PRICE MODELS( PRICE PATTERNS)
- Price Models(PATTERNS)
Definition
The basic principle of technical analysis is that prices move in trends. We also know that trends do not exist forever. Ultimately, prices change direction, and, as a rule, this happens in stages. For example, the price can slow down its movement, stop at one level and only then turn around. These phases arise at a time when investors are creating new expectations and thereby shifting the supply / demand line.
Changes in expectations are often the cause of price patterns. Although there are no two identical markets, still the price models are often very similar. Predictability of price behavior is made possible by these models.
Graphic models of prices can be formed from several days to several weeks, months and even years. Accordingly, the more time is spent on the formation of the model, the more dramatic will be the subsequent movement.
Interpretation
The next section will tell you about the most common price models.
- Head-and-Shoulders
A growing trend is formed by increments, step by step, by minima (bottoms) and peaks (peaks). The trend breaks if this requirement is violated. As you can see in the following illustration, the “left shoulder” and “head” are the two last growing (one after another) maxima. The “head and shoulders” model is the most well-known and at the same time the most reliable. She got this name because of the similarity to the figure of the head and two shoulders on one side. The “GIP” model is reversal and is therefore widely distributed.
(chart with signatures of the head and shoulders)
The right shoulder was formed at a time when bulls tried to push prices higher than the previous high, but could not. What signals the end of the growing trend. Confirmation of the turn comes after the penetration of the neck level.
During the development of the trend, the volumes should grow during each growing wave and fall during corrective movement. The signal to the fact that the trend is weakening is that the volumes on the growing wave are smaller than the volumes on the correctional movement. In a typical “head and shoulders” model, volumes fall when the head is formed and, especially, when the right shoulder is formed.
After breaking through the neck line, prices often return to it, as the last opportunity to continue the growing trend. If prices can not rise again above the neck, then they usually fall quickly on growing volumes.
The model “inverted head and shoulders” often coincides with the bottom in the market. As with the “normal” GIP model, volumes tend to fall when the model finishes forming, and then grow along with the price when it pierces the neck line from the bottom up.
(a picture with an inverted head and shoulders)
Rounded tops and bottoms (“saucers”)
The rounded top (“inverted saucer”) is drawn with a gradual shift in expectations from bull to bearish. The rounded bottom (“saucer”) is drawn with a gradual shift in expectations from bearish to bullish. In this case, the volumes in both cases always draw a saucer. First, they decrease as the previous trend weakens and again begin to grow after the designation of the new one.
The following chart shows Goodyear and a classic rounding bottom formation.
(plot saucer and inverted saucer)
Triangles
The triangle arises from the narrowing of the range between the peaks and the bottoms. At the same time, the price moves inside the triangle, starting from the lines of support and resistance.
Triangles are of three types. A symmetrical triangle is formed by a falling line of resistance and a growing support line. He rarely indicates the direction of further movement. An ascending triangle is formed by a growing support line and a horizontal resistance line. Exit from the triangle occurs with the penetration of the resistance level. The descending triangle is formed by a falling line of resistance and a horizontal support line. Exit from the triangle occurs with a break through the support level.
The longer the formation of a triangle takes place, the stronger the “pressure” of the price in it. A breakthrough is usually accompanied by a strong price movement and an increase in volumes.
The most reliable breakouts occur on a segment from half to ¾ of the side of the triangle.
If the price moves to the point of the vertex of the triangle, a breakthrough is unlikely.
The following chart shows Boeing and a descending triangle.
Note the strong downside breakout on increased volume.
- “Double bottom” and “double top”
A double peak occurs when the price of large volumes approaches the resistance line, rolls back down, and returns to resistance again on falling volumes. After that, the price goes down and a new falling trend is indicated.
(picture for a dabttop)
The double bottom, in fact, is an inverted double top, so it has the same characteristics, except that the double bottom is a bullish reversal pattern.