Projections
The patterns featured within this guide are the only continuation patterns that give off price targets.
A few reminders before you begin to study the measuring techniques:
As a general rule for triangles:
Prices should break out in the direction of the original trend somewhere between two-thirds and three-quarters of the horizontal width of the triangle.
If the price remains within the triangle beyond the three quarters point, the triangle begins to lose it’s potency and usually means the price will drift out of the apex of the triangle and beyond.
An analyst can trade the swings within patterns such as triangles and rectangle patterns providing they are large enough patterns. Buying on buy lines and taking profits on sell lines.
This guide will re-introduce you to the continuation patterns one-by-one and show you the individual techniques used to build price targets from each.
The measuring technique is similar to most patterns in that it relies heavily on the height of the pattern.
The distance between A vs B is equivalent from point B to C. Point ‘C’ being the price target.
The higher/deeper a rectangle pattern the greater the price target will be.
Do watch out for breaks on the downside of rectangles as rarely this will cause reversals.
The Bear flag price target can be measured by the length of the pole preceding it. The distance from ‘A’ vs ‘B’ should be projected downwards from point ‘C’ (Where support of the Bear flag is broken) That will give you a target of ‘D’.
The measuring technique for this type of triangle is the height of the pattern at its widest point – projected from the point where the sell line of the pattern is broken.
The distance between A vs B is equal to C (break out point) to D (price target).
An alternative to the conventional method of establishing price targets with this type of triangle is to use the BUY LINE to form an imaginary parallel sell line.
The imaginary sell line would then become the price target. This method is reliable and many analyst favour it.
Care should always be exercised to ensure the buy and imaginary sell line is parallel!
The bull flag is a firm favourite with traders. It is one of the most reliable of all patterns. Like the bear flag, it relies on the length of its ‘pole’ to give a signal as to where its projection will be.
‘Flags tend to fly at half mast’ is a common expression for these types of patterns. The the consolidation often represents the half way stage in the trend.
The two patterns above are a mix between the triangles and the flags. They look more like a triangle but work more like a flag.
PSSST! Don’t forget that these patterns often take less time to form in down trends!
This bearish triangle gives us a price target by measuring the distance between point A vs point B.
This exact measurement should then be used to measure from the break out point ( C ).
The distance will then give you a price target a D.
This pattern represents a mere pause in a down trend.
An advanced feature to the two day rule and should only be attempted by experienced traders.
f you have an established LONG TERM buy line in a bull market – the market has one BIG down day. The second day it opens and drops below the buy line…
You can exercise the two day rule.
This is the ONLY time we would buy under a buy line. This is one reason why a lot of analysts require TWO closes below a trend line to consider it penetrated.
This type of triangle typically represents an area of consolidation before the sell line is breached and the trend continues.
The height of the triangle at it’s widest point gives you the measurement that you will need in order to see the patterns impact on the share price.
To use this pattern to trade – either buy on the pattern’s buy line OR buy after a close above the sell line of the pattern.
