Pattern Alerts
Autochartist is a powerful tool which offers traders the capability to anticipate prospective market movement based on established patterns in trend, support and resistance - the basis of chart pattern trading.
In the first of four in-depth guides discussing chart analysis, we'll be looking at the aspects of Pattern Alerts available through Autochartist. You can follow through the guides in order by using the links at the bottom of each article, or jump straight to your chosen guide through the links on the left.
Emerging patterns
Emerging patterns are those where Autochartist detects a probable pattern and raises a pattern alert before price action has pierced either the support or resistance of the formation, confirming or invalidating the pattern.They offer a proactive trading approach, as you can take advantage of the probable market movement laid out by the emerging pattern.
You can then filter results depending upon the pattern type, trend, and price action, which helps to minimise the subjectivity in chart pattern trading. We'll be talking more about this in Custom Searches.
In this example, note the 15-minute timeframe (I). This can be seen both on the right-hand side's 'interval' line and in the chart itself, where each chart bar represents a 15 minute trading period. Autochartist can scan 15, 30, 60, 240 minute and daily timeframes, allowing it to detect patterns with scale ranging from the short- to the long-term.
The pattern type (P) is also listed on the chart, as well as the potential direction (D) of the pattern break. A falling wedge pattern type is a downtrending pattern, which in this example occurs on a short-term intraday chart.
The initial trend (T) indicates the strength of the trend leading into the forming pattern – for a trending pattern to continue (as opposed to a non-trending pattern), it is best if the initial trend reading is medium to high. In this example the mid-level reading indicates a trend does exist, but not a very strong one. The strength of the initial trend reading is one of the more important 'quality indicators' you should take into account when judging which patterns to trade on.
When a breakout from the pattern eventually occurs, the breakout reading (B) indicates the magnitude of that movement - in this case, the momentum with which the support of the wedge pattern (at point 'B' on the chart) was pierced. In our example the breakout reading is very low, showing little momentum as prices break lower, and therefore expectations of immediate follow-through will be similarly low. Note, however, that if a pattern breaks in the lead-up to a significant economic event, or to the open of a major financial centre (such as London), there could be significant follow-through later regardless of the breakout reading.
Completed patterns
Completed patterns are listed in the column on the left side of the interface. While emerging patterns are proactive alerts, completed patterns are reactive alerts.
Using the same EUR/USD 15-minute falling wedge pattern alert, we can differentiate between emerging and completed patterns through:
- whether or not the price action broke the pattern; and
- the prediction area plotted on completed patterns.
The completed alert shows a prediction area (outlined in grey at the bottom right of the chart) which suggests the possible direction of post-breakout movement. On the example above this prediction level acts as a level of support, since it is plotted below the downward breakout. The other outlined area shows the prices that make up the prediction area, in this case from 1.5010 to 1.5027. The direction of the breakout can either reinforce or weaken the appearance of an ongoing trend, while the completed pattern's prediction area is valuable as an indicator of the market's potential future.
Autochartist in-depth: custom searches
Part two of our guide to Autochartist looks at tailoring the software's search facility to target your preferred markets or types of chart pattern. Find out more.
