This Blog provides you with information about types of chart patterns we’re going to learn in Technical Analysis that often forms in the market , which helps you in taking your trading decisions wisely. This is one of the parts of Technical Analysis.
Chart Patterns - Technical Analysis
As we all know market can’t go straight forward in a single side movement. It keeps moving in an up and down direction and because of that, it forms Continuous Higher high, higher low, lower high, and lower low.
These are the 4 parameters that form a chart pattern in the market.
These patterns are human behavior that never changed in the last 100+ years.
There is one saying in the market: ” History repeat itself “, which means whatever happens in the past will continue in the future. Because human behavior never changes.
So before we learn about chart patterns, there are some terms of Technical Analysis that are mandatory to know which help us in identifying chart patterns in a live market.
Swing: Point/place on a chart from where the market turns around is known as swing.
Trendline: It is a line connecting 2 or more points on a series of HH-HL/LH-LL to define the prevailing direction of the market.
Generally, traders prefer to draw a trendline by connecting the closing point of price because it shows that traders and investors are willing to hold a position overnight or over a weekend.
Support/Resistance: You can read a complete guide about Support and Resistance in our previous blog “Technical Analysis Guide – Part 2”.
Supply/Demand: Read the Supply and Demand guide here.
There is a number of chart patterns in Technical Analysis that forms in the market and that differs from person to person. It all depends on observation.
But we’ll only talk about the most important ones here. So let’s start learning one by one.
Types of Chart Patterns
Chart patterns are divided into 3 Parts:
1. Continuation Pattern: Chart pattern that continues the previous trend as it is after forming a pattern.
2. Trend Reversal Pattern: Chart pattern that changes its previous trend after forming a pattern.
3. Bilateral Pattern: Chart patterns that can give a target in either direction of the previous trend.
1. Poll and Flag
There are 2 types of flags:
- bullish flag and
- bearish flag.
It is formed when the market consolidates in a narrow range after a sharp move. The flag pattern is used to identify the possible continuation of the trend.
Should the trend resume, the price increase could be rapid, making the timing of a trade advantageous by noticing the flag pattern.
Flags are areas of tight consolidation in price action showing a counter-trend move that follows directly after a sharp directional movement in price.
The bottom of the flag should not exceed the midpoint of the flagpole that preceded it.
Flag patterns have five main characteristics:
- The preceding trend
- The consolidation channel
- The volume pattern
- A breakout
- A confirmation where the price moves in the same direction as the breakout
2. Falling Wedge
The falling wedge pattern is both a bullish continuation and bearish reversal pattern which gives rise to confusion in the identification of the pattern. Both scenarios contain different market conditions which must be taken into consideration.
A falling wedge is a continuation pattern if it appears in an uptrend and is a reversal pattern when it appears in a downtrend.
3. Rising Wedge
The Rising wedge pattern is both a bearish continuation and bullish reversal pattern which gives rise to confusion in the identification of the pattern.
Both scenarios contain different market conditions which must be taken into consideration.
A rising wedge is a continuation pattern if it appears in a downtrend and is a reversal pattern when it appears in a uptrend.
1. Head and Shoulder
A head and shoulders pattern is a chart formation that appears as a baseline with three peaks, where the outside two are close in height and the middle is highest. It is one of the most reliable trend reversal patterns.
The ups and downs of the head and shoulders pattern tell us a story about the battle between bulls and bears.
1st peak forms through just a normal pull back because the market is in the up move and at some point, profit booking leads to pulling back.
When the market crosses high of the previous high, traders are getting good profit again so they start booking profit again which ultimately forms the 2nd peak but here it is clear that bears are gaining ground.
But as 3rd time the buyer tries, a bear takes control before it crosses or forms a new higher high, bear pushes the market down. Which forms a head and shoulder pattern.
You can take entry as soon as the price breaks the baseline or retest of baseline if you want more confirmation.
2. Inverse Head and Shoulder
It’s the same as head n Shoulder but it forms at the end of a downtrend.
Entry criteria are the same as of head n shoulder either at break-point of baseline or at retest on the baseline.
The target for both above patterns is the distance between the baseline and higher peak of the head
3. Double Top
A double top is an extremely bearish technical analysis reversal pattern that forms after an asset reaches the same price two times with a moderate decline between the two highs.
The psychology behind this formation is that the market was already in an uptrend and has a good move, some profit booking kept the market a little down.
At the same point, buyers join again and push the market upside, but from the same high point, bears joined agin and push the market more down and broke the support where buyers were joined.
This support broking suggests that bears are so much strong that they even didn’t let the buyer cross the previous high and drag them down quickly.
You can take entry at the breaking point or at a retest of that support/baseline.
4. Double Bottom
It’s the same as but Double bottom forms at the end of a downtrend. Entry criteria are the same as of Double top either at break-point of baseline or at retest on the baseline.
The target for both above patterns is the distance between baseline and peak of a double top.
So that’s all for Technical Analysis.
Don’t forget to check out our more “Financial Market-related articles” to improve your learning & enhance your knowledge.