CHART PATTERNS

Symmetrical triangles can be characterized The Ascending triangle is a variation of the

as areas of indecision. symmetrical triangle.
Ascending
triangles are
generally
considered
bullish

and are most reliable when found in an uptrend.

The top part of the triangle appears flat, while the
A market pauses and future direction is
bottom part of the triangle has an upward slant. In
questioned. Typically, the forces of supply and
ascending triangles, the market becomes
demand at that moment are considered nearly
overbought and prices are turned back. Buying
equal. Attempts to push higher are quickly met by
then re-enters the market and prices soon reach
selling, while dips are seen as bargains. Each new
their old highs, where they are once again turned
lower top and higher bottom becomes more
back. Buying then resurfaces, although at a higher
shallow than the last, taking on the shape of a
level than before. Prices eventually break through
sideways triangle.
the old highs and are propelled even higher as new
(It's interesting to
buying comes in. (As in the case of the
note that there is
symmetrical triangle, the breakout is generally
a tendency for
accompanied by a marked increase in volume.)
volume to
diminish during
this period.) The Descending triangle, also a variation of
the symmetrical triangle, is generally considered
to be bearish and is usually found in downtrends.
Eventually, this indecision is met with resolve and
Unlike the ascending
usually explodes out of this formation (often on
triangle, this time the
heavy volume.)
bottom part of the
triangle appears flat. The
Research has shown that symmetrical triangles
top part of the triangle
overwhelmingly resolve themselves in the
direction of the trend. With this in mind, has a downward slant.
symmetrical triangles in my opinion, are great Prices drop to a point where they are oversold.
patterns to use and should be traded as Tentative buying comes in at the lows, and prices
continuation patterns. perk up. The higher price however attracts more
sellers and prices re-test the old lows. Buyers then
once again tentatively re-enter the market. The
better prices though, once again attract even more
selling. Sellers are now in control and push
through the old lows of this pattern, while the
previous buyers rush to dump their positions. (And
like the symmetrical triangle and the ascending
triangle, volume tends to diminish during the
formation of the pattern with an increase in
volume on its resolve.)
The Wedge formation is also similar to a Flags and Pennants can be categorized as
symmetrical triangle in appearance, in that they continuation patterns. They usually represent only
have converging trendlines that come together at brief pauses in a dynamic market. They are
an apex. typically seen right after a big, quick move. The
market then usually takes off again in the same
direction. Research has shown that these patterns
are some of the most reliable continuation
patterns.

Bullish flags are characterized by lower tops and

lower bottoms, with the pattern slanting against
However, wedges are distinguished by a the trend. But unlike wedges, their trendlines run
noticeable slant, either to the upside or to the parallel.
downside. (As with triangles, volume should diminish
during its formation and increase on its resolve.) Bearish flags are comprised of higher tops and
higher bottoms. "Bear" flags also have a tendency
A falling wedge is generally considered bullish to slope against the trend. Their trendlines run
and is usually found in up trends. But they can parallel as well.
also be found in downtrends as well. The
implication however is still generally bullish. This Pennants look very much like symmetrical
pattern is marked by a series of lower tops and triangles. But pennants are typically smaller in
lower bottoms. size (volatility) and duration.
A rising wedge is generally considered bearish
and is usually found in downtrends. They can be
found in up trends too, but would still generally be
regarded as bearish. Rising wedges put in a series
of higher tops and higher bottoms.

(Volume generally contracts during the pause with

an increase on the breakout.)

The volume is not that important for the rising

wedge, but it is critical for the falling wedge. The
volume should expand to confirm the break of a
resistance.
The Head and Shoulders pattern is generally The Head and Shoulders pattern can
regarded as a reversal pattern and it is most often sometimes be inverted. The inverted head and
seen in uptrends. It is also most reliable when shoulders is typically seen in downtrends.
found in an uptrend as well.

Eventually, the What's

market begins noteworthy
to slow down about the
and the forces inverted head
of supply and and shoulders
demand are is the volume
generally aspect.
considered in The inverted left shoulder should be accompanied
balance. by an increase in volume. The inverted head
Sellers come in at the highs (left shoulder) and the should be made on lighter volume. The rally from
downside is probed (beginning neckline.) Buyers the head however, should show greater volume
soon return to the market and ultimately push than the rally from the left shoulder. Ultimately,
through to new highs (head.) However, the new the inverted right shoulder should register the
highs are quickly turned back and the downside is lightest volume of all. When the market then
tested again (continuing neckline.) Tentative rallies through the neckline, a big increase in
buying re-emerges and the market rallies once volume should be seen.)
more, but fails to take out the previous high. (This
last top is considered the right shoulder.) Buying Rectangles should generally be traded as
dries up and the market tests the downside yet continuation patterns. They are indecision areas
again. Your trendline for this pattern should be that are usually resolved in the direction of the
drawn from the beginning neckline to the trend.
continuing neckline. (Volume has a greater
importance in the head and shoulders pattern in
comparison to other patterns. Volume generally
follows the price higher on the left shoulder.
However, the head is formed on diminished
volume indicating the buyers aren't as aggressive
as they once were. And on the last rallying
attempt-the left shoulder-volume is even lighter Research has shown that this is true far more often
than on the head, signaling that the buyers may than not. Of course, the trendlines run parallel in a
have exhausted themselves.) New selling comes in rectangle. Supply and demand seems evenly
and previous buyers get out. The pattern is balanced at the moment. Buyers and sellers also
complete when the market breaks the neckline. seem equally matched. The same 'highs' are
(Volume should increase on the breakout.) constantly tested as are the same 'lows'. The
market vacillates between two clearly set
parameters. (While volume doesn't seem to suffer
like it does in other patterns, there usually is a
lessening of activity within the pattern. But like
the others, volume should noticeably increase on
the breakout.)
After looking at the various chart patterns is heavier on the down days, with the market
explained so far, you'll notice that consideration likely to breakout to the downside.
has been given to volume. Simply put, volume is So while it seems as if chart patterns, volume and
the number of contracts traded over a period of technical analysis in general all have some
time. And since even the most reliable of patterns forecasting abilities, none are foolproof. Used
will fail sometimes, volume can be used as together, they can be quite helpful in your trading
another tool in determining what's happening and investing, but should be looked at more as
within the market and more specifically what's helpful hints as to a markets bias, more than
happening within the pattern. anything else.
It is believed that volume should increase in the
direction of the price. If the prevailing trend is up, Thank you to Forex Joe for the following
volume should be heavier on the up days and insights into chart patterns:
lighter on the down days. If the trend was down,
volume should be heavier on the down days, with
Wave - a pattern where the chart shows
lighter volume on the up days. This makes sense
movement up and down as the lines move across
because in an uptrend there should be more buyers
the chart. These waves can move across the chart
than sellers, and in a downtrend there should be
with consistent highs and lows (consolidation
more sellers than buyers. If volume should start to
movement). These waves can also move upward
diminish, it could be a warning that the trend
with higher highs and higher lows (trending
could be losing steam and that a consolidation or
upward) or move downward with lower highs and
perhaps a reversal could be ahead. If the trend was
lower lows (trending downward)
up, and now we're seeing more volume on dips
than on rallies, it should be an alert that buying
pressure is waning and sellers are becoming more
aggressive. The reverse would be true in a Descending
downtrend. If volume starts to shrink on the sell- waves - are
offs and picks up on the rallies, once again, it waves that are
could be a sign that the trend is in trouble, and trending lower.
buyers are starting to assert themselves. When
This means lower highs and lower lows.
volume moves in the opposite direction of the
price, this is called divergence.
Ascending waves - are waves that are getting
One of the reasons why volume has a tendency to
higher highs and higher lows.
diminish during periods of indecision is for just
that reason. During periods of sideways
movement, often traders will avoid a market, Double Bottom - a chart formation where you
preferring to commit their funds once a clear-cut get two valleys that looks like an upside down
breakout is seen. However, while it's typical for tooth.
volume to diminish during these times, volume
can give clues as to possible future direction by
measuring the level of conviction of the buyers
and the sellers. Seeing if there's heavier volume on
the up days or on the down days could be useful in
getting positioned during a sideways move or a
formation of a pattern. The idea being that if
there's more volume on the up days than the down
days, the buyers are probably the more aggressive Often when the chart bounces off the bottom of
and the market should more than likely breakout the valley the second time it will turn around and
to the upside. The reverse being true if the volume head up.
Double top - a chart formation where you get Oscillations - When a pair cannot make up its
two peaks that looks like a tooth. mind to which direction to go next it begins to
oscillate in a channel and build new waves
before taking off in a resumed direction or a new
direction depending on the strength of the impetus
which is invariably a strong and awaited news
driver. This may be in a repeatable pattern,
trending up, trending down, or channeling
sideways.

Often when the chart bounces off the top of the

peak the second time it will turn around and head
down. This is a reversal pattern that forms after an
uptrend. It consists of two peaks. The size of
peaks is nearly equal. The important confirmation
signal occurs when the support line is broken after
the second peak.
Oscillations on the larger lights can produce
potential pip movements between 175 to 500 pips
Channel - waves that are not trending but
or more. Not in a continuous fashion. Movement
instead are moving sideways.
and consolidation, movement and consolidations.
A pattern
where the
chart shows
movement up
Counter Cycle - The first Counter Cycle on the
180 minute light of 4x made easy software will
and down as
cause the ST (Short Term) to converge.
the lines
move across
the chart.
These waves move across the chart with consistent
highs (bumping against the resistance) and lows
(bumping against the support). Depending on the
amount of movement between highs and lows, you
may be able to trade a channel as it moves up or
down. When the lines break through either support
or resistance levels you have a breakout. If the
movements of the lines up and down were really The second Counter Cycle will cause the ST
small the pattern would be called braided. (Short Term) green line to fresh cross.
Also referred to as a narrow price range. A
channel is the high and low price range between
support and resistance levels that a currency pair
has traded in for a specific period of time. A
breakout above a channel is a bullish movement; a
breakout below a channel is a bearish movement.
Retracements - A price movement in the and run the direction with renewed energy and
opposite direction of the previous trend. determination.

Retracing occurs almost every day when a pair is The runners mind is sometimes oscillating while
trending. You will notice that there are periods the runner is gathering in renewed energy or calm,
when pairs are in a strong ascending or quite and relaxed sometimes for hours on end,
descending movement that there is a reversal of almost flat but always ready for the signal that will
the trend for a period of time. That is referred to as send him or her in the next direction.
the retracements or resting mode. Consolidation involves a small pullback and then
a channel, followed by a continuation.
These moves are also called corrections. After a
significant price move many traders want to know Consolidation vs. Retracements for Big
how far this new move or correction will extend.
Light Traders
Think of it as stopping and catching your breath
after a long run. The reasons these retracement A consolidation is basically a sideways movement
periods exist are the lack of momentum of the or oscillation on the smaller lights, a tight channel,
session (usually after the close of New York at 5 and tends to occur when the market is trending. It's
PM Eastern and the opening of the Asian at 7 PM like the market is taking a rest between moves.
and into the Euro session when trends generally A retracement is, indeed a movement against the
begin to pick up steam again. overall trend, usually involving at least 100-to-200
pips on the Big Lights.
Retracements are short trend reversals that are the
result of limits being hit and profits being taken by I guess the distinction would be if a consolidation
larger account traders and institutions or price involves a small pullback and then a channel,
movements in the opposite direction of the followed by a continuation. The short term light
previous trend towards a previous level of would converge somewhat, but not cross, and the
resistance and support. next move would easily reopen the light.
Sometimes these moves, takes days in a channel
Consolidation: When a trend seeks before having a continuation. A Big Lights trader
confirmation of future direction and is uncertain could comfortably hold his position during this
which course it will take whether continuation or move.
reversal it is in a mode of consolidation. It has
gathered up its energy and slowed its pace, much Retracements in Big Lights terms would cause
like a marathon runner stopped and standing on much greater convergence or a cross of the 720
the side lines having a Gatorade break and and even the Short Term. Here a Big Lights trader
observing which way the next run will go as you needs to evaluate whether to stay in, or whether to
patiently wait and are ready to burst onto the road take profits and think of another entry when the
overall trend resumes.
The following is taken from the Big Lights Increasing Tops and Bottoms
DVD’s with MM - under Technical Analysis: is a standard bullish pattern. You can see that you
have an upcycle, and then a consolidation, then
Long before there was a program called another upcycle and consolidation, and it keeps
4XMadeEasy, and long before there was even moving in this pattern.
something called the Euro, people were trading
currencies. Back before these things happened –
you only had two ways to trade – Fundamental
Analysis or Technical Analysis. Now we’re talking
about the technical analysis portion. At the time
there was what I called standard technical
indicators. Some of them were somewhat reliable,
and some of them did nothing more than conflict
the arena. What you have to remember is when If you see the top of the cycle (A) - the tops are
trying to tie technical analysis to 4XMadeEasy is increasing, and the bottoms (B) are also
that 4XMadeEasy is a price based software. You increasing. What ever chart this is - I don’t care if
see the open, high, low, close, by rolling your it’s a minute light or the short term chart - What
mouse across the curves, and you know that price ever chart has increasing tops and bottoms - the
forms the basis for some of the parameters that lights to the right will be fully separated and
goes into the algorithm. So, if you look at certain pointing up. That’s your foundation light, and this
price charts, don’t kill yourself in what I call chart would be your entry window. It makes a
technical analysis overkill. You don’t want to movement and then a consolidation cycle, and
drive yourself crazy with a bunch of outside then what’s called a relative low. Then it will go
charts, but if you inspect these charts over a into its next upward movement, if the lights to the
period of time, and I’m talking a period of a year, right are separated. This is a trigger window for a
on the 4XMadeEasy charts, you are going to start trade - if the lights to the right are separated. If I
seeing some chart patterns that match saw a fresh cross with angle and separation (at B)
conventional technical analysis. What I don’t - I might be inclined to trade it before it broke the
want people to take away from this is that every resistance (at A) - because I know that my lights to
single outside technical indicators going to help the right are separated. That’s the advantage of
you. What I’m looking for, first and foremost – is 4XME.
4XMadeEasy. I’m trying to take the approach of
starting with 4XME and trying to make a
Decreasing Tops and Bottoms - is a
determination of what chart patterns I see, that
standard bearish pattern. Downward movement
match some of the conventional chart patterns.
followed by consolidation, downward movement,
I’m trying to use that to my benefit to help me with
consolidation - it is a mirror image of increasing
my entry points. I’m not trying to turn it into
tops and bottoms.
technical analysis overkill. I still want a fresh
cross with angle and separation. I still want a
foundation light. I want to use the 4XME software
to do what it was designed to do – Forex made
easy – or the conventional analysis made
e-a-s-i-e-r! But – I don’t want to bury my head in
the sand and ignore what I call some very obvious
chart patterns that you see that are based on
conventional technical analysis. I want to do The lights to the right will be fully separated and
everything I can to get a better entry point. That’s red. You are building what’s called a relative high.
what we’re going to be looking at, and that’s how You have decreasing tops (A) and your bottoms
we’re going to use the information. are also decreasing (B).
Increasing or decreasing tops and bottoms are one that it will form a reversal. You see it happening
of the most straight forward, conventional, basic time after time. You can start to recognize it - and
technical analysis that you see on the Forex, It’s then your accuracy starts to go way up. A Double
wrong to ignore it. You could have a short term Bottom is a mirror to the Double Top pattern.
foundation chart and see these waves on a 180
minute chart, or a mid term foundation chart and Ascending or Descending Wedge - is a less
see the waves on a short term chart. common chart pattern - be careful, it is only 50%
reliable. How do you recognize a descending
wedge? You have a long down cycle, then a
consolidation, then another down cycle, but the
second down cycle is shorter than the first - then it
consolidates again, and the third down cycle is
Once you know your direction, you can start shorter than the first and second down cycle. The
spotting these particular chart patterns. down cycles are shrinking.

Ascending Triangle (or Pennant)- If you This is an important

look at it closely, the resistance levels are about point. This is the one
the same and the support levels are increasing. that you say, when it
You have increasing bottoms and steady tops. reaches the bottom of
its third cycle, (and
they move in three’s -
it’s a funny thing)

All you can say, is that it could signal a reversal.

If you draw straight lines across the top, and along If they’re moving this way - what are the lights on
the bottom, you will see that it forms a triangle the right going to be? Well, they’re going to be
shape. With 4xMadeEasy, you can have potential separated. This is one where you’re looking at a
entry points at 1, 2, or 3. With conventional chart 50/50 probability - so - It is far less reliable, It’s
analysis, you would only have a potential entry at where it reaches this critical point - at the end of
3. A Descending Triangle (Pennant) is a mirror to the third wave, pointing down, and if the lights to
the Ascending Triangle pattern. the right are separated and pointing down, then
that could be the very point of reversal.
Double Top - signals a reversal. This is one of
the more reliable chart patterns. It makes a fairly
long move in one direction, and hits a resistance,
One thing traders
rolls down, then comes back up and hits the same
always want to
resistance - which is the double top, and signals a
avoid is getting in
reversal.
at a certain
direction, right at
the point of
reversal.

This is a very common place and every day chart When you get to the third down cycle, and you try
pattern. The experienced 4XMadeEasy trader will and short it, you’re pretty much taking your life in
recognize this pattern everyday. It is a visually your own hands - because you DON’T KNOW
obvious chart pattern. The common thinking is what’s going to happen. It’s a coin toss!