Million Dollar Journey

Building Wealth through Saving and Investing

Welcome to Million Dollar Journey! If you're new here, you can learn about me, read our user guide, and even follow my net worth updates. A great place to start reading is with the popular articles located in the right side bar. If you would like to join thousands of others and keep up with the free daily updates, you can subscribe to the RSS feed via reader or E-mail.

On your way out, make sure to check out the exclusive Million Dollar Journey Freebies and Deals.

Stock Chart Continuation Patterns – Triangles and Channels





The previous post had looked at some continuation stock chart patterns. This week we’ll touch upon more patterns that can be identified in stock charts. Please note that the screen shots may not perfectly reflect the definition of that pattern, which a trader performing technical analysis would look for and accept and only meant to provide some visual idea instead of mere text (click on images for enlarged views).  Here are more continuation type patterns (continued).

Triangle Chart Patterns

Triangle patterns are continuation patterns that are identified by narrowing price movements. Adding trend lines to the chart helps to recognize such patterns, which can be ascending, descending, or symmetrical triangles.

Ascending Triangle Pattern

ascendingtriangle

The ascending triangle continuation pattern is seen during a stock upswing. It is marked by a horizontal line at the top offering resistance to the price movement and a rising trend line at the bottom. The breakout from the resting area (or period) is an indication that the uptrend will continue. The volume may shrink during the resting phase and expand during the breakout, which is an indication that bullish traders are moving in to buy the stock.

Descending Triangle Pattern

descendingtriangle

The descending triangle continuation pattern is seen during a stock downswing. It is marked by a horizontal line at the bottom offering support to the price movement and a falling trend line at the top. The breakout from the resting period is a signal that the downtrend will continue. The volume may shrink during the resting phase and expand during the breakout, which is an indication that bearish traders are moving in to sell their shares.

Symmetrical Triangle Pattern

symtriangle

A symmetrical triangle is a continuation pattern with converging trend lines. Generally, a breakout from the top signals a bullish trend, whereas a breakout from the bottom indicates a bearish trend, both accompanied by increasing volume of shares. Similar to ascending and descending triangle patterns, the symmetrical triangle pattern is another consolidation phase, which is a resting period before the stock continues its upswing or downswing.

Channeling

A channel is a trading range (phase) where there is a no clear trend to be identified, usually occurring after an obvious trend. There are three types of channels – rising, falling, or rectangle.

Rising Channel

risingchannel

A rising channel is a continuation pattern where a stock shows bullish signals with increasing prices along a channel marked by two parallel lines. Generally, such a channel can be seen during a downtrend that includes this minor rising channel, which is usually followed by a breakout from the lower end of the channel. The rising channel continues until the stock moves to break through the upper (bullish) or lower (bearish, ending the minor upswing) end of the channel with the breakout indicated by expanding volume.

Falling Channel

fallingchannel

A falling channel is a continuation pattern where a stock shows bearish signals with decreasing prices along a channel marked by two parallel lines. Generally, such a channel can be seen during an uptrend that includes this minor falling channel, which is usually followed by a breakout from the upper end of the channel. The falling channel continues until the stock moves to break through the upper (bullish, ending the minor downtrend) or lower (bearish) end of the channel accompanied by high volume.

Rectangle Channel

rectanglechannel

A rectangle channel is a continuation pattern and can be seen as a consolidation phase after a clear trend. The upper end of the channel connects the high prices, while the lower end of the channel links the low prices to form a rectangle (the two lines indicate resistance and support respectively). High volume trades accompany the breakout, which occurs when either line is broken through; a breakout from the top is a bullish signal and a breakout from the bottom indicates a bearish trend.

Do you examine stock charts for patterns? Have you had reasonable success doing it over a period of time?

About the Author: Clark works in Saskatchewan and has been working to build his (DIY) investment portfolio, structured for an early retirement. He loves reading (and using the lessons learned) about personal finance, technology and minimalism. You can read his other articles here.





9 Comments, Comment or Ping

  1. 1. DanP

    Neat article. My question would be how long of a time frame is one supposed to use? For some of the charts, you’ve used 6 month charts, while others have years on them. I’ve heard that ppl who trade currency will often use charts that are only 2-3 long and look for trends within those.

  2. 2. Ryan

    I am not a fan of this technical analysis mumbo jumbo. You could probably be as successful just reading some tea leaves.

  3. 3. Clark

    @DanP, Good spot! Most patterns are deduced over a few months; generally, 1 – 3 but could be days or, for an uncommon one like rounded bottom reversal pattern, over several months. I selected a longer time frame on the ascending triangle chart to show the upward momentum but I could have started during mid-2004 and achieved the same goal.

  4. 4. Richard

    Thanks for this new variety in articles. I am enjoying reading your series on charts.

  5. 5. MB

    “Do you examine stock charts for patterns? Have you had reasonable success doing it over a period of time?”

    Yes, I look at them everyday. Have been using them for ages. However, there’s are more to it than just trading off the chart patterns. For many successful traders, they are just a guide. Need to understand when and why certain chart partterns will likely to fail.

    MB

  6. I find learning about charting fascinating since I know so little about it, but have a heavy dose of skepticism after reading A Random Walk Down Wall Street. I’d love to see more data on the performance of these methods and if these are just a guide @MB what do you use to fill in the rest of the information?

  7. Very nice analysis of charting! Do you find that charting techniques have made you money long term? The finance books I read usually argue against it as a long term strategy.

  8. 8. Clark

    Jacob @ My Personal Finance Journey: I do not have the time to utilize (look at charts) technical analysis. Depending on who you ask, it is bupkis or truly an alternative to fundamental analysis.

  9. 9. MB

    @No Debt MBA:

    I also use indicators for market sentiment, volume, trends, consolidation, exhaustion, cycles, price action, etc. Also, the relative strength of individual stock, between similar stocks, between sectors, and even between indices are important factors in creating a directional bias. Understanding of smart money flow and futures helps also.

    Malkiel’s book is a popular read, but there are many who dispute his claim. You should google. Since you read his book, why not try “A Non-Random Walk Down Wall Street” for the opposing view? Yes, there are many failed traders, but you have to wonder why do some make consistent profit despite this “randomness”.

    Technical trading is not just about specific chart or indicators. The most important part begins after initiating positions. All indicators are far from perfect – just some have more favourable odds than others. Thus, understanding how to manage positions is far more important to a trader. You will commonly hear the terms like edge, risk management, ratios, position sizing, and expectancy from a successful technical trader – rather than indicators and charts.

    MB

    Trackbacks

Reply to “Stock Chart Continuation Patterns – Triangles and Channels”

Subscribe without commenting



Get the Latest

      

Money Tips Newsletter

Premium Sponsors



Recent Comments

  • Godlberg: You guys are debating facts versus emotions. At the end of the day, sleeping well at night is what matters...
  • Jay: It’s so tough to tell. I’m generally a buy and hold guy so I enjoy the merger pop and then let it...
  • SST: re: “Burger King is a publicly traded company that is in the process of acquiring another publicly traded...
  • Stephen @ HowToSaveMoney.ca: Since I’m mostly in index funds, I don’t think I’ve ever held a...
  • JT: @FT, lucky you! I’ve got just over $100k left on my mortgage with the plan of converting my remaining...
  • FrugalTrader: @JT, we paid off the instalment portion of our mortgage a few years ago. The dividends are reinvestd in...
  • JT: Just to confirm; you are using the approx. $5,600 in annual dividends to pay down your existing mortgage and...
  • Ed Rempel: Hi Mark, An important question in this debate is: Is it a good idea to pay off your mortgage early? I have...
  • Ed Rempel: Hi Mark, I think you are missing the mark. (Pardon the pun.) From working with thousands of people and...
  • R: “Guaranteed by the government ” is baloney. Somebody flies a jet into a skyscraper and all of the...
 css.php