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Andrews Pitchfork

As with the majority of candlesticks, Andrew’s Pitchfork is exactly how it sounds – a pitchfork shape formed by drawing trend lines which are parallel to each other. This pattern was developed by Dr Alan Andrews and is based on support and resistance. To draw the pattern you need to select a major peak or trough in the candlestick pattern.

The first trend line begins at the left-most point selected (either a major peak or trough) and is drawn so it passes directly between the two right-most points. This line is the “handle” of the pitchfork. This major swing point will later be the origin of the median line for the indicator. The second and third trend lines are then drawn beginning at the two right-most points, (a major peak and a major trough) and are drawn parallel to the first line. These lines are the “tines” of the pitchfork.

Ascending Channel

Similar to the horizontal channel however this pattern forms an upward moving channel pattern (i.e. the parallel trend lines slope upwards from left to right). The upper trend line connects a stocks daily highs and the lower trend line connects a stocks daily lows.

As a general rule of thumb, if the stock fails to move within an established channel it usually indicates that the trend is changing and will most likely break out of the current pattern in the opposite direction. Thus, the clearing of the upper trend line could indicate an upward trend and the clearing of the lower trend line could indicate a downward trend.

Basing

Basing describes a period in which there has been little or no movement in the stock price. The pattern shown is then a flat line. After a market has been in a lengthy upward or downward trend you will usually find that it has a basing pattern. It correlates with the market taking time out to assess what possible direction the stock may take next. Therefore there is little price or volume movement during this time.

Breakout

Breakout trades are one of the most popular and profitable trade ideas. A breakout occurs when the share price moves out of a trading range or goes through a trend line. Basically, a breakout occurs when the share price ‘breaks’ through a support or resistance line. A breakout is the bullish counterpart to a breakdown.

If a pattern experiences a breakout but reverses in the opposite direction it is called a ˜whipsaw’ – that is, the breakout is only small or lacks momentum and is unable to continue. For a true breakout to occur, analysts consider a change of 3% to 5% is necessary.

Broadening Formation

This pattern is formed when you draw trend lines along the daily highs and daily lows to form a < pattern (see graphic). This particular pattern is used to predict the possibility of a reversal in the current trend. It is most commonly used to identify trend lines along an uptrend which can predict a move in a downward position.

A broadening formation is the reverse pattern to a symmetrical triangle. This pattern is considered quite rare, but the signal it generates is deemed to be very reliable.

Channel

If the trend breaks out in an upward trend then it is considered to be bullish. If the trend breaks in a downward trend then it is considered to be bearish. A channel is the common term for the range between support and resistance levels which have been traded in for a period of time.

Cup and Handle

As with most other charts this is also exactly as it sounds – a pattern on a chart resembling a cup with a handle. The cup is in the shape of a “U” and the handle has a slight downward angle.

The Cup with Handle is a bullish continuation pattern which marks a consolidation period followed by a breakout. It was developed by William O’Neil in the late 1980’s.

There are two distinct parts to the cup and handle pattern – the cup and the handle. The cup forms after a downward trend turns into an upward trend – it looks very similar to a round bottom pattern. The shape must be a ‘U’ with near equal sides. If it is a ˜V’ shape then it is not a cup and handle pattern.

As the cup is formed the market then experiences a pullback and changes direction to a downward pattern which forms the handle. This is not a common pattern and takes many weeks, if not many months, to actually form.

Descending Channel

Similar to the horizontal channel however this pattern forms a downward moving channel pattern (i.e. the parallel trend lines slope downwards from left to right). This is the opposite pattern to the ascending channel. The upper trend line connects a stocks daily highs and the lower trend line connects a stocks daily lows.

As a general rule of thumb, if the stock fails to move within an established channel it usually indicates that the trend is changing and will most likely break out of the current pattern in the opposite direction. Thus, the clearing of the upper trend line could indicate an upward trend and the clearing of the lower trend line could indicate a downward trend.

Flag

This is a rectangular shaped chart pattern that looks like a flag with a mast on either side. It occurs after a security has a sudden move up or down – something like a hiccup – but then continues on the original trend. It has a clearly defined ‘flagpole’, followed by the rectangular flag pattern then another flagpole.

If the original trend was upward, then the flag will slope down. If the original trend was downward, then the flag will slope up. This is a very reliable short term continuation pattern and very rarely results in a trend reversal.

Flags form over a period of no more than 12 weeks – once the pattern exceeds 12 weeks it is considered to be a rectangle. Most analysts rely on the pattern for around 1 to 4 weeks however some will take it up to 12 weeks.

Horizontal Channel

A horizontal channel is the section of a candlestick chart that is contained within 2 horizontal parallel lines drawn along the top and bottom of the pattern. The parallel lines are drawn along the daily highs and daily lows. This is also known as a trading channel.

Once the price of a stock breaks out of the upper or lower line of a horizontal channel, a large price movement in the direction of the break usually follows.

Pennant

This pattern is very similar to a flag pattern. The difference with this pattern are the angles of the support and resistance lines. Instead of running parallel like a flag pattern, a Pennant pattern will converge on each other. This is due to the Highs making new lows and the lows making new highs.

Confirmation of this pattern being a continuation of an upwards trend occurs when a breakout moves through the resistance line. This could be used as a signal for a buy order.

Triangle

A triangle pattern is formed when the trading highs and lows for a particular stock move closer together towards a common point – the fluctuations in price become progressively smaller over time. By drawing trend lines along the daily highs and daily lows it will form the outline of a triangle. You will notice on the graph that the daily highs become lower whilst at the same time the daily lows become higher.

If the pattern breaks out above the upper trend line then it is considered bullish however it the pattern breaks out below the lower trend line it is considered bearish.

Wedge

A wedge chart pattern is formed when price variations converge to meet at a point on a straight line. There are two types of wedges – a falling wedge and a rising wedge. A wedge is exactly how it sounds – a wedge shape that forms on a candlestick chart when you join together the peaks and troughs (highs and lows).

A falling wedge formation develops as the price continues to converge to a point after falling rapidly. It forms with lower highs and lower lows. A falling wedge is considered to be a bullish pattern. If it occurs in an upward trend it is considered to be a continuation pattern – if it occurs in a downward trend it is considered to be a reversal signal.

A rising wedge formation develops as the price continues to converge to a point after rallying (an upward trend) for a period of time. A rising wedge is considered to be a bearish signal and forms with higher highs and higher lows. A rising wedge is considered a continuation pattern in a downtrend however in an upward trend it is considered to be a reversal signal. In order to draw a definite wedge, the trend pattern must be compact with frequent price fluctuations and tightly bound lines that converge to a point.

Thee one difference between rising and falling wedges is that falling wedges may drift out of the wedge pattern before rallying sharply. Rising wedges are most common in bear markets, as they provide the fuel for the continuation of the primary trend.