Chart Patterns In Stock Market
A technical chart pattern consists of a specific combination of lines and/or arcs that appear on a chart. In most cases, the lines and arcs form shapes that are believed to indicate a bullish or bearish directional bias. Chart patterns occur in all forms of trading; the same sequences of lines and arcs that appear in stock and index charts can also be found in the charts of currency pairs and futures contracts.
Chart Pattern Categories:-
Most Chart patterns fall into one of two categories:
1) Reversal chart patterns indicate that the price is about to change direction.
2) Continuation chart patterns indicate that the price should continue in its current direction
”Chart patterns occur in all different chart types and time frames; they are just as likely to appear on a five-minute line chart as they are on a monthly candlestick chart.”
Patterns are Imperfect
Every experienced trader has witnessed the failure of a chart pattern; and the longer you trade, the more failures you will see. If these
patterns are flawed, then why use them at all? If any aspect of technical or fundamental analysis worked consistently and
flawlessly, trading would be an easy game indeed.
patterns are flawed, then why use them at all? If any aspect of technical or fundamental analysis worked consistently and
flawlessly, trading would be an easy game indeed.
That’s why it’s important that we manage our expectations. Chart patterns aren’t the key to an unbeatable advantage, and their use won’t automatically result in a bonanza of trading profits. They are simply used in an attempt to gain an edge.
Reversal vs. Continuation Patterns
As mentioned earlier, chart patterns can be grouped into two main categories reversal patterns and continuation patterns. Reversal patterns tend to be more dramatic and impactful than continuation patterns. Trends can continue for long periods of time, and because of this both traders and investors tend to become complacent. The reversal of a trend provides a jolt to these complacent market participants, shocking them into action and creating an opportunity for those looking to take the other side of the trade.
Reversal chart patterns
In this post you will come to know important reversal chart pattern.
The Head and Shoulders Reversal Pattern
When lower highs and lower lows are introduced into a series of higher highs and higher lows, it forms the basis for one of the most notorious reversal patterns in existence—the ‘‘head and shoulders’’ pattern.
The head and shoulders is a bearish reversal pattern that consists of three main parts: the left shoulder, the head, and the right shoulder. The pattern begins as a series of higher highs and higher lows.
The sequence is altered when a low point is formed that has the same approximate value as the previous low. The left shoulder and head of the pattern are now fully formed; this is the first sign that a change in trend may be imminent.
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| The Structure of a Head and Shoulders Pattern |
The three lows should be similar in value and represent an area of horizontal support. A line is drawn across the three
lows; this is known as the ‘‘neckline’’ of the pattern.
lows; this is known as the ‘‘neckline’’ of the pattern.
Variations on the Head and Shoulders Pattern
In some cases, the head and shoulders pattern forms as it normally does but fails to break the neckline, instead, it forms a second or even third right shoulder. The fact that this version of the pattern has multiple right shoulders doesn’t invalidate its meaning.
Island Head and Shoulders
In this pattern, the price has gapped up prior to the formation of the head and shoulders. After the head and shoulders is fully formed, the pattern ends with a gap down. This leaves the pattern itself disconnected from the rest of the chart—hence, the term ‘‘island.’’
Inverse Head and Shoulders Pattern
The inverse head and shoulders begins as a series of lower highs and lower lows. In this case, after the formation of a lower low, a high point occurs that is not lower, but equal to the previous high. This ‘‘equal high’’ breaks the pattern of lower highs. As the price falls away from this level, a higher low is formed, preferably on light volume. The price returns to the area of the previous high for a third time, forming the neckline, which is also resistance.
The Structure of an Inverse Head and Shoulders
Double Top Pattern
A stock, currency, or commodity must form a series of higher highs and higher lows. The sequence is disrupted when the price finally fails to reach a higher high; instead the price is only able to match its previous high. The chart now resembles twin mountain peaks, the two peaks do not have to be perfectly symmetrical. Ideally, volume on the first peak is higher than it is on the second peak.
The focal point of this pattern is the ‘‘valley’’ that lies between the peaks. That low point is considered the support level of the pattern. If and when the price falls beneath that low, traders use it as a signal to sell because the next likely move is lower.
Double Bottom Pattern
The bullish double bottom pattern is simply the inverse of the bearish double top formation. The price has formed a downtrend, consisting of a series of lower lows and lower highs. At some point, the price fails to make a lower low; instead the low price approximately matches the previous low. The two lows need not be exactly the same.
Triple Top Pattern
This bearish pattern is a slightly more elaborate version of a double top.
Triple Bottom Pattern
This is the bullish version of the triple top pattern
So we can say a reversal pattern indicates a high degree of likelihood that the current trend is about to change. This makes reversal patterns useful in creating trade entries and exits.
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