For those who wish to engage in trading, grasping chart patterns is perhaps one of the most important milestones to accomplish in technical analysis. Chart patterns aid traders in understanding the market better and help in forecasting the price movements in the future.
We will discuss the top 10 chart patterns which every trader should know and incorporate into their trading activities in the course of their trading journey in this blog.
Head and Shoulders
This is a reversal pattern that indicates the change of trend direction. It consists of three peaks, where the middle one is the highest and the other two are lower and approximately equal towards each other.
Signal: This pattern suggests a bearish reversal after an uptrend confirming the structure.
Inverse Head and Shoulders
This pattern bears a resemblance to the previous one, but instead of appearing at the middle of an uptrend, it appears at the bottom of a downtrend. The pattern also comprises three parts, with the middle trough being the lowest.
Signal: This pattern suggests a bullish reversal after a downtrend confirming the structure.
Double Top
This is a bearish reversal pattern formed after an uptrend which is characterised by price attempting to break a resistance level beyond which price fails to advance at twice.
Double Bottom
A bullish reversal pattern that occurs during a downtrend. The price touches a support level two times and attempts to break lower.
Signal: There may be a rising price movement after twice bouncing off the same support level.
Triangle Patterns (Symmetrical, Ascending, Descending)
These are continuation patterns and are further divided into three types.
Symmetrical Triangle: Price may be consolidating between converging trend lines.
Ascending Triangle: Resistance is flat while support rises.
Descending Triangle: Support is flat while resistance is declining.
Signal: A breakout typically takes place in the prevailing trend direction.
Cup and Handle
This pattern appears to have a cup with a small downward drift which forms the handle. This pattern typically forms following an uptrend.
Signal: This is a bullish continuation pattern suggesting that the price will likely increase.
Flag Pattern
This is a short-term continuation pattern where the price consolidates within a small rectangle after a strong move. Appears after a sharp increase or decrease in price.
Signal: After flag consolidation, there is continuation in the preceding trend.
Pennant Pattern
This is like the flag pattern but shaped like a small symmetrical triangle. They follow a sharp price movement and represent a pause in the trend before it continues.
Signal: After a breakout, consolidation of the preceding trend.
Wedge Pattern (Falling and Rising)
This type of pattern can be divided into two sub-types.
Falling Wedge: Bullish pattern emerges when a price movement within a funneling range makes lower highs and lower lows.
Rising Wedge: Bearish pattern emerges when a price movement within a funneling range makes higher highs and higher lows.
Signal: The direction of the breakout depends on the type of wedge formed.
Rectangle Pattern
The rectangle price pattern occurs when the price moves horizontally bounded within a specific level. It shows the balance between purchasing and selling pressure resulting in price stagnation before a subsequent breakout or breakdown.
Signal: This is a neutral pattern, which suggests waiting for either a breakout or breakdown confirmation.
Conclusion
Learning these chart patterns can greatly improve someone's technical analysis skills. These patterns, for example, assist with predicting the movement direction of a price to make profitable trades.
To build confidence as a trader, attempt to locate these patterns on actual charts and repeat the process. With experience and learning, a trader will most likely become more successful in making trading decisions.
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