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Identifying Charts Patterns

Major Trading Chart Patterns

A chart pattern is a distinct formation on the chart of a financial security. There are many different types of patterns which are distinguished by many characteristics as presented below. When a chart pattern is identified –there is a high probability that a certain (upward / downward) price movement will occur in the future. A pattern is not able to predict with certainty future price movements but is can indicate a high-probable trade. In other words chart Patterns are used by some traders to identify buy, hold and sell signals.


Two Categories of Chart Patterns (Reversal and Continuation Chart Patterns) 

Two major pattern categories can be identified -the Reversal and the Continuation Patterns. Reversal patterns are signaling the reversing of the current trend. Continuation patterns signify that a price trend will continue.

 

MAJOR REVERSAL CHART PATTERNS


(1) Head and Shoulders Patterns


Head and Shoulders pattern is widely used among traders and considered as one of the most reliable patterns. The timeframe of these patterns usually includes some weeks to some months. There are two types of a head and shoulders chart patterns.

i) Head and shoulders top is a chart pattern that signifies the reversal of an upward trend (it is presented on the left of the following chart).

ii) Head and shoulders bottom or inverse head and shoulders may signify the reversal of a downward trend (it is presented on the right of the below chart).

PAMM 250

 

(2) Double Tops and Bottoms Patterns


Double Tops and Bottoms patterns are very common and considered as reliable patterns. These patterns are confirmed when a price movement hit support or resistance levels twice but is unable to pass through. Time frame of these patterns includes a couple of weeks to several months.

 

(3) Triple Tops and Bottoms Patterns


Triple tops and triple bottoms are formed when the price movement tests the level of support or resistance three times and although is unable to pass through. Usually, when these patterns are identified the reversal of the current trend is extremely fast and strong. The timeframe includes a couple of months but triple tops and bottoms can also be met in long-term price movements.

 

(4) Rounding Top and Bottom Patterns

 

Rounding top and bottom patterns are also called Saucer patterns. These patterns indicate a significant upward / downward price movement after a long consolidation period. Time frame includes from several months to several years.

 

MAJOR CONTINUATION CHART PATTERNS

 

(5) Cup and Handle Patterns


Cup and handle chart is a continuation pattern that signifies that a certain upward trend has paused but it will not reverse. The name of the pattern is due to the fact that its form looks like a cup. When a cup and handle chart is confirmed an upward trend is strengthened and becomes very bullish. This kind of pattern can be formed in a wide range of time frames –from a couple of months to a couple of years.


(6) Triangles Chart Patterns

Triangles are patterns signifying strong continuation of a price trend. Three types of triangles can be identified: Symmetrical, Ascending and Descending triangle. Time frame of triangles includes a couple of weeks to several months.

 

(7) Flag and Pennant Patterns


Flag and Pennant Patterns are continuation patterns signaling the continuation of a master trend after a sharp advance or decline. In order these patterns to be confirmed price movement must be accompanied by a significant increase of the volume activity. Time frame usually includes a couple of weeks to a couple of months.


 

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