art patterns

Double top / double bottom

Briefing:Sometimes called an "M" (or "W" for double bottom) formation because of the pattern
it creates on the chart, the double top is one of the most frequently seen and common of the
patterns. Because they seem to be so easy to identify, the double top should be approached ith
caution by the in!estor.
" double top occurs hen prices form to distinct pea#s on a chart. " double top is only
complete, hoe!er, hen prices decline belo the loest lo $ the "!alley floor" $ of the pattern.
%he to tops should be distinct and sharp. %he pattern is complete hen prices decline belo the
loest lo in the formation. %he loest lo is called the confirmation point.
" real
e&ample: 'lic# to enlarge
" double top often forms in acti!e mar#ets, e&periencing hea!y trading. " stoc#(s price heads up
rapidly on high !olume. )emand falls off and price falls, often remaining in a trough for ee#s or
months. " second run$up in the price occurs ta#ing the price bac# up to the le!el achie!ed by the
first top. %his time !olume is hea!y but not as hea!y as during the first run$up. Stoc# prices fall
bac# a second time, unable to pierce the resistance le!el. %hese to sharp ad!ances ith
relati!ely hea!y !olume ha!e e&hausted the buying poer in the stoc#. Without that poer
behind it, the stoc# re!erses its upard mo!ement and falls into a donard trend.
*o to use it+: ,enerally, the you ant to enter a position as soon as the nec# line is bro#en,
and close the position hen the target price is reached. %arget price is calculated based on the
amplitude of the to pea#s or !alleys $ the equal distance from the top to the nec# line. -t is up to
you to determine the brea# through nec# line criteria as ell as e&it conditions $ stoploss and
profit ta#ing. "lso, you must interpret the quality of the shape. Screenulator has included the
"*ori.ontal symmetry inde&" to aid this purpose.
Screenulator table values: Because of relati!e abundance of double top pattern, Screenulator
has added many parameter criteria to eed out irregular and assymetrical ones, and their !alues
are indicated in the data table.
1st top %he date hen the first top is detected
2nd top %he date hen the second top is detected
Vertical
Symmetry
%his is the !ariation beteen /st and 0nd top, 1 being no difference (/st and 0nd
top has the e&act same height), and / being completely different. "t the time of
riting, a limit of 1.2 is set to be the ma&imum !alue for this parameter, hich
means the difference beteen to tops should not e&ceed 213 for the pattern to
be qualified as double top.
Horizontal
Symmetry
%his measures ho symmetrical the pattern is from left to right, ith the mid point
at the head pea#. 1 $ mean the most symmetrical, and / being completely
asymetrical. "t the time of riting, a limit of 1.4 is set so that no pattern ith
symmetry score more than 1.4 are screened.
Volume
score
%his is the ratio of !olume around pea# / to the !olume around pea# 0. %his is
important because the pattern is the strongest ith the increasing !olume. Because
there is a debate as to ho important the increasing !olume is and eather or not a
pattern should be disqualified soled based on lac# of increasing !olume, there is
no limit placed on this parameter. -t is simply shon as an information to the
readers so they can ma#e their on decision.
Between
regularity
%his measures the ma&imum de!iation of any local pea#s (if there is any) to the
nec# line, and its ratio to the a!erage height of the to pea#s. %his essentially
measures the regularity of the shape beteen to pea#s. -f there is no local pea#s
beteen the to ma5or tops6bottoms, then the score is 1. -f there is a pea# more
significant than the other to ma5or tops6bottoms, then the score is greater than /,
hich ne!er happens because the pattern ould be in!alid. "t the time of riting,
the ma&imum !alue of this parameter is set to 1.78.
Tail
regularity
" ell formed double top pattern should ha!e an acending tail (time span
preceding the first top), and for double bottom, the descending tail. %his parameter
measures the ratio of difference beteen all local pea#s preceeding the first top to
the nec#line to the height of the first ma5or top. 9ssentially, it measures ho
regular the tail loo#s li#e (if it as acending smoothly or ith pea#s that ha!e
heights comparable to the first ma5or pea#). "t the time of this riting, the
ma&imum !alue of / is permitted.
Head and shoulder
Briefing: " classical chart pattern. Many te&t boo#s claim that this is one of the most reliable
chart patterns. "s depicted belo, the classic head and shoulders top loo#s li#e a human head
ith shoulders on either side of the head. " perfect e&ample of the pattern has three sharp high
points, created by three successi!e rallies in the price of the stoc#.
" real
e&ample: 'lic# to enlarge
%he first point $ the left shoulder $ occurs as the price of the stoc# in a rising mar#et hits a high
and then falls bac#. %he second point $ the head $ happens hen prices rise to an e!en higher high
and then fall bac# again. %he third point $ the right shoulder $ occurs hen prices rise again but
don(t hit the high of the head. :rices then fall bac# again once they ha!e hit the high of the right
shoulder. %he shoulders are definitely loer than the head and, in a classic formation, are often
roughly equal to one another.
" #ey element of the pattern is the nec#line. %he nec#line is formed by draing a line connecting
to lo price points of the formation. %he first lo point occurs at the end of the left shoulder
and the beginning of the uptrend to the head. %he second mar#s the end of the head and the
beginning of the upturn to the right shoulder. %he nec#line can be hori.ontal or it can slope up or
don. *oe!er, as 9laine ;ager, )irector of %echnical "nalysis at -n!estec 9rnst and 'ompany
in <e ;or# and a member of =ecognia(s Board of "d!isors points out, a *ead and Shoulders
%op nec#line that is sloping donards is highly unusual and demonstrates e&treme ea#ness.
%he pattern is complete hen the support pro!ided by the nec#line is "bro#en." %his occurs hen
the price of the stoc#, falling from the high point of the right shoulder, mo!es belo the nec#line.
%echnical analysts ill often say that the pattern is not confirmed until the price closes belo the
nec#line $ it is not enough for it to trade belo the nec#line.
" classic head and shoulders top has been described abo!e. %here are many !ariations, some of
hich are described here and can be 5ust as !alid as the classic formation. >ther factors $
including !olume and the quality of the brea#out $ should be considered in con5unction ith the
pattern itself.
*o to use it+: ,enerally, the you ant to enter a position as soon as the nec# line is bro#en,
and close the position hen the target price is reached, hich is a mo!e don (for re!erse head
and shoulder, mo!e up) the equal distance from the tip of the head to the nec# line. -t is up to you
to determine the brea# through nec# line criteria as ell as e&it conditions $ stoploss and profit
ta#ing. "lso, you must interpret the quality of the shape. Screenulator has included the
"*ori.ontal symmetry inde&" to aid this purpose.
Screenulator table values:
left shoulder
%he date hen the left shoulder is detected. %his is a local ma&ima for upright
pattern, and local minima for re!erse pattern.
head
%he date hen the head is detected. %his is a local ma&ima for upright pattern,
and local minima for re!erse pattern. *ead is beteen left and right shoulder, and
must protrude more than either left or right shoulders.
right
shoulder
%he date hen the right shoulder is detected. %his is a local ma&ima for upright
pattern, and local minima for re!erse pattern.
Horizontal
Symmetry
%his measures ho symmetrical the pattern is from left to right, ith the mid
point at the head pea#. 1 $ mean the most symmetrical, and / being completely
asymetrical. "t the time of riting, a limit of 1.4 is set so that no pattern ith
symmetry score more than 1.4 are screened.
Flat channel breakout
Briefing:%his is hen a long period of narro trading range folloed by sudden increase in
price and !olume, effecti!ely brea#ing out of the narro trading range. %his #ind of pattern has
been described in boo#s such as "*o - Made ?0 Million in the Stoc# Mar#et by <icolas
)ar!as", and "Stan Weinstein, Stan Weinstein(s Secrets @or :rofiting in Bull and Bear Mar#ets".
'lic# to enlarge
*o to use it+:,enerally, this is a continuation pattern, so you ant to buy after the first
retracement. *oe!er, you could try to fade it after the initial brea#out, and co!er on the first
retracement.
Screenulator table values:
mean
deviation
Mathematically, this is square root of percentage !ariance of price bars to the best
fit line (dran in the chart), during the set time span. -n 9nglish, it means ho
!olatile the stoc# as during the "flat channel" phase of the pattern.
slope (%day! %his is the slope of the best fit line during the "flat channel" phase of the pattern.
"verage
volume
%he a!erage !olume during the "flat channel" phase
#rea$out
volume
%he single day !olume on the brea# out day. "t this time of riting, the brea#out
!olume is set to be at least 4 times the a!erage !olume during the "flat channel"
phase
#rea$out
percentage
%he single day percentage change on the detected brea#out day.
Trendlines
" trend line is a straight line connecting pea# points in a chart. -t is significant in both identifying
trends and determining entry and e&it points for traders. -n screenulator, a trend line must consists
of at least 4 points in a straight line ith a standard de!iation limit $ meaning the points can
de!iate from the line a little bit but not too much. Sometimes, you ill see a chart ith a lot of
trendlines cluttered together. - call them trend line #undles. %hey usually indicate a !ery strong
trend because there are a lot of small and large pea#s creating o!erlapping lines. Sometimes, you
ill see trendlines that does not ma#e intuiti!e sense, such as connecting points you do not
consider being significant tops6bottoms, then you can discard it as you see fit. %he automatically
generated trendlines are meant as a guide for you to ma#e your on decisions instead of spoon
feeding you the final ansers.
%rendlines are also important because a lot of chart patterns are defined by them as follos:
Breakouts
Briefing:%his is hen a trend line is penetrated deep enough the line is qualified as bro#en. -t is
di!ided into to categories, top lines and bottom lines. %he e&act algorithm for determining ho
deep or ho long of a time period the price bar has to penetrate the trend line is proprietary, but it
is sufficient to say that it is based on the length, slope and the "a!erage amplitude" of the trend
line. "!erage amplitude of the trend line is the calculated of all the pea#s and !alleys along the
trend line and their distances to the line.
'lic# to
enlarge 'lic# to enlarge
*o to use it+: -t depends on your strategy or trading system. ,enerally, hen a trend line is
bro#en, it signals the end of the trend. So if you are a trend trader, you ould sell hen a up
(bottom) trendline is bro#en, and buy (top) trendline is bro#en). But you could also use this filter
as an alert and ait for the brea# out to reach sufficient distance then try to fade it. -t is up to you.
;ou can e!en combine it ith other indicators, most popular ones being oscillators.
Screenulator table values:
line length
%his is the time beteen the last point (pea# or !alley) on the line and the most
recent point on the line.
slope
(%day!
%his is the a!erage slope of the top6bottom pair measured in percentage price
change per day.
"verage
amplitude
%he a!erage distance beteen the points on the line (pea#s or !alleys) to the line.
%he larger this number usually indicates the !olatility of the stoc# as ell as the
magnitude of penetration required to effecti!ely "brea#" the trend line.
Wedges
Briefing: Sometimes also called "triangular consolidation" $ is formed hen con!erging
trendlines of support and resistance gi!es the triangle pattern its distincti!e shape. %his occurs
because "the trading action gets tighter and tighter until the mar#et brea#s out ith great force."
Buyers and sellers find themsel!es in a period here they are not sure here the mar#et is
headed. %heir uncertainty is mar#ed by their actions of buying and selling sooner, ma#ing the
pattern loo# li#e an increasingly tight coil mo!ing across the chart.
"s the range beteen the pea#s and troughs mar#ing the progression of price narros, the
trendlines meet at the "ape&," located at the right of the chart. %he "base" of the triangle is the
!ertical line at the left of the chart hich measures the !ertical height of the pattern.
" real
e&ample: 'lic# to enlarge
-t depends on your strategy or trading system. ,enerally, a trade decision should be made hen
either top or bottom trend line is bro#en. >nce one of the trend line is bro#en, the price
mo!ement ill become increasinly !olatile until a clear directional trend is established. But one
thing for sure is increased !olatility. So perhaps, straddle options strategy could be used
here.How to use it?: -t depends on your strategy or trading system. ,enerally, a trade decision
should be made hen either top or bottom trend line is bro#en. >nce one of the trend line is
bro#en, the price mo!ement ill become increasinly !olatile until a clear directional trend is
established. But one thing for sure is increased !olatility. So perhaps, straddle options strategy
could be used here.
Screenulator table values:
average %
slope
: %his is the a!erage slope of the top6bottom pair measured in percentage price
change per day.
average
volatility
: this is the a!erage !olatility for the duration of the longest trend line of the
top6bottom pair. )aily !olatility is calculated by Screenulator as %a& (today's
range( a#solute)value)of(today's close * yesterday's close!!. %his !alue is useful for
determining the li#elihood of reaching the target =S- !alue, 41 or 71 or any other
user$defined !alue
hannels
Briefing: 'hannels are formed hen to trend lines, one top, one bottom ith more or less
parallel slope acts as a pair of support and resistance for the price mo!ement in the chart.
Screenulator limits the steepness to be less than 1.836day.
'lic# to enlarge
Screenulator table values:
average %
slope
: %his is the a!erage slope of the top6bottom pair measured in percentage price
change per day. "t this time of riting, the ma&imum limit of a!erage slope is set
to 1.83.
average
volatility
: this is the a!erage !olatility for the duration of the longest trend line of the
top6bottom pair. )aily !olatility is calculated by Screenulator as %a& (today's
range( a#solute)value)of(today's close * yesterday's close!!. %his !alue is useful for
determining the li#elihood of reaching the target =S- !alue, 41 or 71 or any other
user$defined !alue
!scillators
"S# $"elative Strength #nde%&
Briefing: " technical momentum indicator that compares the magnitude of recent gains to recent
losses in an attempt to determine o!erbought and o!ersold conditions of an asset. -t is calculated
using the folloing formula:
"S# A /11 $
/11
BBBBBB
/ C =S
"S A "!erage of & days( up closes 6 "!erage of & days( don closes
"s you can see from the chart belo, the =S- ranges from 1 to /11. "n asset is deemed to be
o!erbought once the =S- approaches the 71 le!el, meaning that it may be getting o!er!alued and
is a good candidate for a pullbac#. Di#eise, if the =S- approaches 41, it is an indication that the
asset may be getting o!ersold and therefore li#ely to become under!alued.

How to use it?: " trader using =S- should be aare that large surges and drops in the price of
an asset ill affect the =S- by creating false buy or sell signals. %he =S- is best used as a !aluable
complement to other stoc#$pic#ing tools.
%he =S- is most typically used on a /2 day timeframe, measured on a scale from 1 to /11, ith
high and lo le!els mar#ed at 71 and 41, respecti!ely. Shorter or longer timeframes are used for
alternately shorter or longer outloo#s. @or e&ample, =S- (0) indicator is used by a lot of day or
short term traders ho often buy and sell the same position ithin the same day, hereas =S-
(41) is used many long term traders ho hold positions for more than one year. More e&treme
high and lo le!elsEF1 and 01, or G1 and /1Eoccur less frequently but indicate stronger
momentum.
%he =elati!e Strength -nde& as de!eloped by H. Welles Wilder and published in a /G7F boo#,
<e 'oncepts in %echnical %rading Systems, and in 'ommodities maga.ine (no @utures
maga.ine) in the Hune /G7F issue. -t has become one of the most popular oscillator indices.
Screenulator table values:
We ha!e multiple filter for =S-. =S-(&) here & is the number of days. /2 day is the most idely
used and therefore atched and used by the most number of traders and generally ha!e more
effect on the mar#et. %he ne&t most idely used is 41 day period.
+S, value
this corresponds to the =S- !alue obtained by the abo!e formula. 71 is considered
o!erbought, and 41 is considered o!ersold.
-rice
change to
+S, ./0/
this !alue is unique to screenulator. -t means the amount of price change required
in the ne&t trading session in order for the =S- !alue to reach 41 or 71. - find it
useful to see ho strong to the =S- !alue obtained by the abo!e formula. 71 is
considered o!erbought, and 41 is considered o!ersold. - use this !alue to calculate
the "potential" price gain 6 or potential ris# associated ith the stoc# if - belie!e it
is bound to head toards =S- 41 or =S- 71.
Volatility this is the a!erage !olatility during the past & days, here & is the =S- period
parameter. )aily !olatility is calculated by Screenulator as %a& (today's range(
a#solute)value)of(today's close * yesterday's close!!. %his !alue is useful for
determining the li#elihood of reaching the target =S- !alue, 41 or 71 or any other
user$defined !alue
Reverse RSI
=e!erse =S- calculation gi!es you the future price of a stoc# gi!en a particular =S-
le!el, so that you can set limit or stop price of the order hen the stoc# reaches the
target =S- le!el.

I01/0 Screenulator
6. Trade in the correct state of mind. There is an optimal performance state for trading and inves
ting, which my partner Bob Koppel described in detail in The Tao of Trading (Dearborn, 199!. "t
incl#des the following$ % The trader is physically rela&ed. % The trader is psychologically calm.
% The trader approaches the mar'et with optimism.
% The trader possesses an energi(ed demeanor.
% The trader is actively engaged with the mar'et.
% The trader has a sense of play, gaming, or )f#n) abo#t the mar'et.
% The trader ma'es decisions and e&ec#tes trades effortlessly.
% The trader trades witho#t an&iety. % The trader*s reaction to the mar'et is a#tomatic+
witho#t hesitation or regret. % The trader is alert and available to all mar'et actions.
% The trader is highly confident. % The trader feels in control of all actions ta'en in the mar'et.
% The trader is highly concentrated and foc#sed on mar'et essentials. ,age 1-
% The trader moves in and o#t of the mar'et witho#t the intr#sion of ego.
That is, the trader does not ma'e decisions based on factors e&ternal to the mar'et.
.. Don*t overtrade. The trader needs to ta'e only high probability )set#ps.) These trades may be
based on chart patterns, comp#ter n#mbers, or historical price and volatility, as is the case with
options. . Don*t average a loss. This is invariably a losing strategy.
9. Ta'e small losses, large profits. The trader m#st adhere to a methodology that allows this to
occ#r. / 0to1 ratio of profittoloss is what most professional traders loo' for.
11. 2ave no bias to either side of the mar'et. Trading with options allows yo# to develop b#ll an
d bear strategies. The trader m#st be poised to e&ploit mar'et opport#nities on either side of the
mar'et and not be a )one way trader.)
11. ,reserve capital. Trader m#st have a clear #nderstanding of the difference between wellcalc
#lated and #ncalc#lated ris' ta'ing. 3#ccessf#l spec#lation is the res#lt of caref#lly planned, wel
lanaly(ed systems and consistent ris' management.
1-. Thin' in probabilities. The s#ccessf#l options trader has a welldefined bo#ndary of operation
s that is based on probability so that the trader may act decisively at 'ey
-+ ,age 14 5ptions 6ssentials
/gain, the two broad categories of investors who can benefit from investing in options are hedg
ers and spec#lators. The hedger transfers ris' to the spec#lator who then ass#mes it. 7et*s first l
oo' at the hedger. 8hy wo#ld an individ#al or firm choose to hedge+to **loc' in) price protectio
n9 "t is the hedger*s ris' management: when investing in options it is ins#rance. 5ptions provide
the following benefit$
% /n option provides protection against falling prices for the seller of the #nderlying instr#ment.
% /n option provides protection against rising prices for those who plan to b#y.
% /n option protects an e&isting position in a sec#rity or f#t#re.
3pecifically then, the benefits of options to the investor see'ing price protection can be easily #n
derstood as follows$
% /mericanstyle options. 5ptions that may be e&ercised before the e&piration date. ,age -;
% 6#ropeanstyle options. 5ptions that may be e&ercised d#ring a specified e&piration period.
% "nthemoney ("T<!. / call is inthemoney if its stri'e is lower than the mar'et price of the #nderly
ing instr#ment. / p#t is inthemoney if its stri'e price is higher than the mar'et price of the #nderl
ying instr#ment.
% /tthemoney (/T<!. /n option whose e&ercise price is e=#al to the c#rrent mar'et price of the
#nderlying sec#rity.
% 5#tofthemoney (5T<!. /n option that has no intrinsic val#e. / call is o#tofthe
money if its stri'e price is greater than the c#rrent mar'et price of the #nderlying instr#ment. / p
#t is o#tofthemoney if its stri'e price is lower than the c#rrent price of the #nderlying instr#ment.
% "ntrinsic val#e. The amo#nt by which an option is inthemoney. 5#tofthemoney options have no
intrinsic val#e.
% 6&trinsic val#e. The price of an option less its intrinsic val#e. The entire premi#m of an o#tofth
emoney option consists of e&trinsic val#e.
% 7ong. / position res#lting from the p#rchase of a contract or instr#ment.
% 3hort. / position res#lting from the selling of a contract or instr#ment. To sell a contract witho#
t, or prior to, e&ercising it.
% 3pread. / long mar'et position and an offsetting short mar'et position #s#ally, b#t not always,
in contracts with the same #nderlying instr#ment.
% B#ll spread. /ny spread in which a rise in the price of the #nderlying sec#rity will theoretically i
ncrease the val#e of the spread. ,age -4
% Bear spread. /ny spread in which a decrease in the price of the #nderlying sec#rity will theoret
ically increase the val#e of the spread.
% >e#tral spread. / position that has virt#ally no e&pos#re to the conditions of a mar'et. /lso 'n
own as flat or s=#are.
% Delta. The sensitivity (rate of change! of an option*s theoretical val#e (assessed val#e! to chan
ges in the price of the #nderlying instr#ment. 6&pressed as a percentage, it represents an e=#iv
alent amo#nt price movement at a given time.
% ?amma. The sensitivity (rate of change! of an option*s delta at a given time. "t is most appropri
ate to #se, e&pressed as the =#antity of (#nderlying! instr#ments prod#ced in a one stri'e move
(e=#ivalent to the basic val#e between two ad@acent stri'e prices!.
% Aho. The sensitivity of an option*s theoretical val#e to a change in interest rates.
% Bega. The sensitivity of an option*s theoretical val#e to a 1 percent change in volatility.
% Theta. The rate of decay of an option*s theoretical val#e over one day.
% 3ynthetics. Two or more trading vehicles combined to em#late another, or a spread. Beca#se t
he pac'age involves different components, price is also different, b#t the ris' is the same (there
are e&ceptions, however!.