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What are the classic chart patterns?
There are many ways to study the financial markets by means of technical analysis (TA). Some traders use indicators and oscillators, while others base their analysis only on price action.
Candlestick charts show price changes over time. The essence is that in the historical movement of the price of an asset, it is possible to identify repetitive patterns. Candlestick patterns can tell you a lot about an asset from its chart, and traders often use this in the forex, stock and cryptocurrency markets.
The most common of these patterns are collectively referred to as classic chart patterns. These are some of the most well-known patterns and for many traders, they are reliable trading indicators. Why? Aren't trading and investing associated with finding unique signals that others haven't found? Yes, but they are also related to crowd psychology. Since technical models are not based on any scientific principles or physical laws, their effectiveness largely depends on the number of market participants using them.
Flags
A flag is a consolidation area which is directed against a long-term trend and is formed after a sharp price movement. Such an area of the chart is similar to a flag on a flagpole, where the flagpole is an impulse movement and the flag is an area of consolidation.
Flags can be used to identify potential trend continuation. In addition, the trading volume accompanying the pattern is important. Ideally, an impulsive move should occur on high volume, and the consolidation phase should have lower, declining volume.
Bullish flag
A bullish flag occurs during an uptrend, follows a sharp rise and, as a rule, the uptrend continues after it.
Bearish flag
A bear flag occurs when there is a downtrend, follows a sharp drop, and usually the downtrend continues afterwards.
Pennant
Pennants are variants of flags in which the consolidation area has converging
trend lines, more similar to a triangle. A pennant is a neutral formation, its interpretation depends a lot on the context of the pattern.
Triangles
A triangle is a graphical pattern characterized by a converging price range and is usually followed by a continuation of the trend. A triangle shows a pause in the underlying trend, but can indicate a reversal or continuation.
Rising Triangle
An ascending triangle is formed by crossing the horizontal
resistance line and an uptrend line drawn through a series of rising lows. This means that every time price bounces off horizontal
resistance, buyers come in with higher prices, creating higher lows. There is increasing tension in the resistance area, and if price breaks through it, it is usually followed by a quick surge with higher volume. Thus, an ascending triangle is a bullish pattern.
Downtrending Triangle
A descending triangle is the inverse of an ascending triangle. It is formed when there is a horizontal support area and a downtrend line drawn through a series of declining highs. Just as with an upward triangle, each time price bounces off the horizontal support level, sellers enter at lower prices, creating lower highs. If price breaks through the horizontal support area, it is usually followed by a quick jump downward with higher volume. Thus, it is a bearish pattern.
Symmetric Triangle
A symmetrical triangle is formed by the descending upper and ascending lower
trend lines, which have approximately the same slope. A symmetrical triangle is neither a bullish nor a bearish pattern, because its interpretation depends a lot on the context (on the underlying trend). It is considered a neutral pattern, showing a period of consolidation.
Wedges
A wedge is drawn by converging trend lines and indicates a narrowing of price action. The trend lines in this case show that the highs and lows are rising or falling at different rates.
This can mean that a reversal is imminent as the underlying trend weakens. A wedge pattern can be accompanied by a decrease in volume, which also indicates that the trend momentum is weakening.
Rising Wedge
The rising wedge is a bearish reversal pattern. It indicates that as price narrows, the uptrend becomes weaker and may break the lower
trend line.
Downward wedge
The downward wedge is a bullish reversal pattern. It indicates that as prices fall and trend lines narrow, tension increases. A downward wedge is often followed by an upward breakout with an impulse move.
Double Top and Double Bottom
Double top and double bottom patterns occur when the market moves in an M or W shape. It is worth noting that these patterns can be effective even if the corresponding price categories are not the same, but close to each other.
As a rule, two points of minimum and maximum are accompanied by higher volume than the rest of the model.
Double Top
A double top is a bearish reversal pattern in which the price reaches the maximum twice and cannot break higher on the second attempt. At the same time, the fall between the two tops should be small. The pattern is confirmed when price breaks the local low between the two peaks after the second high.
Double bottom
A double bottom is a bullish reversal pattern in which price reaches a low twice, followed by a significant rise. As with a double top, the rebound between the two lows should be moderate. The pattern is confirmed when price breaks the local low between the two highs after the second high.
Head and Shoulders
Head and shoulders is a bearish reversal pattern with a base line ("neck") and three peaks. The two side peaks should be approximately on the same level, and the middle peak should be higher than them. The pattern is confirmed when price breaks the support line of the neck.
Inverse Head & Shoulders
As the name implies, this pattern is the opposite of the Head & Shoulders pattern and indicates a bullish reversal. The inverted head and shoulders pattern is formed when price falls to a lower low in a downtrend and then bounces to a support line at about the same level as the first low. The pattern is confirmed when price overcomes neckline resistance and continues to rise.
Summary
Classic chart patterns are the most common TA patterns. However, like any other method of market analysis, they should not be considered in isolation. What works well in one market environment may not work in another. So it is always a good idea to find validation for them, while exercising proper risk management.
Keep your nose to the wind and know that Fortune, Luck and Success
always favor you,
when you are with us!
Always yours C.J.
All the above is not a financial advice, but only a subjective opinion of the author. If you doubt something, do your own research and double-check the information yourself.
