MARTIN, Glessy Pulig

BSAB 3A
Technical Analysis Patterns:
1.Head and Shoulders
This is one of the most popular and reliable chart patterns in technical analysis.Head
and shoulders is a reversal chart pattern that when formed, signals that the security is likely
to move against the previous trend. As you can see in Figure 1, there are two versions of the
head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart
pattern that is formed at the high of an upward movement and signals that the upward trend
is about to end. Head and shoulders bottom, also known as inverse head and
shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal
in a downtrend .
Figure 1: Head and shoulders top is shown on the left. Head and shoulders
bottom, or inverse head and shoulders, is on the right.

Both of these head and shoulders patterns are similar in that there are four main parts: two
shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a
high and a low. For example, in the head and shoulders top image shown on the left side in
Figure 1, the left shoulder is made up of a high followed by a low. In this pattern, the neckline
is a level of support or resistance. Remember that an upward trend is a period of successive
rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a
weakening in a trend by showing the deterioration in the successive movements of the highs
and lows.
2.Cup and Handle
A cup and handle chart is a bullish continuation pattern in which the upward trend has
paused but will continue in an upward direction once the pattern is confirmed.

This price pattern forms what looks like a cup, which is preceded by an upward trend.
The handle follows the cup formation and is formed by a generally downward/sideways
movement in the security's price. Once the price movement pushes above the resistance lines
formed in the handle, the upward trend can continue. There is a wide ranging time frame for
this type of pattern, with the span ranging from several months to more than a year.
3.Double Tops and Bottoms
This chart pattern is another well-known pattern that signals a trend reversal - it is
considered to be one of the most reliable and is commonly used. These patterns are formed
after a sustained trend and signal to chartists that the trend is about to reverse. The pattern
is created when a price movement tests support or resistance levels twice and is unable to
break through. This pattern is often used to signal intermediate and long-term trend
reversals.

Figure 3: A double top pattern is shown on the left, while a double bottom
pattern is shown on the right.
In the case of the double top pattern in Figure 3, the price movement has twice tried to
move above a certain price level. After two unsuccessful attempts at pushing the price higher,
the trend reverses and the price heads lower. In the case of a double bottom (shown on the
right), the price movement has tried to go lower twice, but has found support each time. After
the second bounce off of the support, the security enters a new trend and heads upward.
4.Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The
three types of triangles, which vary in construct and implication, are the symmetrical
triangle, ascending and descending triangle. These chart patterns are considered to last

anywhere from a couple of weeks to several months.

The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge toward each
other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of
a trend in that direction. In an ascending triangle, the upper trendline is flat, while the bottom
trendline is upward sloping. This is generally thought of as a bullish pattern in which chartists
look for an upside breakout. In a descending triangle, the lower trendline is flat and the upper
trendline is descending. This is generally seen as a bearish pattern where chartists look for a
downside breakout.
5.Flag and Pennant
These two short-term chart patterns are continuation patterns that are formed when
there is a sharp price movement followed by a generally sideways price movement. This
pattern is then completed upon another sharp price movement in the same direction as the

move that started the trend.

As you can see in Figure 5, there is little difference between a pennant and aflag. The main
difference between these price movements can be seen in the middle section of the chart
pattern. In a pennant, the middle section is characterized by converging trendlines, much like
what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other
hand, shows a channel pattern, with no convergence between the trendlines. In both cases,
the trend is expected to continue when the price moves above the upper trendline.
6.Wedge

The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a
symmetrical triangle except that the wedge pattern slants in an upward or downward
direction, while the symmetrical triangle generally shows a sideways movement. The other
difference is that wedges tend to form over longer periods, usually between three and six
months.

The fact that wedges are classified as both continuation and reversal patterns can make
reading signals confusing. However, at the most basic level, a falling wedge is bullish and a
rising wedge is bearish. In Figure 6, we have a falling wedge in which two trendlines are
converging in a downward direction. If the price was to rise above the upper trendline, it
would form a continuation pattern, while a move below the lower trendline would signal a
reversal pattern.
7.Triple Tops and Bottoms
Triple tops and triple bottoms are another type of reversal chart pattern in chart
analysis. These are not as prevalent in charts as head and shoulders and double tops and
bottoms, but they act in a similar fashion. These two chart patterns are formed when the price
movement tests a level of support or resistance three times and is unable to
break through; this signals a reversal of the prior trend.

8.Rounding Bottom
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that
signals a shift from a downward trend to an upward trend. This pattern is traditionally thought
to last anywhere from several months to several years.

9.Simple Moving Average (SMA)

This is the most common method used to calculate the moving average of prices. It
simply takes the sum of all of the past closing prices over the time period and divides the
result by the number of prices used in the calculation. For example, in a 10-day moving
average, the last 10 closing prices are added together and then divided by 10. As you can see
in Figure 1, a trader is able to make the average less responsive to changing prices by
increasing the number of periods used in the calculation. Increasing the number of time
periods in the calculation is one of the best ways to gauge the strength of the long-term trend
and the likelihood that it will reverse.

Many individuals argue that the usefulness of this type of average is limited because
each point in the data series has the same impact on the result regardless of where it occurs
in the sequence. The critics argue that the most recent data is more important and, therefore,
it should also have a higher weighting. This type of criticism has been one of the main factors
leading to the invention of other forms of moving averages.
10.Exponential Moving Average (EMA)
This moving average calculation uses a smoothing factor to place a higher weight on
recent data points and is regarded as much more efficient than the linear weighted average.
Having an understanding of the calculation is not generally required for most traders because
most charting packages do the calculation for you. The most important thing to remember
about the exponential moving average is that it is more responsive to new information relative
to the simple moving average. This responsiveness is one of the key factors of why this is the
moving average of choice among many technical traders. As you can see in Figure 2, a 15period EMA rises and falls faster than a 15-period SMA. This slight difference doesn't seem like

much, but it is an important factor to be aware of since it can affect returns.

11.Major Uses of Moving Averages

Moving averages are used to identify current trends and trend reversals as well as to
set up support and resistance levels.
Moving averages can be used to quickly identify whether a security is moving in an
uptrend or a downtrend depending on the direction of the moving average. As you can see in
Figure 3, when a moving average is heading upward and the price is above it, the security is in
an uptrend. Conversely, a downward sloping moving average with the price below can be used
to signal a downtrend.

Another method of determining momentum is to look at the order of a pair of moving

averages. When a short-term average is above a longer-term average, the trend is up. On the
other hand, a long-term average above a shorter-term average signals a downward movement
in the trend.
Moving average trend reversals are formed in two main ways: when the price moves
through a moving average and when it moves through moving average crossovers. The first
common signal is when the price moves through an important moving average. For example,
when the price of a security that was in an uptrend falls below a 50-period moving average,
like in Figure 4, it is a sign that the uptrend may be reversing.

The other signal of a trend reversal is when one moving average crosses through
another. For example, as you can see in Figure 5, if the 15-day moving average crosses above
the 50-day moving average, it is a positive sign that the price will start to increase.

If the periods used in the calculation are relatively short, for example 15 and 35, this
could signal a short-term trend reversal. On the other hand, when two averages with relatively
long time frames cross over (50 and 200, for example), this is used to suggest a long-term
shift in trend.
Another major way moving averages are used is to identify support and resistance
levels. It is not uncommon to see a stock that has been falling stop its decline and reverse
direction once it hits the support of a major moving average. A move through a major moving
average is often used as a signal by technical traders that the trend is reversing. For example,
if the price breaks through the 200-day moving average in a downward direction, it is a signal

that the uptrend is reversing.

Moving averages are a powerful tool for analyzing the trend in a security. They provide
useful support and resistance points and are very easy to use. The most common time frames
that are used when creating moving averages are the 200-day, 100-day, 50-day, 20-day and 10day. The 200-day average is thought to be a good measure of a trading year, a 100-day
average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month
and 10-day average of two weeks.
Moving averages help technical traders smooth out some of the noise that is found in
day-to-day price movements, giving traders a clearer view of the price trend. So far we have
been focused on price movement, through charts and averages. In the next section, we'll look
at some other techniques used to confirm price movement and patterns.
12.Relative Strength Index
The relative strength index (RSI) is another one of the most used and well-known
momentum indicators in technical analysis. RSI helps to signal overbought and oversold
conditions in a security. The indicator is plotted in a range between zero and 100. A reading
above 70 is used to suggest that a security is overbought, while a reading below 30 is used to
suggest that it is oversold. This indicator helps traders to identify whether a security's price
has been unreasonably pushed to current levels and whether a reversal may be on the way.

The standard calculation for RSI uses 14 trading days as the basis, which can be
adjusted to meet the needs of the user. If the trading period is adjusted to use fewer days, the
RSI will be more volatile and will be used for shorter term trades.