Basics

The two basic elements of technical analysis, and the study of chart patterns in particular, are the concepts of support and resistance and trend lines. The Dow Theory of trends, for example, is based on support and resistance and states that a market is in an uptrend when it makes higher highs and higher lows, and is in a downtrend when it makes lower lows and lower highs. The highs are formed at resistance levels where selling is strong enough to reverse the rally in prices while the lows are formed at support levels where buying is strong enough to reverse the decline in prices. However, support and resistance lines, which are horizontal lines, are often confused with trend lines, which are lines that slope in the direction of the trend.


Support and Resistance

Support and Resistance
Support and Resistance

Support and Resistance lines are often confused with trend lines but they are horizontal lines under the lows and above the highs respectively. They indicate where a previous rally met resistance and where a previous decline met support. These are two important levels in terms of trend identification since an uptrend will tend to break previous resistance levels above the market while a down trend will break the previous support levels below the market.

When the support line below the recent minor low in broken in an uptrend, it indicates that ...

Trend Lines

Trend Lines
Trend lines

Trend lines play an important role in identifying chart patterns as they draw the chartist's attention significant price levels. Trend lines are relatively easy to draw. In an uptrend, which is characterized by higher highs and lower lows, a support trend line is drawn below two or more correction lows. If the trend line connects only two correction lows, it is a tentative trend line and is only confirmed when the price touches the line for a third time without breaking that line.

When a trend line has been identified, it can used to identify areas of potential support or ...



Channel Lines

Trend Lines
Channel Lines

Trend lines form the basis for channel lines when the price can be seen to bounce off a line parallel to the trend line. The latter is called the channel line and is drawn along the peaks in an uptrend and along the dips or valleys in a downtrend. However, the price must bounce off the channel line at least twice to confirm the channel. The more tests the trend line and channel line survives without being broken, the more significant the channel is considered to be.

However, the trend line, which offers trade entries in the direction of the trend, should always ...

Pivot Points

Pivot Points
Pivot Points

Pivot Points were developed by floor traders as a quick and easy method of identifying key support and resistance levels, which are called pivot levels, at which the market might turn, and to identify the direction the market may take in the short-term.

At its basic level, these pivot levels are calculated using the range and close of the previous period. However, there are different formulae that can be used to calculate the various support and resistance levels, which includes the Classic Floor Trader's Method, the Woodie ...


Symmetrical Triangles

Support and Resistance
Symmetrical Triangle

Symmetrical triangles are characterized by a symmetrical convergence of trend lines with symmetry. These triangles indicate a period of indecision when the forces of supply and demand are nearly equal. During these conditions attempts to push the price up are met with selling and attempts to push the price down are met with buying.

There is also a tendency for volume to drop off during this period. When the price breaks out of the triangle, an increase in volume confirms a valid breakout while a decrease in volume indicates that the breakout might be a ...


Double Tops

Double Tops Pattern
Double Tops

The Double Tops patterns appear at the end of an uptrend when the price reaches the previous resistance level but fails to break through the resistance. The result is two price peaks with the same high. The entry point in this pattern is when the price moves below the minor low between the two peaks. This will result in a lower low and the start of a downtrend.

The Double Top pattern is confirmed when the support at the bottom of the recent low is broken and indicates an intermediate to long-term change of the ...


Head and Shoulders

Head and Shoulders
Head and Shoulders

The head and shoulders pattern is one of the most reliable trend reversal patterns and usually occur at the end of an uptrend, where it is also called a Head and Shoulders Top. They can occur at the end of a downtrend, where they are also called a Head and Shoulders Bottom or Inverted Head and Shoulders. A Head and Shoulders pattern is named for the three highs in an uptrend or the three lows in a downtrend which form a left shoulder, the head, and a right shoulder.

Head and Shoulders Tops tend to be more reliable than Head and Shoulders Bottoms. A ...