One of the most commonly used technical analysis tools is chart patterns. On price charts, traders observe these patterns to know how the market is behaving and how the prices would be moving in the future.
In whatever you trade, be it Forex, stocks, cryptocurrencies, or commodities, chart patterns can guide you in the identification of possible reversals of trends, breakouts and continuation movements.
Here we are going to discuss chart patterns and the 3 types of patterns that weep traders commonly use: Head and Shoulders, Double Top, and Triangle patterns.
What Are Chart Patterns?
The pattern of charts are structures formed by the movement of prices in a chart. These trends are built as the buyers and sellers interact within the market.
Traders when studying the price charts many times find that some formations are repeated in prices. Such recurring patterns are referred to as chart patterns.
Chart patterns help traders:
- Learn market psychology.
- Identify trend reversals
- Continuation opportunities in spot trends.
- Locate more advantageous entry and exit.
These patterns are very common in technical analysis as they can be found in virtually all financial markets.
The Head and Shoulders Pattern.
One of the most popular reversal patterns in the trading is the Head and Shoulders pattern. It tends to indicate that an uptrend might end and a downtrend might start.
This trend is made up of three primary components:
Left Shoulder
The price increases and then decreases.
Head
The price increases to a higher percentage than the previous peak and returns.
Right Shoulder
The price increases once more but does not win the heights of the head and goes down.
One of the main aspects in this trend is a neckline that joins the lowest points between the shoulders and the head.
Once the price falls below the neckline, then traders usually take it as a sign of the bear, that is, the market may act down.
The Inverse Head and Shoulders also has an inverse counterpart that points to a potential occurrence of a trend reversal.
The Double Top Pattern
Another typically used chart pattern is the Double top, which indicates potential reversal of the trend.
This trend is typically the result of a vigorous upward movement, and it resembles the letter M.
- The pattern forms when:
- The cost increases and they form a resistance point.
- The price falls slightly.
Price increases once more but cannot surpass the old one.
The fact that the market is not able to cross the resistance level twice indicates that there is a loss of strength on the part of buyers.
The traders tend to anticipate the market to fall when the price crosses the support level between the two peaks.
The reverse of this trend is the Double Bottom that indicates a possible revival of the bull.
The Triangle Pattern
Triangle patterns are highly used by traders as they usually indicated a strong breakout.
Triangles are created when movements in prices narrow with time making the shape appear as a triangle.
Triangle patterns are of three major types.
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Ascending Triangle
An Ascending Triangle occurs when the market forms higher lows where the resistance level is the same.
This trend tends to indicate a bullish breakout i.e. the price might increase.
Descending Triangle
A Descending Triangle is developed when the market develops low highs and the support level is flat.
This trend is usually an indication of bearish break out, i.e. the price might fall.
Symmetrical Triangle
When the lows and the highs are towards each other a Symmetrical Triangle is formed.
This implies that the market is getting concentrated and the traders tend to wait before getting a break out before entering in a trade.
The direction of the breakout will accompany the market either on the uphill or downhill trend.
The importance of the Chart Patterns.
The reason why chart patterns are good is due to the fact that they enable the traders to know what is transpiring in the market.
They allow traders to:
Determine possible trend alterations.
Breakouts in the spot market.
Awareness of the buyer and seller behaviour.
Grand strategic planning.
These tendencies are likely to be repeated over time since markets frequently move depending on the psychology of the traders.
Tips for Beginners
Some tips to remember in case you are new in chart pattern trading include:
Never jump into a trade before you have been assured.
Test the pattern by using several timeframes.
Use chart patterns in conjunction with support and resistance levels.
Implement the right risk management in order to safeguard your capital.
As you get used to it, you will learn to identify patterns and incorporate them into your trading strategy.
Final Thoughts
Technical analysis involves chart patterns as one of its functions and they assist traders to understand the market behavior.
Some of these patterns such as Head and Shoulders, Double top and Triangle patterns give a great insight into the possibility of market movement.
Charts patterns are effective tools but must not be applied solely. They can be combined with other types of analysis and proper risk management that can assist traders in making more confident trading decisions.
Similar to any other trading, chart patterns need practice, patience, and experience to learn. The more charts one studies the easier it will be to see such patterns and apply them to your trading.
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