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References

Index

- Chart patterns
      - Double top / Double bottom
      - Head and Shoulder
      - Flat channel breakout
      - Rounding Bottom
- Trendlines
      - Breakouts
      - Wedges
      - Channels
      - Quality of trendlines
- Trend Reversal Indicator
      - Reversal
      - Exhaustion
      - TR S/R lines
      - Screening
- Oscillators
      - RSI (Relative Strength Index)

Chart 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 with caution by the investor.

A double top occurs when prices form two distinct peaks on a chart. A double top is only complete, however, when prices decline below the lowest low - the "valley floor" - of the pattern.

The two tops should be distinct and sharp. The pattern is complete when prices decline below the lowest low in the formation. The lowest low is called the confirmation point.


  A real example: Click to enlarge

A double top often forms in active markets, experiencing heavy trading. A stock's price heads up rapidly on high volume. Demand falls off and price falls, often remaining in a trough for weeks or months. A second run-up in the price occurs taking the price back up to the level achieved by the first top. This time volume is heavy but not as heavy as during the first run-up. Stock prices fall back a second time, unable to pierce the resistance level. These two sharp advances with relatively heavy volume have exhausted the buying power in the stock. Without that power behind it, the stock reverses its upward movement and falls into a downward trend.
How to use it?: Generally, the you want to enter a position as soon as the neck line is broken, and close the position when the target price is reached. Target price is calculated based on the amplitude of the two peaks or valleys - the equal distance from the top to the neck line. It is up to you to determine the break through neck line criteria as well as exit conditions - stoploss and profit taking. Also, you must interpret the quality of the shape. Screenulator has included the "Horizontal symmetry index" to aid this purpose.

Screenulator table values
: Because of relative abundance of double top pattern, Screenulator has added many parameter criteria to weed out irregular and asymmetrical ones, and their values are indicated in the data table.
1st topThe date when the first top is detected
2nd topThe date when the second top is detected
Vertical SymmetryThis is the variation between 1st and 2nd top, 0 being no difference (1st and 2nd top has the exact same height), and 1 being completely different. At the time of writing, a limit of 0.4 is set to be the maximum value for this parameter, which means the difference between two tops should not exceed 40% for the pattern to be qualified as double top.
Horizontal SymmetryThis measures how symmetrical the pattern is from left to right, with the mid point at the head peak. 0 - mean the most asymmetrical , and 1 being completely asymmetrical. At the time of writing, a limit of 0.3 is set so that no pattern with symmetry score more than 0.3 are screened.
Volume scoreThis is the ratio of volume around peak 1 to the volume around peak 2. This is important because the pattern is the strongest with the increasing volume. Because there is a debate as to how important the increasing volume is and weather or not a pattern should be disqualified soled based on lack of increasing volume, there is no limit placed on this parameter. It is simply shown as information to the readers so they can make their own decision.
Between regularityThis measures the maximum deviation of any local peaks (if there is any) to the neck line, and its ratio to the average height of the two peaks. This essentially measures the regularity of the shape between two peaks. If there is no local peaks between the two major tops/bottoms, then the score is 0. If there is a peak more significant than the other two major tops/bottoms, then the score is greater than 1, which never happens because the pattern would be invalid. At the time of writing, the maximum value of this parameter is set to 0.75.
Tail regularityA well formed double top pattern should have an ascending tail (time span preceding the first top), and for double bottom, the descending tail. This parameter measures the ratio of difference between all local peaks preceeding the first top to the neckline to the height of the first major top. Essentially, it measures how regular the tail looks like (if it was ascending smoothly or with peaks that have heights comparable to the first major peak). At the time of this writing, the maximum value of 1 is permitted.

Head and shoulder

Briefing: A classical chart pattern. Many text books claim that this is one of the most reliable chart patterns. As depicted below, the classic head and shoulders top looks like a human head with shoulders on either side of the head. A perfect example of the pattern has three sharp high points, created by three successive rallies in the price of the stock.
  A real example: Click to enlarge

The first point - the left shoulder - occurs as the price of the stock in a rising market hits a high and then falls back. The second point - the head - happens when prices rise to an even higher high and then fall back again. The third point - the right shoulder - occurs when prices rise again but don't hit the high of the head. Prices then fall back again once they have hit the high of the right shoulder. The shoulders are definitely lower than the head and, in a classic formation, are often roughly equal to one another.

A key element of the pattern is the neckline. The neckline is formed by drawing a line connecting two low price points of the formation. The first low point occurs at the end of the left shoulder and the beginning of the uptrend to the head. The second marks the end of the head and the beginning of the upturn to the right shoulder. The neckline can be horizontal or it can slope up or down. However, as Elaine Yager, Director of Technical Analysis at Investec Ernst and Company in New York and a member of Recognia's Board of Advisors points out, a Head and Shoulders Top neckline that is sloping downwards is highly unusual and demonstrates extreme weakness.

The pattern is complete when the support provided by the neckline is "broken." This occurs when the price of the stock, falling from the high point of the right shoulder, moves below the neckline. Technical analysts will often say that the pattern is not confirmed until the price closes below the neckline - it is not enough for it to trade below the neckline.

A classic head and shoulders top has been described above. There are many variations, some of which are described here and can be just as valid as the classic formation. Other factors - including volume and the quality of the breakout - should be considered in conjunction with the pattern itself.
How to use it?: Generally, the you want to enter a position as soon as the neck line is broken, and close the position when the target price is reached, which is a move down (for reverse head and shoulder, move up) the equal distance from the tip of the head to the neck line. It is up to you to determine the break through neck line criteria as well as exit conditions - stoploss and profit taking. Also, you must interpret the quality of the shape. Screenulator has included the "Horizontal symmetry index" to aid this purpose.

Screenulator table values
:
left shoulderThe date when the left shoulder is detected. This is a local maxima for upright pattern, and local minima for reverse pattern.
headThe date when the head is detected. This is a local maxima for upright pattern, and local minima for reverse pattern. Head is between left and right shoulder, and must protrude more than either left or right shoulders.
right shoulderThe date when the right shoulder is detected. This is a local maxima for upright pattern, and local minima for reverse pattern.
Horizontal SymmetryThis measures how symmetrical the pattern is from left to right, with the mid point at the head peak. 0 - mean the most symmetrical, and 1 being completely asymmetrical. At the time of writing, a limit of 0.3 is set so that no pattern with symmetry score more than 0.3 are screened.

Flat channel breakout

Briefing:This is when a long period of narrow trading range followed by sudden increase in price and volume, effectively breaking out of the narrow trading range. This kind of pattern has been described in books such as "How I Made $2 Million in the Stock Market by Nicolas Darvas", and "Stan Weinstein, Stan Weinstein's Secrets For Profiting in Bull and Bear Markets".

Click to enlarge


How to use it?:Generally, this is a continuation pattern, so you want to buy after the first retracement. However, you could try to fade it after the initial breakout, and cover on the first retracement.

Screenulator table values
:
mean deviationMathematically, this is square root of percentage variance of price bars to the best fit line (drawn in the chart), during the set time span. In English, it means how volatile the stock was during the "flat channel" phase of the pattern.
slope (%/day)This is the slope of the best fit line during the "flat channel" phase of the pattern.
Average volumeThe average volume during the "flat channel" phase
breakout volumeThe single day volume on the break out day. At this time of writing, the breakout volume is set to be at least 3 times the average volume during the "flat channel" phase
breakout percentageThe single day percentage change on the detected breakout day.

Rounding Bottom

Briefing:This is a "U" shaped pattern characterized by a descend from a high point to a flat bottom, followed by a sudden breakout usually accompanied by a news or market events, and resulting a prolonged "rounding up" uptrend, sometimes even far exceeds the previous high. This is usually a long term pattern with the bottom section lasting more than 100 days. In Screenulator, we scan patterns between 100 to 1000 day time span. It is usually a high profitable pattern, but rare in occurrence.
RB PotentialRB PotentialRB Complete


Because of the rarity of this pattern, Screenulator also screens for potential Rounding Bottom patterns which have not been confirmed with the rounding up side reaching the previous high, but has started the initial breakout exceeding 20% of total pattern amplitude. The "Rounding Bottom Potential" therefore has more daily qualifiers than "Rounding Bottom Complete", and more profit potentials, albeit with less success rate.

How to use it?:For RB Potential, you buy on the initial breakout, and sell when price reaches the previous high or wait for further appreciation for long term trade. For RB Complete, you buy on confirmation signal which is breakout of previous high, and hold the stock for long term appreciation.

Screenulator table values
:
AmplitudePrice difference between the initial high and bottom low.
DurationNumber of trading days between detection day and initial high.
Left to right shoulder ratio(Initial high - bottom low) / (Rounding up high - bottom low)

Trendlines

A trend line is a straight line connecting peak points in a chart. It is significant in both identifying trends and determining entry and exit points for traders. In screenulator, a trend line must consists of at least 3 points in a straight line with a standard deviation limit - meaning the points can deviate from the line a little bit but not too much. Sometimes, you will see a chart with a lot of trendlines cluttered together. I call them trend line bundles. They usually indicate a very strong trend because there are a lot of small and large peaks creating overlapping lines. Sometimes, you will see trendlines that does not make intuitive sense, such as connecting points you do not consider being significant tops/bottoms, then you can discard it as you see fit. The automatically generated trendlines are meant as a guide for you to make your own decisions instead of spoon feeding you the final answers.
Trendlines are also important because a lot of chart patterns are defined by them as follows:

Breakouts

Briefing:This is when a trend line is penetrated deep enough the line is qualified as broken. It is divided into two categories, top lines and bottom lines. The exact algorithm for determining how deep or how 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 "average amplitude" of the trend line. Average amplitude of the trend line is the calculated of all the peaks and valleys along the trend line and their distances to the line.
Click to enlarge   Click to enlarge

How to use it?: It depends on your strategy or trading system. Generally, when a trend line is broken, it signals the end of the trend. So if you are a trend trader, you would sell when a up (bottom) trendline is broken, and buy (top) trendline is broken). But you could also use this filter as an alert and wait for the break out to reach sufficient distance then try to fade it. It is up to you. You can even combine it with other indicators, most popular ones being oscillators.

Screenulator table values
:
line lengthThis is the time between the last point (peak or valley) on the line and the most recent point on the line.
slope (%/day)This is the average slope of the top/bottom pair measured in percentage price change per day.
Average amplitudeThe average distance between the points on the line (peaks or valleys) to the line. The larger this number usually indicates the volatility of the stock as well as the magnitude of penetration required to effectively "break" the trend line.

Wedges

Briefing: Sometimes also called "triangular consolidation" - is formed when converging trendlines of support and resistance gives the triangle pattern its distinctive shape. This occurs because "the trading action gets tighter and tighter until the market breaks out with great force." Buyers and sellers find themselves in a period where they are not sure where the market is headed. Their uncertainty is marked by their actions of buying and selling sooner, making the pattern look like an increasingly tight coil moving across the chart.

As the range between the peaks and troughs marking the progression of price narrows, the trendlines meet at the "apex," located at the right of the chart. The "base" of the triangle is the vertical line at the left of the chart which measures the vertical height of the pattern.
  A real example: Click to enlarge

It depends on your strategy or trading system. Generally, a trade decision should be made when either top or bottom trend line is broken. Once one of the trend line is broken, the price movement will become increasingly volatile until a clear directional trend is established. But one thing for sure is increased volatility. So perhaps, straddle options strategy could be used here. How to use it?: It depends on your strategy or trading system. Generally, a trade decision should be made when either top or bottom trend line is broken. Once one of the trend line is broken, the price movement will become increasinly volatile until a clear directional trend is established. But one thing for sure is increased volatility. So perhaps, straddle options strategy could be used here.



Screenulator table values
:
average % slope: This is the average slope of the top/bottom pair measured in percentage price change per day.
average volatility: this is the average volatility for the duration of the longest trend line of the top/bottom pair. Daily volatility is calculated by Screenulator as Max (today's range, absolute_value_of(today's close - yesterday's close)). This value is useful for determining the likelihood of reaching the target RSI value, 30 or 70 or any other user-defined value

Channels

Briefing: Channels are formed when two trend lines, one top, one bottom with more or less parallel slope acts as a pair of support and resistance for the price movement in the chart. Screenulator limits the steepness to be less than 0.5%/day.
Click to enlarge



Screenulator table values
:
average % slope: This is the average slope of the top/bottom pair measured in percentage price change per day. At this time of writing, the maximum limit of average slope is set to 0.5%.
average volatility: this is the average volatility for the duration of the longest trend line of the top/bottom pair. Daily volatility is calculated by Screenulator as Max (today's range, absolute_value_of(today's close - yesterday's close)). This value is useful for determining the likelihood of reaching the target RSI value, 30 or 70 or any other user-defined value

Quality of Trendlines (Read Full Article)

- Uniform distance between pivot points

Distances between bottom points and top points should be uniformed spaced. While they do not have to exactly equal, but the more regular intervals between up and down cycles of a stock indicate underying cyclical nature of the stock, therefore more predictable the pattern will hold true in the near future.

The equal distances between pivots also make trendlines better defined in a sense that once it is breached, it cannot be redrawn with a lower sloped one. This allows you to have a very tight stoploss in case of breach. The reason will become apperant if you read the following section.

- Avoid "big gaps" and "big heads"

If the most recent gap (distance between the most recent pivot and the previous one) is overwhelmingly large (50% of overall trendline length or more) and the height of the peak between these two pivots are very high, then it is a bad trendline. These trendlines tend to get broken and unpredictable. The reason is the downward cycle of the big head usually marks short term downtrend line, often not shown in the chart, therefore forming a "wedge pattern" with short topline, and VERY long bottom line. When the two trends clashes - down and up, it usually results in very volatile actions with unpredictable breakouts or sharp falls. While you can use the "wedge" pattern to your advantage if you had other informations to help you decide the trades.



Big gap Big head example:


Good trendline example:

History of Trend Reversal and Exhaustion Indicator

Screenulator's unique Trend Reversal Indicator is based on 9,13 Count Indicator, a highly sought after technical analysis tool. Unlike other indicators (such as MACD or Stochastics) based on variation of moving averages of only closing prices, Trend Reversal is based on the market trending and exhaustion patterns, utilizing the entire OHLC (open, high, low, close) prices.

The Reversal indicator has an impressive record of identifying and anticipating turning points across the FX, bond, equity and commodity markets. Furthermore, the indicators provide signals not only on a daily, weekly and monthly basis but also intraday. The Trend Reversal Indicator identifies when a trend is becoming, or has become, exhausted. On daily charts, for example, Reversal indicator identifies precisely which day to enter into a new position or liquidate an existing one. This total absence of ambiguity with regard to market timing makes the Reversal stand out. Trend Reversal indicator has been used by institutional traders since 1990s, and so far only been available exclusively on professional platforms such as Bloomberg, making its use rare among average retail investors.

Reversal

The Indicator consists of two patterns, a Reversal and a Exhaustion. Reversals are the shortest in duration, lasting for exactly nine price bars when completed. It is best associated with potential trend reversal. For example, a buy Reversal exists when there have been nine consecutive price bars in which each bar\'s close is lower than the close four price bars earlier. In charts, when a price bar closes below that of four price bars previously a green bar (red for sell Reversal) appears in the indicator window below the price candle. The color of green or red bar brightens as counts increases until it reaches nine, the 9th bar becomes an arrow, point up for Buy Reversal completion, and down for Sell Reversal completion. Once nine consecutive price bars have been completed the trader will be looking for a perfected Reversal; one that is now valid for trading. A buy Reversal is perfected when the low of either price bar 8 or 9 is less than the lows of both price bars 6 and 7. Vice versa for perfected Sell Reversal. A green or red circle is placed on top of 9th count arrow to indicate this is a perfected Reversal.



Some recent examples by my power user Pat: (and he successfully used it!)







Exhaustion

A Exhaustion occurs after a completed Reversal. It is best associated with trend exhaustion, if a trend continues after a trend reversal, how long it can keep going until it is exhausted. A buy Exhaustion consists of 13 price bars whose close is lower than or equal to the low two bars earlier. The corresponding numbers appear below the price bar. Unlike the Reversal, a Exhaustion does not have to consist of consecutive days. The Exhaustion is a bigger pattern than the Reversal in that it can take months for a Exhaustion to form and often signifies a larger market move once the trend changes. Like the Reversal, the Exhaustion also has perfected condition. For a buy Exhaustion this requires that the low of price bar 13 be less than or equal to the close of price bar 8. Inverse is for the sell Reversal. The placing of stoploss levels is a crucial component of the Indicator and they are generated automatically only after the completion of a Exhaustion. For a buy signal, their level is calculated by identifying the lowest price bar of the entire Exhaustion (whether numbered or not) and then subtracting the low of that price bar from its high, or the prior price bar's close, whichever is the greater. This value is in turn subtracted from the low of that same price bar and the critical stop loss level is established. The stop loss is only executed when there is a close above the stop loss level followed by a close below it. The next price bar must also open below the stop loss but must also have a low that is below its open.



TR Support / Resistance lines

A TR resistance line is drawn when a completed Reversal Buy signal, and it can often be used as sell target in a long trade. A TR support line is drawn when a completed Reversal Sell signal, and it can often be used as buy back target in a short trade. These lines are drawn from the point of count 1. ISC app automatically draws these when you click on "Generate trendlines" button when TR indicator is shown, or select "TR S/R lines" from right click menu. Below chart shows an example of TR S/R lines in CELG 5 minute chart



Also see The Basics of TR Indicator.
If you are a long term subscriber (6 months or more), please also see Joe's Intraday picks and TR indicator guide!
These are hand picked stocks perfectly fitted for intraday scalping using TR / TD indicator!

Video Demo



Automated Screening

Screenulator's charting tool automatically detects Trend Reversal and Exhaustion for every stock chart, and display the indicator with its proprietary and patent pending gradient color bars and arrows to give you clear and concise information to anticipate market reversal and exhaustion. Moreover, it screens over 15000 stocks worldwide for Reversal completion, Exhaustion completion, perfected Reversal and Exhaustions, giving you countless new trading opportunities every day and alerts you if your favorite tracking stock is about to reach potential Reversal or Exhaustion.

How to use Reversal & Exhaustion screener:

Since there are 8000 stocks in the US markets alone, and many more if including penny stocks, the screener usually give you hundreds of qualifiers daily. It is important to note that penny stocks tend not to work well with the Reversal & Exhaustion indicator because of their low liquidity and easily manipulated by just a few players.

To this end, you must use the "custom filter" (http://www.screenulator.com/cgi-bin/custom_filter) to narrow down your search. You may also want to combine it with other orthogonal indicators or patterns. Luckily R&E indicator is orthogonal to almost any other indicators, unlike MACD is correlated to SMA and EMA, and RSI is correlated to momentum indicators. I usually filter out by closing price > 5 to weed out penny stocks, then combine it with trendline patterns, and volume surge for buy signals. You can also combine with RSI or other indicators you find useful - create your own!



Oscillators

RSI (Relative Strength Index)

Briefing: A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:
RSI = 100 - 100
 ______
1 + RS

RS = Average of x days' up closes / Average of x days' down closes

As you can see from the chart below, the RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.

Relative Strength Index (RSI)

How to use it?: A trader using RSI should be aware that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals. The RSI is best used as a valuable complement to other stock-picking tools.
The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. For example, RSI (2) indicator is used by a lot of day or short term traders who often buy and sell the same position within the same day, whereas RSI (30) is used many long term traders who hold positions for more than one year. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum.
The Relative Strength Index was developed by J. Welles Wilder and published in a 1978 book, New Concepts in Technical Trading Systems, and in Commodities magazine (now Futures magazine) in the June 1978 issue. It has become one of the most popular oscillator indices.

Screenulator table values:
We have multiple filter for RSI. RSI(x) where x is the number of days. 14 day is the most widely used and therefore watched and used by the most number of traders and generally has more effect on the market. The next most widely used is 30 day period.
RSI valueThis corresponds to the RSI value obtained by the above formula. 70 is considered overbought, and 30 is considered oversold.
Price change to RSI 30/70This value is unique to screenulator. It means the amount of price change required in the next trading session in order for the RSI value to reach 30 or 70. I find it useful to see how strong to the RSI value obtained by the above formula. 70 is considered overbought, and 30 is considered oversold. I use this value to calculate the "potential" price gain / or potential risk associated with the stock if I believe it is bound to head towards RSI 30 or RSI 70.
VolatilityThis is the average volatility during the past x days, where x is the RSI period parameter. Daily volatility is calculated by Screenulator as Max (today's range, absolute_value_of(today's close - yesterday's close)). This value is useful for determining the likelihood of reaching the target RSI value, 30 or 70 or any other user-defined value
Reverse RSIReverse RSI calculation gives you the future price of a stock given a particular RSI level, so that you can set limit or stop price of the order when the stock reaches the target RSI level.









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