Technical analysts often study stock charts for recurring price patterns, or stock chart formations, that appear on price charts on fairly a regular basis. These recurring chart patterns are one of the key elements of technical analysis and can be used on their own or as confirmation for signals from technical indicators. They are based, by and large, on trend lines, which are lines drawn on a chart to indicate support and resistance levels. A support line is a level where the stock price appears to have difficulty moving or penetrating below while a resistance line is a level that the stock price appears to have difficulty moving above.
Chart patterns can be based on any price chart of any time-frame, and usually provide clear entry and exit signals, as well as price projections, stop levels and profit targets. Most patterns fall into two categories: continuation patterns and reversal patterns, but some are both continuation and reversal patterns, depending on the price breakout.
However, a few of these recurring chart patterns, such as the rectangle pattern can be either a continuous or a reversal pattern.
Most of these chart patterns can be applied to bar charts, candlestick charts, and line charts. Some technicians suggest that the best type of chart for identifying common chart patterns is the line chart. However, some chart patterns are specific to bar charts, candlestick charts, and point and figure charts.
Quite a number of these patterns, such as the flag, pennant, head and shoulders, and rising and falling wedges have logical price objectives where a trader could seek to take profits. However, these price objectives do not represent the end of a particular price action and should not be misconstrued as a point at which to reverse onesposition as it does not mark the start of a new trajectory in the price action.
Furthermore, technical analysis is not an exact science, thus these patterns indicate direction and target prices not with absolute certainty, but with a degree of high probability. However, there is a danger of seeing patterns that are not there. For this reason, the use of volume as confirming the underlying market psychology and possibly the use of other technical indicators is highly recommended.
Continuation patterns indicate that there is a greater probability of the continuation of a trend than a trend reversal.. These patterns are generally formed when the price action enters a consolidation phase during a pre-existing trend. During the consolidation phase, the trend appears to change; however, the continuation of the preceding trend is more probable.
Some of the common continuation patterns include the cup and handle pattern, flags and pennants, symmetrical triangles, ascending triangle and desc...
Double Top Pattern
Reversal patterns mark the turning point of an existing trend and are good indicators for taking profit or reversing your position. Generally, trend reversal patterns indicate that a support level in a downtrend or a resistance level in an uptrend will hold and that the pre-existing trend will start to reverse. These patterns allow you to enter early in the establishment of the new trend and are usually result in very profitable trades.
The common reversal patterns include the double tops and double bottoms, triple tops and triple bottoms, broadening tops and broadening bottoms, ...
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 ...
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 ...