TECHNICAL ANALYSIS- Patterns and probabilities 2

Triangle Patterns

The triangle formation can be more difficult to analyse and the fact that a few

different types of triangle exists doesn’t make this task any easier. Triangle is

most commonly just a pause in a trend (continuation pattern) and can also

terminate a trend (reversal pattern).

The "classical" triangle has at least 5 waves, and the breakthrough happens at

about 2/3 of the horizontal size of a triangle. It is not enough for the price to

touch the side of a triangle, the price bar must close outside the triangle,

otherwise we might have a false signal.

During the uptrend the triangle will more likely produce a false signal,

especially if the breakthrough happened too close to the end of a triangle.

This pattern can be considered as a sign that the market is "uncertain" in which

direction to move. Both buyers and sellers are pushing the price towards some

middle value. As it happens the volume usually is decreasing as everybody is

waiting for the price to break out of the triangle. The moment it happens, the

volume is usually increasing - due to psychological reasons.

It seems that the triangle USUALLY does not change the trend - if the price was

going up, then it is most probable that it will break UP from the triangle and

vice versa.

This pattern is a variation of the Symmetrical triangle. Think of it in terms of

"increasing pressure up and constant pressure down". The pattern will most

probably be resolved UP.

As the pattern is forming, the volume is deminishing, and when the

breakthrough occures, the pattern is usually expanding. It is a useful (but not

mandatory) confirmation.

The price projection equals the maximim height of the triangle.

Wedges

Unlike with the triangles, both upper and lower edges are either going up

(bearish formation) or down

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.

Flags

Flags are (sort of) variations of a triangles. They can be explained using the

same logic and they predict the same thing. The pattern is considered part of

the trend, which means that on the uptrend it is a sign that price will continue

to increase and on the downtrend it is a sign that the price will fall.