A chart pattern, also known as a price pattern, is essentially a pattern embedded in a chart, where the price of an instrument is represented in a graph. Studying these patterns play an important role in technical analysis when trading in the global financial markets.
Some patterns occur repeatedly over some time and signal either a trend extension or reversal. Knowing how to identify various chart patterns is an important aspect of technical analysis of the global financial market. Below are 5 patterns you need to know as a trader.
- Head and Shoulders
The head and shoulders is a type of chart pattern where a large price high has two smaller price highs on both sides of it. In most cases, the 2 price highs (first and third) are smaller than the mid-price high (second). However, all of these price highs will eventually fall back to the same support level which is called the “neckline”.
A fall of the third price high back to the support level is usually an indication of a downtrend otherwise known as a bearish movement. The inverse of this pattern predicts an uptrend or bullish movement. Practice trading using Head & Shoulders trading strategy.
- Wedges
We have two types which are the falling and rising wedge. These are formed as a result of the price of an instrument tightening between two slanting trendlines.
Rising Wedge
When there are two ascending support and resistance lines where the support line is steeper than the resistance line, what you have is a rising wedge.
This chart pattern is an indication that the price of an instrument will face a further decrease when it breaks through support.
Falling Wedge
A falling wedge is the opposite of a rising wedge, where resistance and support lines are ascending but the resistance line is steeper than the support line. This chart pattern is an indication that the price of an instrument will face a further increase when it breaks through resistance.
The rising and falling wedges are indications of a price reversal, where a falling wedge indicates a bullish price reversal and a rising wedge indicates a bullish price reversal.
- Double Top Pattern
Sometimes the price of an instrument experiences a rise before going down to its support level, after which it goes up, tests its resistance once more, and eventually reverses against its current trend. This is referred to as a double top.
- Double Bottom Pattern
The reverse is the case for the double bottom. In this pattern, the price of the instrument is in a decline, after which it rises, touches resistance, and goes back down. Eventually, the market becomes bullish and price breaks resistance, and the market trend reverses. This pattern indicates that a downtrend has come to an end and an uptrend is about to begin.
- Triangles
Ascending Triangle
An ascending triangle shows the extension of a current upward price movement. The trendline of ascending triangles generally signals an uptrend of the asset, whereas the horizontal line signals a regular level of resistance. Ascending triangles are characterized by two or more similar price highs, which enables a horizontal line to be drawn.
- Descending Triangle
A descending triangle on the contrary shows that the price of an asset will most likely continue to move in a downward trend. Short positions are usually taken by traders, enabling them to turn profits from the market during a period of price fall.
Descending triangle typically moves in a downward manner and tends to break support. It signals that the market is currently influenced by sellers. This means that subsequently, lower price-lows are likely to occur and the market is not going to reverse. The market trend breaks through support in a descending triangle and there is a continuation of a downtrend.
