Chart patterns are a way to summarize all the buying and selling happening in the stock exchange. Chart patterns provide a complete picture of all trading and a framework to analyse the battle between bears and bulls. Chart patterns are useful in helping us determine who is winning and allowing traders to place themselves accordingly. Chart patterns can be used for making short-term and long-term forecasts. Chart patterns can use intraday, daily or weekly data, as well as monthly and yearly data. While gaps and reversals can form in one trading session (or even a single trading session), broadening tops or dormant bottoms could take many months.
What Is The Importance Of Chart Patterns Analysis?
Chart patterns can be used to visualize price movements such that occur during stock trading periods. Chart patterns are a common pattern that repeats itself over and over which appeals to both human psychology and trader psychology. You can also read: Hidden RSI Divergence and Swing Trading. These patterns can be identified early and will give you a competitive edge in the markets. Stock chart patterns, just like volume, support, resistance levels, RSI and Fibonacci retracements, help in identifying trend reversals or continuations.
Different Types Of Chart Patterns:
- Chart patterns can basically be classified into:
- Continuation patterns are chart patterns that indicate continuation of an ongoing trend
- Chart patterns that are reversal: These chart patterns can give you reversal signals
- Bilateral patterns: These chart patterns indicate uncertainty and high market volatility.
These are the top 10 chart patterns that will help you trade: Top 10 Chat Patterns
- Head and Shoulders
This pattern is both a bullish and a bearish reversal such as patrones de reversión. It has a large peak at the middle and smaller peaks to the sides. The Head and Shoulders pattern is one of the most reliable chart reversal patterns. This pattern occurs when stock prices rise to a peak, then fall to the same level as it was before. The prices rise again to form a peak that is higher than the previous peak, and then it falls back to its original base. The prices rise again to form a third peak which is lower than that of the first peak. From here, it begins to decline to the base level. Bearish reversal occurs when prices exceed the baseline volume.
- Double top
Double tops are another popular bearish reversal pattern used by traders a lot. The stock price will reach a peak, then fall back to support. The stock price will then reach a peak again before it reverses from its prevailing trend.
- Double bottom:
Double bottom is a bullish reversal pattern. It is completely opposite to double top. Stock prices will reach a peak, then retrace to the resistance level. The stock price will then reach a peak again before it reverses from the current trend.
- Cup and Handle
A cup and handle is a bullish reverse chart pattern that looks like a cup with a handle. The handle is slightly downward-drifted and the cup is in the form of a U. The handle and cup look similar to a rounding-bottom chart pattern. Low trading volume can be found on the right side of this pattern. It may last as little as 7 weeks, or as long as 65.
- Rounding Bottom
This is also known by the “saucer bottom”, and it is a long-term reversal pattern. Rounding Bottom indicates that the stock is moving from a downward trend to an upward trend. You can also read: Technical Analysis and Importance Of Volume in Trading. It may take several months or years for the stock to form. The cup and handle are very similar, but there is no handle.
These are continuation patterns that are created by joining two trend lines that converge. You can choose to have a rising or falling wedge. Rising wedge is when the stock price is increasing over time, while falling wedge is when it is decreasing over time. Trend lines can be used to draw a wedge pattern by connecting the peaks with the troughs. If there is a price breakout, you will see a sharp move in prices in one of the two directions.
When there is an abrupt movement in stock, either upward or down, a pennant or flag pattern is formed. The converging lines create the pennant shape. A breakout movement follows in the same direction of the major stock move. The pennant patterns look similar to flag patterns, and last for between one and three week. There is an initial stock movement that is markedly large. This is followed by a weaker volume section and then a rise in volume at the breakout.
- Symmetrical Triangles
Symmetrical triangles are continuation charts that can be either bullish or bearish. They are created by two trend lines that converge. These two trend lines connect the peaks or troughs, and they are in the direction of an ongoing trend.
- Ascending Triangles
This triangle is considered a bullish continuation pattern and appears in an uptrend. It can also be created at the end a downward trend to create a reversal, but it is more often considered a continuation chart pattern. When formed in charts, ascending triangles are considered bullish patterns.
- Descending Triangles
The descending triangle is a continuation chart pattern, just like the ascending triangular. It is a bearish continuation chart pattern that is created in the downtrend.