JUN 4, 2020 By : ATHUL RAJEEV, VENTESKRAFT.
Chart Patterns are the distinctive formations created by the movements of security prices on a chart and are the foundation of technical analysis. A pattern is identified by a line that connects common price points. Such as closing prices or highs or lows, during a specific period of time of chart patterns. Technical analysts and chartists seek to identify chart patterns as a way to anticipate the future direction of a security’s price. These patterns can be as simple as trend lines and as complex as double head-and-shoulders formations of chart patterns.
Since price patterns are identified using a series of lines and/or curves. It is helpful to understand trendlines and know how to draw them. Trendlines help technical analysts spot areas of support and resistance a price chart. Trendlines are straight lines drawn on a chart by connecting a series of descending peaks (highs) or ascending troughs(lows).
A trendline that is angled up, or an up trendline, occurs where prices are experiencing higher highs and higher lows. The up trendline is drawn by connecting the ascending lows. Conversely, a trendline that is angled down, called a down trendline, occurs where prices are experiencing lower highs and lower lows.
Chart Pattern represents a distinct pattern/formation on the stock chart that signifies a trading signal, or a sign of future price movement. Traders use these chart patterns to identify the current market trends or any sign of trend reversal and to trigger buy and sell signals. There are two types of patterns:
Reversal
In chart patterns, Reversal signals is a prior trend will reverse upon completion of the pattern
Continuation
In chart patterns, Continuation patterns are an indication traders look for to signal that a price trend is likely to remain in play. These patterns occur in the middle of a trend and signal that once a pattern has completed, the trend will most likely resume.
Following are some of the most popular patterns:
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TRIANGLES
Triangle chart pattern are very popular and well-known chart patterns used in technical analysis. There are three types of triangles formed symmetrical, ascending and descending triangle. The symmetrical triangle displays a pattern in which two trendlines converge toward each other indicating a neutral pattern such that a breakout to the upside or downside a confirmation of a trend in direction. The ascending triangle displays a pattern in which the upper trendline is flat, while the bottom trendline has an upward slope which generally indicates a bullish pattern in which chartists look for an upside breakout. The descending triangle displays a pattern in which the lower trendline is flat and the upper trendline is descending. This is generally seen as a bearish chart patterns where chartists look for a downside breakout.
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Head and Shoulders
Heads and Shoulders is one of the most popular and reliable reversal chart patterns in technical analysis, indicating that the security is likely to move against the previous trend.
– Generally better when the RS (right Shoulder) is smaller than LS.
– Similar to wedges make excellent trading opportunities if market retests the broken trendline (neckline)
– Break outs can be very strong and fast.
– This can make them difficult to enter on the breakout(due to slippage and price gaps etc.)
– I prefer to confirm patterns then look for suitable retracement before entering in direction of the breakout.
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Cup and Handle
Cup and Handle chart pattern is a bullish continuation pattern in which the upward trend pauses for a while but continues in an upward direction once the pattern is confirmed.A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of a “u” and the handle has a slight downward drift.A cup and handle is considered a bullish signal extending an uptrend, and is used to spot opportunities to go long.Technical traders using this indicator should place a stop buy order slightly above the upper trendline of the handle part of the pattern.
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Double/Triple Tops and Bottoms
– Can be difficult to trade because (like flags/pennants) they are often very messy
– Good for observational purposes and targets
– Act as a good warning that trend is losing strength (due to the lower high/low)
– Easier to enter after a breakout.
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PENNANTS / FLAGS
Flags and Pennants are two short-term continuation patterns that are formed when a sharp price movement is observed followed by a generally sideways price movement. The main difference between these price movements can be observed in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trendlines on the other hand flag pattern represents a channel pattern, with no convergence between the trendlines. Such that in both cases, the trend is expected to continue when the price moves above the upper trendline.
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Wedges
– After a strong trend the swings begin to contract and often in defined cycles
– Similar to a broken trendline; Can provide good opportunities to enter a trade if market re-test the broken trendline
– Do not necessarily have to obey trendlines. Observe the relationship between the swings to visualize the balance between buyers, sellers.
