In technical analysis, since chart types make an important part, chart patterns are yet another crucial aspect to be learned by traders to make their trading beneficial. Chart patterns often provide a wider perspective to traders by assisting in identifying the trading signals or signals of future price movements or changes.
Reversals and continuations are the most approved chart patterns. A reversal pattern signals that a prior trend will reverse on the completion of the pattern, whereas a continuation pattern signals that the trend will continue once the pattern is complete. Moreover, these patterns are accessible over any time frames. Below are some more popular chart patterns.
The Head and shoulders is a reversal chart pattern that implies that a trend is likely to reverse once it is completed. A head and shoulder top consists of three peaks. The middle peak is the highest peak, known as head and other two peaks are lower ones and almost equal known as shoulders. A trendline or neckline connects the lows between these peaks which eventually indicates the key support level to look out for a breakdown or trend reversal. The inverse of head and shoulders top, where neckline acts as a resistance level in order to look for a breakout higher is called Head and shoulders Bottom or Inverse Head and shoulders.
Cup and Handle
The Cup and Handle implies a bullish continuation pattern, in which an upward trend has paused but is expected to continue when the pattern is confirmed. The ‘cup’ portion of the pattern should be a “U” shape that looks like the rounding of a bowl instead of a “V” shape with equal highs on each side of the cup. The ‘handle’ is shaped on the right side of the cup in the form of a short pullback that appears like a flag or pennant chart pattern. Once the handle is complete, the stock may breakout to new highs and recommence its trend higher.
The Double Top or Double bottom pattern can easily be recognized. These patterns are considered most reliable. Technical traders usually prefer these charts because of their convenience. The pattern is formed after a prolonged trend when a price tests the same support or resistance level twice without a breakthrough. The pattern provides the signal for the beginning of a trend reversal over the intermediate- or long-term.
Another popular chart pattern is Triangles. These chart patterns are common and popular as triangles are likely to occur rapidly in technical analysis. The three most types of triangles are symmetrical triangles, ascending triangles and descending triangles. These chart patterns are likely to last for couple weeks to several months.
When two trend lines converge toward each other provide signal of an upcoming breakout but not the direction, symmetrical triangles are formed. Whereas, ascending triangles are formed by a flat upper trend line and a rising lower trend line and imply that a breakout higher is likely to occur. On the other side, descending triangles have a flat lower trend line and a descending upper trend line indicates the likelihood of a breakout.
The rounding bottom
The Rounding Bottom also known as Saucer Bottom is a long term reversal pattern that provides a signal for a shift in a downtrend to an uptrend. This pattern usually lasts for several months to several years. The rounding bottom pattern is similar to the cup and handle pattern, but excluding the handle. However, this pattern becomes difficult to trade because of long term nature and as handle is missing, this pattern marks the absence of a confirmation trigger.
Triple Tops and Bottoms
Triple Tops and Triple Bottoms are reversal patterns that aren’t as prevalent as Head and Shoulders or Double Tops or Double Bottoms. But, they still can be strong trading patterns because of their nature. These patterns result when price tests the same support and resistance level three times and is not able to break through.
However, chart patterns are important to be understood by traders, traders should always combine these with other technical analysis tools and indicators to get the most out of their trading session and increase the odds of success.