The chart pattern is an arrangement in the price related to past pricing in the technical chart which might help you in expecting the further move in the chart.
Identifying trading patterns is learnt from experience and by developing skills by analysing chart regularly. If chart pattern is formed followed by a spike in volume and evaluating price action then the move in the coming days will be huge.
Chart patterns are formed in the bear and bull trends of the market. One just needs to recognise the trend reversal pattern formed.
To help you find the patterns, one needs to first study and practice in the past technical charts which every trader follows:
Types of Chart Patterns
There are three major types of a chart pattern which are further categorised for simple understanding:
Reversal Chart Pattern:
In this kind of pattern, the trend is reversed which can be plotted at the bottom formation of the pattern. One need to trade in them only when the pattern is complete and not in the half made one. As, it could be wrong signal to trap the traders.
The main six reversal patterns are:
1. Double top:
A double top is formed on an uptrend when two continuous times the same high price is obtained with a decent decline. Basically, forming an alphabet “M”.
One should enter the trade only when the share price falls below the support level which is the low between the two highs. The target of the pattern is calculated by considering the height of the double top and stretching that distance down from the neck of the low.
2. Double Bottom:
It formed on the downtrend when two continuous times the same low price is obtained with a decent rise. Usually, forming an alphabet “W”. It is advisable to trade only when the stock price rise above the resistance level which is high between the two lows.
The target is calculated by taking the distance from the two low prices to the neckline and then stretching that same range after the neck for further up move.
3. Head and Shoulder:
This pattern is formed on the bull run consisting of three main components left shoulder, head and right shoulder. Another important feature is when you draw a horizontal line below the connecting lows of the same three price declines and the head being the longest.
The left and right shoulder are of the same height whereas the head or the centre peak is bigger than the two shoulders height.
The target is generated by the price difference of the highest high of the head and the low point of any shoulder. Once the price breaks the neckline or baseline, the target is calculated by subtracting the neckline price break and the price difference of above.
4. Inverse Head and Shoulder:
This pattern is similar to the above pattern. As the name suggests it is the inverse or reverse of head and shoulder. Otherwise, the formation, calculation of everything is the same but in a reverse manner. The important point is formed at the downtrend, which is the reversal of the trend only when the price breaks the neckline.
5. Rising Wedge:
This pattern is generally formed in the uptrend where higher highs and higher lows are formed within a narrow range like a funnel. When a trader forms two trendlines joining all the highs with one TL and lows with the other one. The starting of the wedge is broader and gets narrower is the rising wedge.
Once the price is breaking the support TL the trader enters the trade confirming it to be a rising trend.
6. Falling Wedge:
It is similar to a rising wedge but in a downtrend. Here, once the resistance TL is broken the trader ride the reversal trend till the target is achieved.
Continuous Chart Pattern:
Trends do not move only in only two directions- higher or lower. They even consolidate for few days, take a breather and then act accordingly.
Continuous patterns are formed when the trend is up and rest for some time and then again gain momentum in an upward direction. The same is with the downward movement also.
Hence to identify such patterns are:
1. Bullish or bearish rectangle pattern:
In this kind of pattern when the trend is following either the uptrend or downtrend after the long run, the share halt for few days. The price moves in a box with similar highs and similar lows. Henceforth, in an uptrend when the resistance is broken it is a bullish rectangle pattern. In a downtrend when the support is broken it is a bearish rectangle pattern.
2. Wedge Pattern:
When a pattern is making lower highs and lower lows in a wedge while in an uptrend then the breakout is upward only and in continuous it is called Falling wedge.
While, when the price is making higher highs and higher lows in a downtrend and breaks the support. It means the price will go further down. This is called rising wedge in continuation.
3. Pennant or Flag pattern:
This pattern is created when the stock is in the uptrend and consolidate for some time. The continuous uptrend is like a flag pole and the consolidation process is a fly end of the flag. Flag pole length should be twice the fly end height. It can be either in a bullish pattern or bearish. Target is calculated by the length of the flag pole on the breakout signal.
Bilateral Chart Pattern:
A bilateral pattern is when the trader is not sure about the movement of the price. Owing to volatility, the patterns are such which can move either side of the trade. Such patterns are as follows:
1. Major Triangular Patterns:
Either triangle in ascending form, descending from or in a symmetrical triangle the price can move either on the topside or downside.
In order to trade this pattern, a trader waits for the price to break the resistance level or support level on a closing basis. Sometimes, the trade gets missed in this kind of pattern. Here is when stop loss comes into the picture. It is better to avoid this kind of pattern.
The patterns discussed here are very useful in trading when practised daily. The probability of trade going wrong on a pattern perspective is very less. But a trader should close their position on achieving the targets.