Chart

Patterns

Chart patterns are the basis of technical analysis and it is a shape within a price
chart that helps to suggest what prices would the share has next and based on what
they have done in the past. The following are the best chart patterns, but there is no
one best chart pattern as they are all used to highlight different trends in a huge
variety of markets. Some charts are to be used when the market is volatile and
others are to be used when the market is bullish and some others are best when the
market is bearish and therefore it should be understood that there is no one pattern
which is to be considered as best for every market condition.

Use of wrong pattern or not knowing which pattern to be used may cause damages
and miss out an opportunity to profit and thus every investor should understand the
best chart pattern for a particular market in which investor is in. Before getting into
the details of different chart patterns, one should be able to understand and have an
idea about support and resistance levels.

The chart patterns fall into three categories namely continuation patterns, reversal
patterns and bilateral patterns. A continuation patterns signal that an ongoing trend
will continue, reversal chart patterns indicate that a trend is about to change the
general direction and whereas bilateral chart patterns reveals that the price could
move in any direction which means the market is highly volatile.

These chart patterns are merely an indication of what might happen to an asset
price but not a guarantee that a market will move in that predicted direction.

1. Head and shoulders
2. Double top
3. Double bottom
4. Rounding bottom
5. Cup and handle
6. Wedges
7. Pennant or flags
8. Ascending triangle
9. Descending triangle
10. Symmetrical triangle

Head and Shoulders:

It is a chart pattern in which a large peak has a slightly smaller peak on either side of
it. This pattern is to be used to predict a bullish-to-bearish reversal. If chart is
observed it will show that the first and third peak will be smaller than the second,
but they will fall back to the level of support which will be known as “neckline”.
When the third peak falls back to the support level, market is expected to breakout
into a bearish downtrend. Observe the following chart it would reveal the same.


Double Top:

The investors and traders to find out the trend reversals use this chart pattern. It is
usual in the market that the share price will experience peak before reversing back
to the support level and after that it will climb up once again before it reverses back
permanently; which will be against the prevailing trend.

Double Bottom:

This chart pattern will indicate a period of selling to inform the investor or trader
that the share price will drop below the support level, afterwards it will rise to the
resistance level and again it will drop. This trend will reverse and begin an upward
when market becomes more bullish. This movement will signifies the end of
downtrend and move towards uptrend and therefore this double bottom pattern is
a bullish reversal pattern.

Rounding Bottom:
This pattern would reveal either a continuation or a reversal, as during an upward
trend share price may fall slightly before increasing again to say that the market is
in bullish continuation. Investor or trader would be interested to capitalize the
information revealed by this pattern by buying halfway around the bottom, at the
low point and again they will take advantage of the situation on the continuation
when it breaks the resistance level. The char given below is an example of bullish
reversal rounding bottom; where it is revealed that if the share price is in
downtrend and a rounding bottom is formed before the trend reversal and entered
a bullish uptrend.









Cup and Handle:

This pattern shows a period of bearish market sentiment before the overall trend
continues in a bullish trend. In other words this is called as a bullish continuation
pattern. The cup would be similar to rounding bottom pattern seen above and the
handle is similar to a wedge pattern. After the formation of rounding bottom, the
price of share enters a temporary retracement within two parallel lines and
therefore, this will be called as the handle; after this the prices reverses out of the
handle and continue with the overall bullish trend.


Wedges:

This wedges pattern is formed when share prices movement are between two
sloping trend line; it may be of two trend lines namely rising and falling trend lines.
If it is a rising trend line a rising wedge is formed with two upward slanted lines of
support and resistance. Here, the line of support is steeper than the resistance line,
to signal that the share price will decline more permanently as it breaks through the
support level. A falling wedge occurs between two downward sloping levels and in
this case the line of resistance is steeper than the support to indicate that the share
price will rise and will break through the resistance level. The chart given below
would provide details described above. Both wedges are reversal patterns, as rising
wedges represents a bearish market and falling wedges represents a bullish market.

Pennant or Flags:

This type of patterns is created after the share price experiences a upward
movement and consolidates the position after that. At the early stages, there will be
a significant increase and share prices will enter into a series of smaller upward and
downward movements. This pattern can be either bullish or bearish to represent a
continuation or a reversal. It may look like a wedge pattern or a triangle pattern but
it can be observed that the wedges are narrower than pennants or triangles and
wedges are always ascending or descending whereas pennants is always horizontal.




Ascending Triangle:

It is a bullish continuation pattern to signify the continuation of upward movement.
It can be observed from the chart given below that on horizontal line the swing
highs to indicate the resistance and trend lines along the swing low to indicate the
support line. This chart pattern will always have two or more similar peak highs to
allow for drawing a horizontal line to indicate the historic level of resistance and
trend line indicate the overall upward movement of the pattern.



Descending Triangle:

As against the ascending triangle, this chart pattern indicates a bearish continuation
of the downward movement. Investor or traders are expected to sell the shares
during a triangle to profit from the falling market. This pattern moves lower and
breaks the support level to indicate that sellers dominate market. The meaning of
this pattern is that the lower peaks are likely to be present and unlikely to reverse.

From the above chart it is seen that descending triangle can be identified from the
horizontal line of support and a downward-sloping line of resistance. After a
particular point, the trend will break through the support and the downward trend
will continue with no indication for reversal.

Symmetrical Triangle:

It is a continuation pattern to mean that the market will usually continue in the
same direction as the overall trend after the pattern is formed. It can be either
bullish or bearish depending upon the market. Symmetrical triangle formed when
the share prices converges with a series of lower peaks and higher troughs. Observe
the chart given below, it can be ascertained that the overall trend is bearish, and the
symmetrical triangle show that there has been a brief period of upward reversals.






The market will break out in any direction, when there is no clear trend before the
formation of triangle pattern is formed. When it breaks on either direction then the
symmetrical triangle can be called as bilateral pattern. Bilateral pattern means that
they are best used in volatile markets when there is no clear indication of direction
of movement of prices. The following chart would provide details as mentioned
above.