successively higher highs and lower lows, which form after a downward move. Usually, two higher highs between three lower lows form the pattern, which is completed when prices break above the second higher high and do not fall below it.
Moving Average: The average price of a security over a specified time period (the most common being 20, 30, 50, 100 and 200 days), used to find pricing trends by flattening out large fluctuations.
Moving Average Convergence/Divergence: A technical analysis tool that shows the relationship between two moving averages of prices.
Resistance: Price levels where sellers have shown a better-than-average willingness to sell.
Reversal Patterns: These patterns break out in a direction opposite to the previous trend. They mark a change in direction of the price of the stock. After pausing to consider their investment strategies, investors decide to reverse an existing trend in a stock's price. Examples of this type of pattern include head-and-shoulders tops and bottoms, double-bottoms or -tops, triple-bottoms or -tops, ascending triangles, descending triangles and symmetrical triangles.
Rounded Top: This is considered a bearish signal, indicating a possible reversal of the current uptrend to a new downtrend. A Rounded Top is dome-shaped, and is sometimes referred to as an inverted bowl or a saucer top. The pattern is confirmed when the price breaks down below its moving average.
Support: Price levels where buyers have shown a better-than-average willingness to buy.
Trendline: A line 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.

Using Chart patterns for profitable trades

Let’s Take a Look at a Few “Classic” Patterns

 Technical analysis is based on historical pricing patterns, so how far back do technical analysts look for patterns?

That all depends.
Some patterns can be traced back to a market's inception, some go back a number of years, some are seasonal and some chart patterns can even be seen happening by the minute or second. Because technical analysis focuses on historical prices, patterns can emerge in the pricing during any time period.
“Classic” refers to a group of patterns that typically have a longer-term horizon (greater than 12 days) and that have distinct price movements that form distinctive patterns.
In technical analysis, the names of classic patterns generally describe the shape of the formation such as the double-top, double-bottom, head-and-shoulders top, ascending triangle, etc.
But, as I stated at the beginning, there are really only two trends to technical analysis: continuations and reversals. If we can remember that trends tell us direction, then we've got the important parts down.

Ascending Triangle

You may also hear this called an ascending right triangle. It's a bullish indicator.
Technically speaking, what happens is that an ascending triangle is a rally to a new high, followed by a pullback to an intermediate support level, then a second rally to test the first peak, followed by a second decline to a level higher than the intermediate-term support level and, finally, a rally to fresh new highs on strong volume.

Descending Triangle

A descending triangle is a decline to a new low on news that's followed by a rally to an intermediate resistance level, then a second decline to test the recent low, followed by a second rally toward (but not through) intermediate resistance. Then, finally, there's a decline to new lows on strong volume.
This happens when The Street becomes extremely bearish and, subsequently, a stock looks like it's done for.
Most analysts consider descending triangles to be the most reliable of all chart patterns because it's easy to define the supply-and-demand relationship.

Technical Analysis Takes Shape

In addition to triangles, technical analysis is full of other patterns, most aptly named for the type of shape they make.
Below, I'll describe a few of the more common ones for you that are considered classic longer-term patterns.

While there are a considerable number of patterns, many of them shorter-term in nature, the following will give you a solid grasp of the basics you need to become a pro at reading the charts.

Double-Bottom

A double-bottom occurs when prices form two distinct lows on a chart. A double-bottom is only complete, however, when prices rise above the high end of the point that formed the second low.
The double-bottom is a reversal pattern of a downward trend in a stock's price. This formation marks a downtrend in the process of becoming an uptrend.
Double-bottoms are among the most common of the patterns. Because they seem to be so easy to identify, the double-bottom should be approached with caution by the investor.
A double-bottom consists of two well-defined lows at approximately the same price level. Prices fall to a support level, rally and pull back up, then fall to the support level again before increasing.

The two lows should be distinct. According to technical analysis experts Robert D. Edwards and John Magee, the second bottom can be rounded while the first should be distinct and sharp. The pattern is complete when prices rise above the highest high in the formation. The highest high is called the confirmation point.
Traders should pay close attention to volume when analyzing a double-bottom.
Generally, volume in a double-bottom is usually higher on the left bottom than the right. Volume tends to be downward as the pattern forms. However, volume picks up as the pattern hits its lows.
Volume increases again when the pattern completes, breaking through the confirmation point.


Double top

 

A double-top occurs when prices form two distinct peaks on a chart. A double-top is only complete, however, when prices decline below the lowest low—the “valley floor”—of the pattern.
The double-top is a reversal pattern of an upward trend in a stock's price. The double top marks an uptrend in the process of becoming a downtrend.
Sometimes called an “M” formation because of the pattern it creates on the chart, the double-top is one of the most frequently seen and common of the patterns. Because they seem to be so easy to identify, the double-top should be regarded very carefully.
As illustrated above, a double top consists of two well-defined, sharp peaks at approximately the same price level. A double-top occurs when prices are in an uptrend.
Prices rise to a resistance level, retreat, and return to the resistance level again before declining. The two tops should be distinct and sharp. The pattern is complete when prices decline below the lowest low in the formation. The lowest low is called the confirmation point.
A double-top often forms in active markets that are experiencing heavy trading. A stock's price heads up rapidly on high volume. Demand falls off, and the price falls, often remaining in a trough for weeks or months.
A second run-up in the price occurs, taking the price back up to the level achieved by the first top. This time volume is heavy but not as heavy as during the first run-up. Stock prices fall back a second time, unable to pierce the resistance level.
These two sharp advances with relatively heavy volume have exhausted the buying power in the stock. Without that power behind it, the stock reverses its upward movement and falls into a downward trend.
Generally, trading volume in a double-top is usually higher on the left top than the right. Volume tends to dissipate as the pattern forms. However, it picks up as the pattern hits its peaks.
Volume increases again when the pattern completes, breaking through the confirmation point.

Cup-and-Handle

As the name would suggest, a cup-and-handle pattern includes an elongated U-shape followed by a short period of consolidation of 1–2 weeks in duration, which tends to be downtrending.
The pattern is similar in appearance to a coffee cup with a right-side handle, and indicates the potential for an uptrend.

 

The depth of the cup indicates the potential for a handle and subsequent breakout to develop. The cup should be fairly shallow.
The handle tends to be down-sloping and indicates a period of consolidation. Consolidation occurs when the price seems to bounce between an upper and lower price limit. You can track the down-sloping angle of the handle by drawing trendlines across the upper and lower price limits.
If the price ascends outside of the trendlines, then it has the potential for breakout. If the price ascends beyond the upper right side of the cup, then the pattern is confirmed, particularly if it is accompanied with a sharp increase in volume.
Volume tends to parallel the price pattern. Consequently, during the cup formation, as price descends, volume tends to decrease. Following a period of relative inactivity (at the bottom of the cup), the price pattern starts an upward turn and volume tends to increase.
During the handle formation, the volume decreases. However, you will notice an increase in volume when the price breaks out beyond the right side of the cup.
Cup-and-handles are long-term patterns that can be observed from about three weeks to several years.