- Trading Chart Patterns
- Pivot Points
- ABCD Pattern
- Andrew’s Pitchfork
- Average True Range (ATR)
- Bearish Gartley Pattern
- Bollinger Bands
- Bullish 3-Drive Pattern

Next: Technical Analysis Part 3.

#### Trading Chart Patterns

Spotting chart patterns is a popular hobby amongst traders of all skill levels, and one of the easiest patterns to spot is a triangle pattern. However, there is more than one kind of triangle to find, and there are a couple of ways to trade them. Here are some of the more basic methods to both finding and trading these patterns.

#### What is an ascending triangle?

The ascending triangles form when the price follows a rising trendline. However, the trend consolidates, failing to make new highs.

Ascending triangles are considered to be continuation patterns. Therefore, a break of the resistance prompts a rally.

The pattern is negated if the price breaks below the upward sloping trendline.

The example below of the EUR/USD (Euro/U.S. Dollar) illustrates an ascending triangle pattern on a 30-minute chart. After a prolonged uptrend marked by an ascending trendline between A and B, the EUR/USD temporarily consolidated, unable to form a new high or fall below the support. The pair reverted to test resistance on three distinct occurrences between B and C, but it was incapable of breaking it.

The ascending triangle pattern formed once a horizontal resistance and ascending support lines acted as buffers for the price action. Finally, EUR/USD breached resistance at E, signaling a potential bullish breakout.

#### How can you trade ascending triangles?

Typically you want to buy after the pattern breaks resistance, as it did at E. It is good practice to set a stop-loss just below the last significant low, which in this example is at D.

Look at the chart below, a continuation of the EUR/USD. Once the ascending triangle formation is formed, we wait for a confirmation candle to signal a breakout. Since the following candle (at F) continued to advance higher, we enter the position at 1.4160, while placing our stop-loss slightly below the previous significant low at 1.4110 (a 50-pip difference from the buy price).

The EUR/USD rallies upward in line with our desired direction. The pair advances roughly 100 pips before consolidating once more at G, providing us with a 2:1 reward-to-risk ratio.

#### What is a descending triangle?

Not surprisingly, the descending triangle is the opposite of the ascending triangle. It forms when the price follows a downward trendline and then consolidates, failing to make new lows or break a downward trendline.

Descending triangles are considered continuation patterns. Therefore, a break in the support prompts the price to fall.

The pattern is negated if the price breaks the downward sloping trendline.

The example above of the NZD/USD (New Zealand Dollar/U.S. Dollar) illustrates a descending triangle pattern on a five-minute chart. After a downtrend which followed a descending trendline between A and B, the pair temporarily consolidated between B and C, unable to make a new low. The pair reverted to test resistance on two distinct occurrences, but it was incapable of breaking out to the upside at D. The pattern formed a horizontal support while descending resistance lines acted as buffers for the price action. Finally, the NZD/USD breached the resistance at E, signaling a potential bearish breakdown.

#### How can we trade descending triangles?

Typically you want to buy after the pattern breaks resistance, as it did at E. It is good practice to set a stop-loss just below the last significant high, which in this example is at D.

Look at the chart below, which is a continuation of the NZD/USD chart above. Once the descending triangle formation is completed, we wait for a candle to breakout from the pattern, as it did at E. We sell short NZD/USD at 0.6375, while placing our stop-loss slightly above the previous significant high at 0.6405 (a 30-pip difference from the sell price). NZD/USD tumbles in our desired direction.

The pair descends roughly 90 pips before consolidating once more at F, providing a 3:1 reward-to-risk ratio. Considering this is a five-minute chart, the profits and risks are generally smaller than if the pattern appeared on a larger timeframe.

#### What is a symmetrical triangle?

The pattern is identified by two discrete trendlines. The first trendline connects a series of lower peaks, while the second trendline connects a series of higher troughs.

Symmetrical triangles generally form during consolidation and the volatility tends to decline as the pattern progresses.

Symmetrical triangles tend to be neutral and can signal either a bullish or a bearish situation. Therefore, a breakout from the pattern in either direction signals a new trend.

The example above of the NZD/USD illustrates a symmetrical triangle formation on a 15-minute chart. After a rapid uptrend, the pair consolidated between A and B, unable to find a distinct trend. During the consolidating state, the pair continued to form a series of lower peaks and higher troughs. Volatility dropped off considerably, if compared to the beginning of the formation. Ultimately, the pattern ended when both of the trendlines came together at C.

#### How can we trade symmetrical triangles?

Since bias upon the conclusion of the pattern pointed higher, we look for an opportunity to buy the pair. Given the candle following the conclusion of the trend rallied at D, we bought NZD/USD at 0.6240. We place our stop-loss slightly below the most recent significant low at 0.6215 (a 25-pip difference from the buy price). The pair continued to consolidate prior to rallying approximately 80 pips at E. Considering this is a 15-minute chart, the profits and risks are generally smaller than if the pattern appeared on a larger timeframe.

#### Pivot Points

Pivot points are used by traders as a predictive indicator and denote levels of technical significance. When used in conjunction with other technical indicators such as support and resistance or Fibonacci, pivot points can be an effective trading tool.

Pivot points are calculated using the high, low and close prices of a previous day, week or month. Three different levels of support and resistance are calculated above and below the pivot point. The three levels of resistance are referred to as R1, R2, and R3 while the three levels of support are referred to as S1, S2, and S3. When the current price is trading above the daily pivot point, this serves as an indication to initiate long positions.

Conversely, when the current price is trading below the daily pivot point, this serves as an indication to initiate short positions. The support and resistance levels are used primarily as trade exits.

For example, if the market price breaks above the pivot point, R1 and R2 may be used as trade targets. Should the market move to R3, traders may consider exiting the long position and even reversing the position if other technical indicators show a strong reversal trend.

#### ABCD Pattern

Reflects the common, rhythmic style in which the market moves.

A visual, geometric price/time pattern comprised of 3 consecutive price swings, or trends—it looks like a lightning bolt on price chart.

A leading indicator that helps determine where & when to enter and exit a trade.

#### Why is the ABCD Pattern important? include the U.S. Dollar (USD).

Helps identify trading opportunities in any market (forex, stocks, futures, etc.), on any timeframe (intraday, swing, position), and in any market condition (bullish, bearish, or range-bound markets)

All other patterns are based on (include) the ABCD pattern.

Highest probability trade entry is at completion of the pattern (point D).

Helps to determine the risk vs. reward prior to placing a trade.

Convergence of several patterns—within the same timeframe, or across multiple timeframes--provide a stronger trade signal.

#### So how do I find an ABCD pattern?

Each pattern has both a bullish and bearish version. Bullish patterns help identify higher probability opportunities to buy, or go long. Bearish patterns help signal opportunities to short, or sell.

Each turning point (A, B, C, and D) represents a significant high or significant low on a price chart. These points define three consecutive price swings, or trends, which make up each of the three pattern legs. These are referred to as the AB leg, the BC leg, and the CD leg.

Trading is not an exact science. As a result, we use some key Fibonacci ratio relationships to look for proportions between AB and CD. Doing so will still give us an approximate range of where the ABCD pattern may complete—both in terms of time and price. This is why converging patterns help increase probabilities, and allow traders to more accurately determine entries and exits.

Each pattern leg is typically within a range of 3-13 bars/candles on any given timeframe, although patterns may be much larger than 13 periods on a given timeframe. Traders may interpret this as a sign to move to a larger timeframe in which the pattern does fit within this range to check for trend/Fibonacci convergence.

There are 3 types of ABCD patterns (each with a bullish and bearish version) in which specific criteria/characteristics must be met.

#### Bullish ABCD Pattern Characteristics (buy at point D)

#### Bullish ABCD Pattern Rules

Find AB

Point A is a significant high

Point B is a significant low

In the move from A to B there can be no highs above point A, and no lows below B

If AB, then find BC

Point C must be lower than point A

In the move from B up to C there can be no lows below point B, and no highs above point C

Point C will ideally be 61.8% or 78.6% of AB

In strongly trending markets, BC may only be 38.2% or 50% of AB

If BC, then draw CD

Point D must be lower than point B (market successfully achieves a new low)

In the move from C down to D there can be no highs above point C, and no lows below point D

Determine where D may complete (price) ---insert fib & abcd tool tutorial link

CD may equal AB

in price

CD may be 127.2% or 161.8% of AB in price

CD may be 127.2% or 161.8% of BC in price

Determine when point D may complete (time) for additional confirmation –insert fib time tool link

CD may equal AB in time

CD may be 61.8% or 78.6% time of AB

CD may be 127.2% or 161.8% time of AB

Look for fib, pattern, trend convergence

Watch for price gaps and/or wide-ranging bars/candles in the CD leg, especially as market approaches point D

Traders may interpret these as signs of a potential strongly trending market and expect to see 127.2% or 161.8% price extensions

#### Bearish ABCD Pattern Characteristics (sell at point D)

#### Bearish ABCD Pattern Rules

Find AB

Point A is a significant low

Point B is a significant high

In the move from A up to B there can be no lows below point A, and no highs above point B

If AB, then find BC

Point C must be higher than point A

In the move from B down to C there can be no highs above point B, and no lows below point C

Point C will ideally be 61.8% or 78.6% of AB

In strongly trending markets, BC may only be 38.2% or 50% of AB

Find AB

Point A is a significant high

Point B is a significant low

In the move from A to B there can be no highs above point A, and no lows below B

If AB, then find BC

Point C must be lower than point A

In the move from B up to C there can be no lows below point B, and no highs above point C

Point C will ideally be 61.8% or 78.6% of AB

In strongly trending markets, BC may only be 38.2% or 50% of AB

If BC, then draw CD

Point D must be higher than point B

In the move from C up to D there can be no lows below point C, and no highs above point D

Determine where D may complete (price)

CD may equal AB in price

CD may be 127.2% or 161.8% of AB in price

CD may be 127.2% or 161.8% of BC in price

Determine when point D may complete (time) for additional confirmation

CD may equal AB in time

CD may be 61.8% or 78.6% time of AB

CD may be 127.2% or 161.8% time of AB

Look for fib, pattern, trend convergence

Watch for price gaps and/or wide-ranging bars/candles in the CD leg, especially as market approaches point D

Traders may interpret these as signs of a potential strongly trending market and expect to see 127.2% or 161.8% price extensions

#### Andrew’s Pitchfork

Traders are always seeking trends, but monitoring them is not always an easy feat. To help simplify this task, many traders choose to employ trendlines, channel lines and moving averages to gauge the ripples and to help separate the false breakouts from the real ones. Four decades ago, Dr. Alan Andrews developed a method to identify and border the deviation from the main path of the market in an effort to better deal with the spillage of markets from the core of the trend. The result, named Andrews Pitchfork, is a channel that offers support and resistance around a median line.

#### Using the Pitchfork

As shown in the figure above, traders will initially seek the uptrend between A and B, and during this phase they will use the standard trend analysis methods. Andrews Pitchfork comes into play only after the market has formed a significant peak at point B and turned against the direction of the original trend. How far will this countertrend move go? The immediate answer can be found by using a full set of Fibonacci retracement levels.

Andrews Pitchfork can also be applied to a downtrend. As shown in the figure above the monthly chart of the downtrend in USD/CAD (U.S. Dollar/Canadian Dollar). The initial downtrend is marked by points A and B. After the pair put in a seemingly important bottom at B, an initial declining channel could have been plotted. Once USD/CAD bounced to C and then turned down again, Andrews Pitchfork was drawn. The extension of the pitchfork, or the middle line, acted as a declining support. The support line gave way in anticipation of an acceleration of the major downtrend, and the grand target became the line declining from point B.

#### Reading the Pitchfork

The outside lines of the pitchfork should provide the sloped trading range of the market, so a trader may choose to buy after a bounce back from the support or following a pullback from the resistance, with the size of the trade biased in the direction of the trend. If the declining resistance in a downtrend or the rising support in an uptrend gives way on a closing basis, then the trend is in danger and probably over. If the market price fails to surpass the centre line in either direction, then you may want to look at a pause in the trend. Finally, if the rising resistance in an uptrend or the declining support in a downtrend gives way on a closing basis, then the trend is accelerating.

#### Adding Prongs to the Pitchfork

For as long as the trend maintains medium to low volatility, three prongs will suffice. But what if the trend accelerates? In this case, one could extend the distance between the centre line and one of the external prongs, or half of the Andrews Pitchfork, in the direction of the breakout.

#### Average True Range (ATR)

The Average True Range (ATR) was initially developed for commodity traders to measure market volatility, but traders of other instruments have added ATR to charts to determine volatility as well as to identify possible trend tops and bottoms.

Similar to Bollinger Bands, the Average True Range (ATR) index measures the volatility of an instrument over a given period of time. The true range compares the following, looking for the greatest absolute value:

Current HIGH minus current LOW

Current HIGH minus previous CLOSE

Current LOW minus previous CLOSE

The standard ATR setting is 14, so it calculates the average of the true range over the past 14 periods.

Like ADX, the ATR creates the single line that appears in the sub-graph below the chart. A low ATR shows that the price for the market is level and that there is little to no volatility in the market. A high ATR indicates that the markets are volatile.

#### Bearish Gartley Pattern

First introduced in 1935 by trader H.M. Gartley in his book, Profits in the Stock Marketposition

Contains an bearish ABCD pattern preceded by a significant high or low (point X)position

A visual, geometric price/time pattern comprised of 4 consecutive price swings, or trends-it looks like a W on price chart.position

A leading indicator that helps determine where & when to enter short (sell) position, or exit along (buy) position.position

#### Why is the Bearish Gartley Pattern important?

Helps identify higher probability selling opportunities in any market (forex, stocks, futures, etc.), on any timeframe (intraday, swing, position).

Reflects convergence of Fibonacci retracement and extension levels at point D suggesting stronger level of resistance, thus higher probability for market reversal.

X-to-A ideally moves in the direction of the overall trend, in which case the move from A-to-D reflects a short-term correction of established downtrend.

May provide a more favorable risk vs. reward ratio, especially when trading with the overall trend.

#### So how do I find it?

Each turning point (X, A, B, C, and D) represents a significant high or significant low on a price chart. These turning points define the four consecutive price swings, or trends, which make up each of the four pattern legs. These are referred to as the XA leg, AB leg, the BC leg, and the CD leg.

#### Bearish Gartley Pattern Rules (sell at point D)

Swing up from A-to-D will typically be 61.8% or 78.6% retracement of XA

Must be valid ABCD pattern observed in move from A-to-D

Time from point XA and AD ideally in ratio and proportion

Limited instances where ABCD move completes at 100% of XA (double top)

Time of XA and AD should be equal for true double top

Pattern failure (price moves beyond point X) may indicate strong continuation move in progress

Price may move up to at least 127.2% or 161.8% of XA

#### Bollinger Bands

Most successful traders can determine when to enter or exit the market because they are able to look at the price chart of an instrument and determine if the markets are moving in a pattern (this is called trending) or simply moving back and forth around a point or between two levels (this is called ranging). Bollinger Bands use two bands to forecast the potential high and low prices for an instrument relative to a moving average. During normal market conditions, the bands usually appear to move in a synchronous pattern, but you can gauge volatility in the market by observing the distance between the bands.

Bollinger Bands are great tools to use to help determine when a particular instrument enters or exits a trend. In this example, two sets of Bollinger Bands were plotted on a chart. The first bands were set to 20,2 (which means two standard deviations away from the 20-day moving average) while the second were set to 20,1 (one standard deviation away from the 20-day moving average).

In the chart above, the upper Bollinger Bands of the two sets create a buy zone. Typically, when an instrument is in a strong uptrend, it will remain in this zone for some time. The two lower Bollinger Bands create a sell zone. When an instrument is in a strong downtrend, it will also stay in this zone for a while. If the instrument closes below the buy zone or above the sell zone, it is entered the range trading zone.

#### Bullish 3-Drive Pattern

The Bullish 3-Drive Pattern (3-drives to a bottom)

Rare pattern where price and time symmetry are key

Should be easily identified, or jump out at you

Formed by 3 consecutive symmetrical valleys

Contains two connecting (intertwined) bullish ABCD patterns

Also contains bullish butterfly pattern (completing at 3rd drive)

#### Why is the Bullish 3-Drive Pattern important? include the U.S. Dollar (USD).

Suggests market potentially at its most bearishâ€”higher probability for market reversal

Typically offers excellent risk/reward ratio

Pattern failure suggest potentially strong bearish continuation move may be in progress

#### So how do I find it?

First, it is very important to remember not to force a 3-drive pattern. Price as well as time symmetry are key, so it is something that should really stands out as three distinct, symmetrical drives to a bottom. Remember, the 3-drive is a far rarer pattern than a butterfly or Gartley (especially on longer timeframes), and it should be something that jumps out at you.

#### Bearish 3-Drive Pattern Rules (sell at 3rd drive)

Symmetry is the key to this pattern

Drives 2 and 3 should be 127.2% or 161.8% extensions of the A and C retracements

The A and C retracements will typically be 61.8% or 78.6% of the previous drive.

In strongly trending markets these retracements may be 38.2% or 50%.

Time of A and C retracements should be symmetrical. Same goes for extensions (2nd & 3rd drives to top)

A large price gap at anytime may be a sign that the pattern is wrong. Traders should wait for further confirmation that a top is in progress.