- Chart patterns put all buying and selling that’s happening in the stock market into a concise picture.
- Chart patterns tend to repeat themselves over and over again which helps to appeal to human psychology and trader psychology in particular.
- If you are able to learn to recognize these patterns early they will help you to gain a real competitive advantage in the markets.
- Chart patterns can be continuation, reversal or bilateral pattern.
- Chart patterns provide a complete pictorial record of all trading, and also provides a framework for analyzing the battle between bulls and bears.
|Table of Contents|
|What are Chart Patterns?|
|Why is it Important to analyze the Chart Patterns?|
|Types of Chart Patterns|
Chart patterns play a crucial role when analyzing the charts for trading.
In technical analysis, the transitions in the trends are signaled by these charts patterns.
By learning about these chart patterns, you will be able to learn how to profit from these technical price patterns.
Also Read: Certification in Technical Analysis
But before you start analyzing these patterns, it’s better to learn about it
In order to get grips with them, here are top 10 chart patterns that every trader should know when trading in the stock market.
But before knowing that let us discus basics of the chart patterns:
What are Chart Patterns?
Chart patterns put all buying and selling that’s happening in the stock market into a concise picture.
It provides complete pictorial record of all trading, and also provides a framework for analyzing the battle between bulls and bears.
Chart patterns can help us in determining who is winning the battle, and also allowing traders to position themselves accordingly.
Chart pattern analysis can be used to make short-term as well as long-term forecasts.
The data used by the chart patterns can be intraday, daily, weekly, monthly or yearly.
Gaps and reversals may form in one trading session, while broadening tops and dormant bottoms may require many months to form.
Why is it Important to analyze the Chart Patterns?
Chart patterns are a great way of viewing price actions which occur during the stock trading period.
Chart patterns tend to repeat themselves over and over again which helps to appeal to human psychology and trader psychology in particular.
If you are able to learn to recognize these patterns early they will help you to gain a real competitive advantage in the markets.
Just as volume, support and resistance levels, RSI, and Fibonacci Retracements and other technical indicators, stock chart patterns helps in identifying trend reversals and continuations.
Types of Chart Patterns:
Chart patterns can be basically classified into:
- Continuation patterns: These kinds of chart patterns give continuation signals of the ongoing trend
- Reversal Patterns: These kinds of chart patterns give reversal signals
- Bilateral Patterns: These kinds of chart patterns shows uncertainty and high volatility in the market.
Here are the 10 most useful chats patterns which will help you in trading:
1. Head and Shoulders:
This is a bullish and bearish reversal patterns which has a large peak in the middle and smaller peaks on the either sides.
Head and shoulders pattern is considered to be one of the most reliable reversal chart patterns.
This pattern is formed when the prices of the stock rises to a peak and falls down to the same level from where it had started rising.
Again the prices rises and form a peak higher than the last peak and again it declines to the original base.
Prices again rise to form a third peak, which is lower than the second peak and from here it starts declining to the base level.
When the prices break the baseline with volume then bearish reversal takes place.
2. Double top:
A double top is another bearish reversal pattern that traders use a lot.
The stock price will form a peak and then retrace back to a level of support. It will then form a peak once more before reversing back from the prevailing trend.
3. Double Bottom:
A double bottom is bullish reversal pattern that is totally opposite of double top.
The stock price will form a peak and then retrace back to a level of resistance. It will then form a peak once more before reversing back from the prevailing trend.
4. Cup and Handle:
A cup and handle is a bullish reversal chart patternwhich resembles a cup and handle where the cup is in the shape of a “U” and the handle has a slight downward drift.
The cup appears similar to a rounding bottom chart pattern, and the handle is similar to a wedge pattern.
The right-hand side of the pattern has low trading volume that may be as short as seven weeks or as long as 65 weeks.
5. Rounding Bottom:
This pattern is also known as the “saucer bottom” and is long-term reversal chart pattern.
Rounding Bottom shows that the stock is reversing from a downward trend towards an upward trend.
It can take any time from several months to years to form. It is very similar to the cup and handle, but the only difference is that there is no handle to the pattern.
6. Wedges :
Wedges are bullish and bearish reversal as well as continuation patterns which are formed by joining two trend lines which converge. It can be a rising wedge or a falling wedge.
Rising wedge occurs when the price of the stock is rising over a time whereas falling wedge occurs when the price of the stock is falling over a time.
This pattern can be drawn by using trend lines and connecting the peaks and the troughs.
Once there is price breakout, there is a sharp movement of prices in either of the directions.
A pennant or a flag is created when there is a sharp movement in the stock either upward or downward.
This is followed by a period of consolidation that creates the pennant shape because of the converging lines.
Then a breakout movement occurs in the same direction as the big stock move. Pennants are similar to flag patterns and tend to last between one and three weeks.
At the initial stock movement there is a significant volume which is followed by weaker volume in the pennant section, and then rise in the volume at the breakout.
8. Symmetrical Triangles:
Symmetrical Triangles can be bullish or bearish continuation chart patterns that are developed by two trend lines which converge.
These two trend lines join the peaks and troughs and they occur in the direction of the ongoing trend.
9. Ascending Triangles:
This triangle appears during an upward trend and is regarded as a bullish continuation pattern.
Sometimes it can be also created at the end of a downward trend as a reversal pattern, but it more commonly considered as a continuation chart pattern.
Ascending triangles are always regarded as bullish patterns whenever they are formed in the charts.
10. Descending Triangles:
Just like the ascending triangle this is also a continuation chart pattern. The only difference is that it is a bearish continuation pattern and it is created during the downtrend.
Sometimes it can be also created at the end of an uptrend as a reversal pattern, but it more commonly considered as a continuation chart pattern.
You can add your comments below and we would like to know what chart patterns you like to trade besides the 10 above.