Friday, April 07, 2006
Short-Term Chart Patterns
In Basic Chart Analysis: Trends, Trading Ranges, and Support and Resistance and Chart Classics: Reversal And Continuation Patterns, we discussed the fundamental principles of chart analysis and the trading implications of many of the better-known chart patterns. While most of these consist of five or more bars, many chart "patterns" contain only one to three bars and are of special interest to traders since they are associated with short-term price extremes.
Gaps, spikes, wide-range days, and reversal days and are some of the more popular examples of this group. Like their longer-term cousins, these patterns are subject to a great deal of misinterpretation--which can be eliminated by remembering a few simple rules. We'll explain these patterns and show you how to make sense of them.
One-day wonders
Gaps
A gap occurs when today's low is higher than yesterday's high or today's high is lower than yesterday's low, forming an open (vertical) space between bars. An opening gap refers to an opening price that falls outside the range of the previous day's bar.
Gaps are quite common, and are often no more than relatively meaningless reactions to news events (or rumors); these can be exaggerated in thinly traded or highly volatile markets. For the most part, gaps that occur in choppy or trading range markets are less significant than those that occur when markets embark on a new price move or during an accelerated phase of a price move (e.g., a "parabolic" rally or decline).
When markets are moving with great force, they will often gap from one day to the next. So, on one hand, gaps can be evidence of a strong trend or runaway move (the reason gaps in these situations are called "runaway" gaps). On the other hand, gaps can be evidence of price exhaustion at the end of a trend, and can present opportunities to take positions in the opposite direction of the gap ("fading" the gap).
Similarly, opening gaps sometimes present opportunities to trade counter to the direction of the gap after the initial selling or buying "panic" subsides and the market reverses. There are many reasons this can happen--the release of an early morning economic report, or an earnings announcement the previous evening; for some examples, see Kevin Haggerty's article on Opening Reversals and the definition of his Trap Door trade.
http://www.investopedia.com/university/tm/TradingPatterns/ShortTermChartPatterns.asp
Gaps, spikes, wide-range days, and reversal days and are some of the more popular examples of this group. Like their longer-term cousins, these patterns are subject to a great deal of misinterpretation--which can be eliminated by remembering a few simple rules. We'll explain these patterns and show you how to make sense of them.
One-day wonders
Gaps
A gap occurs when today's low is higher than yesterday's high or today's high is lower than yesterday's low, forming an open (vertical) space between bars. An opening gap refers to an opening price that falls outside the range of the previous day's bar.
Gaps are quite common, and are often no more than relatively meaningless reactions to news events (or rumors); these can be exaggerated in thinly traded or highly volatile markets. For the most part, gaps that occur in choppy or trading range markets are less significant than those that occur when markets embark on a new price move or during an accelerated phase of a price move (e.g., a "parabolic" rally or decline).
When markets are moving with great force, they will often gap from one day to the next. So, on one hand, gaps can be evidence of a strong trend or runaway move (the reason gaps in these situations are called "runaway" gaps). On the other hand, gaps can be evidence of price exhaustion at the end of a trend, and can present opportunities to take positions in the opposite direction of the gap ("fading" the gap).
Similarly, opening gaps sometimes present opportunities to trade counter to the direction of the gap after the initial selling or buying "panic" subsides and the market reverses. There are many reasons this can happen--the release of an early morning economic report, or an earnings announcement the previous evening; for some examples, see Kevin Haggerty's article on Opening Reversals and the definition of his Trap Door trade.
http://www.investopedia.com/university/tm/TradingPatterns/ShortTermChartPatterns.asp
# posted by Cherie : 8:53 AM
