DUKASCOPY BANK SA

AN INTRODUCTION
TO THE CHART
PATTERNS

DUKASCOPY BANK SA
EDUCATIONAL GUIDE
AN INTRODUCTION
TO THE CHART
PATTERNS

www.dukascopy.com
 CONTENTS

TECHNICAL ANALYSIS AND CHART PATTERNS 04

CHARACTERISTICS OF PATTERNS 05
PATTERNS 06
Channels 06
Rising Wedge 08
Falling Wedge 09
Triangle 10
Ascending Triangle 11
Descending Triangle 12
Double Bottom 13
Double Top 14
Triple Bottom 15
Triple Top 16
Rectangle 17
NAVIGATION IN THE TRADE PATTERN WIDGET 18
General guidelines 18
Design customisation 19
Functionality customisation 20
Finding the pattern 22

DUKASCOPY BANK SA EDUCATIONAL GUIDE 03

TECHNICAL ANALYSIS AND CHART PATTERNS
Technical
analysis
chart patterns
In finance, technical analysis is a technique
which uses past market data, primarily
volume and prices, to predict future
movements of prices. Technical analysis is
used on a wide range of financial instruments,
including equities, bonds, commodity
futures, and currency futures. The underlying
logic of technical analysis is simple:
• Supply and demand determine prices;
• Changes in supply and demand cause
changes in prices;
• Prices can be projected with charts and
other technical tools.
04
As long as the chart represents the action in a
freely traded market, a technical analyst is not
required to possess detailed knowledge of
that instrument. He does not even need to
know the name or type of the security to
conduct the analysis. Technical analysis is
based on few main assumptions:
• Technical analysts believe that it is
unreasonable to assume that investing is the
one exception where humans always behave
rationally since one's behaviour is influenced
by many aspects of life and that market
trends and patterns reflect this irrationality;
• Collective knowledge and sentiment is
reflected in buying and selling activities of
market participants, therefore actions of
the traders determine volume and price of
a financial instrument.
From the first assumption comes the existence
of chart patterns. A chart pattern is a pattern
that is formed within a chart when prices are
graphed in a candlestick or bar chart and it is
believed they represent the irrationality and
influence of various aspects in the behaviour of
traders. Chart patterns play a large role during
technical analysis of financial instruments.
When data is plotted there is usually a pattern
of support and resistance levels which
naturally occurs and repeats over a period.
Chart patterns are used as either reversal or
continuation signals.
DUKASCOPY BANK SA EDUCATIONAL GUIDE
 CHARACTERISTICS OF PATTERNS

Every pattern has individual characteristics which

can be quantified in a pattern quality and
magnitude reading.

Quality
Quality is a reading which quanifies a pattern’s
trend. It shows how well a price fits in the
boundaries of a pattern's support and resis-
tance (green and red lines in Figure 1) and how well it
moves from one touch point to another (blue line
in Figure 1). Calculations include the symmetry or
asymmetry (depending on the pattern at
hand) of support and resistance lines, the
number of touch points and gaps between
them, and a few other factors.
Magnitude
Magnitude is a reading which shows expected
returns of a financial instrument which has
formed a chart pattern.
Calculation takes in to account minimum and
maximum prices of the pair in chart and
historical volatility. This helps to approximate
the scale of the pair’s movements and
potential returns after the pair breaks the
pattern’s boundaries.

200 bar SMA

Figure 1. Channel Up pattern with 53% quality and 65% magnitude readings

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PATTERNS

PATTERNS

This section will introduce with main guidelines for patterns which can be found using the
Dukascopy trade pattern tool on the JForex trade platform and provide real life examples for those
patterns. Note: All patterns are from the JForex trading platform one-hour charts of various
currency pairs and are used purely for illustrative purposes for this document. Characteristics and
discussion of the patterns come from the books and website of Thomas N. Bulkowski.

1. Channels
Characteristic Discussion
Price trend The price trend leading to the channel can be from any direction.
A pipe tilted up or down, but not horizontal.
Shape
See rectangle for horizontal channels.
The two trend lines should be parallel or nearly so.
Trend lines
Both should tilt upward or both should tilt downward.
The price should touch each trend line at least twice as distinct peaks
Touches
or valleys.
The price should cross the pattern from trend line to trend line,
Crossing nearly filling the available space.
Occurs when the price closes outside the trend line boundary
Breakout and can be in any direction.

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 PATTERNS

Figure 2. Example of Channel Up pattern 200 bar SMA

Figure 3. Example of Channel Down pattern 200 bar SMA

DUKASCOPY BANK SA EDUCATIONAL GUIDE 07

PATTERNS

2. Rising Wedge
Characteristic Discussion
Price trend Can be any direction leading to the pattern.
Shape A narrowing and rising triangle shape.
The price bounces between two up-sloping and converging trend
Trend lines
lines.
The price should touch trend lines at least five times to outline a
Touches good pattern. That's three touches of one trend line and two of the
opposite.
Volume Trends downward at least 74% of the time until the breakout.
Breakout Can be in any direction but is downward 69% of the time.
The pattern is confirmed as a valid one when the price closes outside
Confirmation
one of the trend lines.

200 bar SMA

Figure 4. Example of Rising Wedge pattern

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 PATTERNS

3. Falling Wedge
Characteristic Discussion
Price trend Can be any direction leading to the pattern.

Shape The price follows two down-sloping and converging trend lines.

The price should touch trend lines at least five times to outline a
Touches good pattern. That's three touches of one trend line and two of the
opposite.

Volume Trends downward 72% of the time until the breakout.

Breakout Can be in any direction but is upward 68% of the time.

The pattern is confirmed as a valid one when the price closes outside
Confirmation
one of the trend lines.

200 bar SMA

Figure 5. Example of Falling Wedge pattern

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PATTERNS

4. Triangle
Characteristic Discussion
Price trend Can be any direction leading to the chart pattern.
Shape Triangular. Prices move between two converging trend lines.
Two trend lines bound prices; the bottom trend line slopes up and
Trend lines
the top one slopes down.
The price must cross the pattern from side to side, filling the triangle
Crossing
with price movement, not white space.
The price must touch each trend line at least twice, forming distinct
Touches
valleys and peaks.
Volume Trends downward 86% of the time.
Upward 54% of the time and 75% of the way to the triangle apex
Breakout
(upward breakout) and 73% of the way for downward breakouts.

200 bar SMA

Figure 6. Example of Triangle pattern

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 PATTERNS

5. Ascending Triangle
Characteristic Discussion
Price trend Can be any direction leading to the chart pattern.
Shape Triangular. Prices move between two converging trend lines.
Two trend lines bound prices; the top trend line is horizontal and the
Trend lines
bottom one slopes upward.
The price must cross the pattern from side to side, filling the triangle
Crossing with price movement, not white space.
The price must touch each trend line at least twice, forming distinct
Touches
valleys and peaks.
Volume Trends downward 77% of the time.
Breakout Can be in any direction but is upward 70% of the time.

200 bar SMA

Figure 7. Example of Ascending Triangle pattern

DUKASCOPY BANK SA EDUCATIONAL GUIDE 11

PATTERNS

6. Descending Triangle
Characteristic Discussion
Price trend Can be any direction leading to the pattern.
A price pattern bounded by two trend lines, the bottom one
Shape horizontal and the top one sloping downward.
The price should touch each trend line at least twice as distinct peaks
Touches or valleys.
This is important: the price must cross the pattern from trend line to
Crossing trend line, nearly filling the available space. Avoid descending
triangles with abundant white space.
Volume Recedes 83% of the time and gets quite low just before the breakout.
Breakout Can be in any direction but is downward 64% of the time.
The pattern is confirmed as a valid one when the price closes outside
Confirmation
one of the trend lines.

200 bar SMA

Figure 8. Example of Descending Triangle pattern

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 PATTERNS

7. Double Bottom
Characteristic Discussion
Price trend Downward leading to the pattern.
Two distinct valleys that look similar. Eve bottoms are wide and of a
more rounded appearance. Adam bottoms are narrow, V-shaped,
Shape sometimes with one long price spike. Spikes that appear tend to be
numerous and short.
The rise between bottoms should measure at least 10% of the move
Peak leading to the first bottom, but allow variations.
The price variation between bottoms is small, usually between 0%
Bottom price and 6%. The two valleys should appear to bottom near the same
price.
The double bottom confirms as a true double bottom once the price
Confirmation closes above the peak between the two valleys.
Volume Usually higher on the left bottom.

200 bar SMA

Figure 9. Example of Double Bottom pattern

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PATTERNS

8. Double Top
Characteristic Discussion
Price trend Upward leading to the pattern.
Two distinct tops that look similar. An Eve top is rounded and wide
Shape looking, but sometimes has several short spikes poking out. Adam
tops are narrow, inverted Vs.
The valley between the tops should measure at least 10% of the
Valley move leading to the first top, but allow variations.
The variation between price peaks is small, less than 3%.
Top price The two tops should appear to peak near the same price.
The double top confirms as a true double top once the price closes
Confirmation
below the valley between the two peaks.
Volume Usually higher on the formation of the left peak.

200 bar SMA

Figure 10. Example of Double Top pattern

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 PATTERNS

9. Triple Bottom
Characteristic Discussion
Downward leading to the pattern but should not drop below the first
Price trend bottom.

Shape Three distinct valleys that look similar.

The price variation between bottoms is small such that it appears the
Bottom price three valleys bottom near the same price. Allow variations.

The pattern is confirmed as a true triple bottom once the price closes
Confirmation
above the highest peak between the valleys.

Volume Usually higher on the first bottom than on the last, trending
downward 67% of the time, but it may peak beneath each valley.

200 bar SMA

Figure 11. Example of Triple Bottom pattern

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PATTERNS

10. Triple Top

Characteristic Discussion
Price trend Upward leading to the pattern.

Shape Three peaks near the same price with a downward breakout.

Middle peak Sometimes the middle peak is priced marginally below the other two.

Trends downward 59% of the time, but is usually high beneath the
Volume formation of each peak.

Bear market More triple tops appear in a bear market than in a bull one.

Confirmation The pattern becomes valid when the price closes below the lowest
valley in the pattern.

200 bar SMA

Figure 12. Example of Triple Top pattern

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 PATTERNS

11. Rectangle
Characteristic Discussion
Price trend The price trend leading to the pattern can be from any direction.

Prices have flat tops and flat bottoms, crossing the pattern from side
Shape to side following two parallel trend lines.

Trend lines Two near horizontal trend lines bound the price action.

The price should touch each trend line at least twice using distinct
Touches
peaks and valleys.

Volume trend Trends downward at least 66% of the time.

Breakout Opposite to the price trend direction 55% of the time.

200 bar SMA

Figure 13. Example of Rectangle pattern

DUKASCOPY BANK SA EDUCATIONAL GUIDE 17

NAVIGATION IN THE TRADE PATTERN WIDGET

Navigation in the This section provides guidelines

Dukascopy on how to use the Dukascopy
Trade pattern trade pattern widget on the

widget JForex trade platform.

General guidelines

Figure 14. Default window of the Dukascopy trade pattern widget on the JForex trade pattern

The Dukascopy trade pattern widget can be found

on the JForex trade platform. The icon to open the
widget ( ) can be found on the right hand side of
the upper part of the trading platform (highlighted
by the red square). It will open the trade pattern
tool’s main window which can be seen in Figure 14.
Besides this main window, the tool has two
secondary windows dedicated to design and
functional customisation of the tool.

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 NAVIGATION IN THE TRADE PATTERN WIDGET

Design customisation

Figure 15. The Dukascopy trade pattern widget's design customisation window

First, the design customisation window can be opened by pressing the icon
which can be found in the tool’s upper right corner. It will open the window
which can be seen in Figure 15. In this window you will be able to customise:
• Widget Title checkbox – turns on/off text on the top left corner of the tool;
• Font drop down list allows you to choose font and colour of the text used
in the widget (Dialog font and yellow colour by default);
• Background drop down list allows you to choose the transparency level
and colour of the tool's body (60% solid and grey colour by default).

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NAVIGATION IN THE TRADE PATTERN WIDGET

Functionality customisation
Once you have customised the design of
the tool to suit your needs, you can
confirm the changes made by pressing
the icon which can be found on the
top right corner of the tool as well. Then
you will be redirected back to the main
window of the tool (Figure 14) which now
will have the design features you
selected.

Figure 16. The Dukascopy trade pattern widget's function customisation window

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 NAVIGATION IN THE TRADE PATTERN WIDGET

Second, the functional customisation window can be opened by pressing the icon which can be
found in the tool's upper right corner. It will open the window which can be seen in Figure 16. In this
window you will be able to customise:

• “Detect patterns by” allows you to choose between two options:

• Closing price – a pattern of support and resistance levels will be searched by the
closing price of each bar. Based on the assumption that closing prices reflect the most
information about a financial instrument and that movements in the bar (high and
low prices) are irrelevant.
• High/low – a pattern of support and resistance levels will be searched by the high and
low prices of bars. Based on the assumption that not closing prices, but price
movements in the bar (high and low prices), reflect the most about what's underlying
a financial instrument.

• Quality (a detailed description can be found in the second part of this document);
• Magnitude (a detailed description can be found in the second part of this document);
• Patterns you wish to search for (a detailed description can be found in the third part of this
document).

Once you have customised the functionality of the tool to suit your needs you can confirm the
changes made by pressing the icon which can be found on the top right corner of the tool as well.
Then you will be redirected back to the main window of the tool (Figure 14).

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NAVIGATION IN THE TRADE PATTERN WIDGET

Finding the pattern

Once you have customised your widget tool for personal use you can start searching for patterns
which you are interested in. A search will start in the tool's main window which can be seen in
Figure 14. At first you are faced with three search options under “Scan mode”:

• All pairs – this is the mode which is turned on by default once you open the tool. It will
scan all the currency pairs (despite what pair or chart you are currently in) for currently
emerging patterns in (an example of a drop down list of findings can be seen in Figure 17).
• Current pair – this tool will scan the current pair’s chart for currently emerging patterns.
• Current pair history – this tool will show all the patterns that have ever emerged in the
current pair and chart type.

Figure 17. The Dukascopy trade pattern widget result drop down list

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 NAVIGATION IN THE TRADE PATTERN WIDGET

Your search results, despite what search option you have chosen, will be shown
in the “Found patterns” drop down list. An example of results under “all pairs” can
be seen in Figure 14. Results in this drop down list can be arranged using several
options (“Sort by”):

• Time – patterns in the list will be arranged according to the date when they
started;
• Size – patterns in the list will be arranged according to how many bars create a
pattern;
• Quality – patterns in the list will be arranged according to their quality rating
(detailed description of what is a pattern's quality can be found on the page
number 5);
• Magnitude – patterns in the list will be arranged according to their magnitude
rating (a detailed description of what is a pattern’s magnitude can be found on
the page number 5);
• Instrument – patterns in the list will be alphabetically arranged according to the
instrument's name (AUD/CAD at the top, XAU/USD at the bottom of the list).
• Period – patterns in the list will be arranged according to the time frame of the
chart (patterns on 10 sec. charts will be at the top, patterns on monthly charts
will be at the bottom of the list).

After you choose the pattern, the button will open the chart you selected from the list. From
there you can carry out analysis and plan your trades.
Sources:

1) Encyclopedia of Chart Patterns. SECOND EDITION. Thomas N. Bulkowski. ISBN-13 978-0-471-66826-8; ISBN-10 0-471-66826-5
2) Personal website of Thomas N. Bulkowski (http://thepatternsite.com/)

DUKASCOPY BANK SA EDUCATIONAL GUIDE 23

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