Chart Pattern Software

This presentation is a 30 minute look at how to trade chart patterns with the Autochartist chart pattern recognition, scanning, and alert program.

October 2nd Chart Pattern Trading chat at FXStreet
Uploaded by ez2tradesoftware

A Head and Shoulders pattern describes a share price movement that depicts the head and shoulders of a person.

Head and Shoulders is a reversal pattern from a bullish trend to a bearish trend. The pattern starts when the price graph crosses the support line upwards before formation of the left shoulder, and is completed once the graph crosses the support line downwards after formation of the right shoulder.

An Inverse Head and Shoulders is similar in shape except that it is upside down and indicates reversal from bearish to bullish trend.

Double Top and Double Bottom are reversal patterns that touch either the support or resistance lines twice before reversing their trend.

Look for a strong initial trend and a significant breakout in order to confirm the reversal.

Triple Top and Triple Bottom are reversal patterns that touch either the support or resistance lines three times before reversing their trend.

This is a stronger indicator of a trend change than a Double Top or Double Bottom. Look for a strong initial trend and a significant breakout in order to confirm the reversal.

Wedges chart patterns are similar to triangles in that these patterns are formed between converging support and resistance lines.

However, where the support and resistance lines in a triangle have one positive and one negative slope, the support and resistance lines of a wedge would both have either a positive or negative slope. Wedges with positive slopes are called Rising Wedges and ones with negative slopes are Falling Wedges.

The most common wedges are found as breakouts in the opposite direction of the wedge. That is, bearish breakouts in a rising wedge, and bullish breakouts in a falling wedge.

Emerging charts patterns — those chart patterns that have not yet broken through the support or resistance of the pattern — have some aspects that trades should be aware of as they watch Emerging chart pattern alert on the Autochartist software.

It is important to remember that although the emerging patterns are cached in the Emerging Pattern section of the results, the results displayed may not exist any more if the price graph changed in such a way as to change the shape of an emerging pattern. You will be notified of this situation when you double click an old emerging pattern in order to view its graph.

The grey shaded area on the image represents the predicted region that the price could reach. The predicted region is not displayed for emerging patterns.

The Autochartist chart paternn results are split into two main sections; complete patterns and emerging patterns.

Complete patterns list the pattern occurrences that have broken through either the support or resistance lines.   Traders and investors would also call this a trade that has “triggered”.

Emerging patterns list the patterns that have not yet broken through, giving you an opportunity to be pro-active in opening a position on the market.   This is a potential trade as prices have not “triggered” an entry.

A channel is formed between parallel support and resistance lines. This pattern usually indicates a relatively strong trend (up or down) with the price staying within the lines until breakout.

A breakout from a channel indicates either a reversal in the trend or a change in the slope of the current trend.

Similar to a channel, a rectangle is a pattern formed between horizontal support and resistance lines.

Rectangles and Channels are sometimes referred to as Flags and Pennants depending on the slope of the initial trend and the slope of the breakout. A Flag would be defined as a Bullish Continuation Channel Down, or a Bearish Continuation Channel Up. A Pennant would be defined as a Bullish Continuation Triangle, or a Bearish Continuation Triangle.

A triangle is formed between converging support and resistance lines

. A negative sloping resistance line indicates a reducing level of profit taking or more uncertainty about the value of the stock. With a positive sloping support line the price levels are squeezed into a corner. Once the support or resistance line is broken, pressure that has built up as a result of uncertainty is released and a certain amount of momentum is added to the price change in the direction of the breakout.

There are specific variations of triangles that can occur, namely ascending and descending triangles. An ascending triangle has a horizontal resistance line and a descending triangle has a horizontal support line.

An ascending triangle usually occurs as a continuation of a bullish trend, while a descending triangle usually occurs as a continuation of a bearish trend.

There are numerous types of chart patterns, all named according to the shapes that the price graphs form between the support and resistance lines. The general types of chart patterns include Triangles, Channels, Wedges, and Head-and-Shoulders.

An important measure of the quality of a chart pattern is the trend (or even the lack of trend) that precedes it. It does not matter whether the trend is bullish or bearish, but the consistency and duration of the initial trend partly determines the well-formedness of the chart pattern.

The chart pattern is said to have “broken out” once it has crossed either the support or resistance line. If the pattern broke out in the same direction as the preceding trend, it is called a continuation pattern. If breakout is in the opposite direction, it is called a reversal pattern.

For example, a chart pattern described as Bullish Reversal Triangle would mean that it is a bullish signal, that is, the breakout was through the resistance line, upward. Because it is a reversal pattern that means the preceding trend was in the opposite direction as the breakout, that is, the preceding trend was bearish.

Ok, so you’ve downloaded your free 21-day trial of the Autochartist chart pattern recognition software.  Now what? 

Searching for patterns: In order to search for new patterns, click on the New toolbar button . This will bring up a search dialog in which you can specify your search criteria.

You can search for patterns on a specific exchange, specific symbols or on a predefined category of instruments. There Autochartist service will return a maximum of 100 results independent of the period that is specified.

Search by Category: A Category of symbols is merely a predefined logical group of symbols. For example, a category called Forex Intraday would contain all pattern occurrences on the Forex market that had been identified on intra-day time data interval.

To search for patterns by category, select the Search by Category radio button and select the group you want to search in the drop-down menu.

Search by Exchange: To search for patterns on an exchange, select the Search by Exchange radio button and select the exchange on which you want to search. Furthermore, it is necessary to select the time interval on which you want to search for patterns. For example, selecting NYSE, 30min, will search for pattern occurrences on shares listed on the New York Stock Exchange using 30 minute intra-day data.

Search By Symbol:  To search for signals on a specific symbol, select the Search by Symbol radio button and enter the details of the symbol you want to look for. Autochartist does not verify the validity of the symbols entered - if an incorrect symbol is entered then no patterns will be returned.

Advanced Criteria:  Once you have entered which symbols, exchanges or groups to search, you can adjust the more advanced search criteria by switching between different tabs on the search window.

Pattern Characteristics:  On the pattern characteristics page you can select the direction of the signals you want (bullish / bearish / both), the trend change of the signals (continuation / reversal / both), the length of the pattern in bars, as well as how far back you want to search the history of pattern.

Pattern Quality:  Autochartist provides quality indicators for all patterns that have been identified. The search facility allows one to specify the minimum quality of the patterns that are displayed.

One is tempted to set all the quality indicators to maximum values, but this results in very few opportunities - it is very rare to find “perfect” patterns. With time you will start to get a feel for the importance of the different quality indicators and how they interact with your existing trading strategy.

The meaning of each of the different quality indicators is provided here.

Patterns:   One may select the patterns by which one wants to search by editing the list of patterns found under the Patterns tab in the search screen. Unselect the patterns that you do not wish to search for. The different pattern types are explained here.