Posted: 01.07.2021 | 04:23
Classic Chart Patterns
There are many ways to analyze financial markets using technical analysis. Some traders prefer indicators and oscillators, while others base their analysis solely on price movements. Candlestick charts show price movements within a certain time frame. The most common examples of these patterns are generally referred to as classical chart patterns. These examples are some of the most well-known and widely used patterns and have been accepted by many traders as reliable trading indicators.
The flag is an area of consolidation in the opposite direction of the long-term trend and occurs after a sharp price move. It looks like a flag hung on a pole. Here, the pole means sudden movement and the flag is shown as the consolidation area. Flags can be used to measure and identify trend continuation potential. The volume accompanying the formation is of great importance.
The bull flag appears especially in an uptrend. The upward movement is followed by the upward movement and generally the upward movement continues after the formation.
A bear flag appears in a downtrend. It follows a sharp downward movement, and usually the downward movement continues after the formation.
Pennants are a type of flag where the consolidation area has intersecting trend lines. It resembles a triangle in shape. The pennant is a neutral formation and its interpretation depends on the context in which the shape originated.
Triangle patterns are a chart pattern characterized by intersecting price ranges and generally trend continuation. The triangle itself indicates a pause in the underlying trend but may indicate a reversal or continuation.
The ascending triangle is formed by the presence of a horizontal resistance zone and an ascending trend line drawn over the series of higher lows. At first, every time the price bounces off the horizontal resistance, buyers enter at higher prices and higher lows form. As tension rises in the resistance area, if the price finally manages to break through this resistance, it tends to rise quickly with high volume. Therefore, the ascending triangle can be given as an example of a bullish formation.
The descending triangle pattern is the opposite of the ascending triangle pattern. It is formed by drawing a descending trendline on a horizontal support area and lower peaks. As seen in the ascending triangle, sellers enter lower prices each time the price bounces off the horizontal support area. This results in lower peaks. Usually, if the price manages to break the horizontal support point, a quick drop is seen with high volume. Therefore, the descending triangle can be shown as an example of a bullish pattern.
The symmetrical triangle is formed by a descending upper trendline and an ascending lower trendline. The slope of both lines is almost the same. The symmetrical triangle cannot be represented as a bullish or bearish pattern as it is interpreted largely based on the underlying trend. On its own, it is a neutral pattern that only indicates a period of consolidation.
The wedge pattern is formed by intersecting trend lines and indicates that price movements are stuck. For this reason, trend lines mean that highs and lows rise or fall at different rates. It could also mean that a reversal is about to happen as the underlying trend weakens.
The ascending wedge pattern is an example of a bearish reversal pattern. It means that as the price tightens, the uptrend is getting weaker and the price may eventually break the lower trendline.
The descending wedge pattern is an example of a bullish reversal pattern. It means that as the price drops, the compression increases and the trend lines narrow. A falling wedge usually causes an upward jump.
DOUBLE TOP AND DOUBLE BOTTOM FORMATION
A double top and double bottom pattern occurs when the market moves, for example, in an “M” or a “W”. These patterns will be valid even if the respective price points are not exactly the same or close to each other.
The double top pattern is an example of a bearish reversal pattern where the price tops twice but fails to climb higher on the second attempt. At the same time, the retracement between the two peaks should be moderate. It is formed by confirming the pattern when the price goes lower than the pullback between the highs.
The double bottom pattern is an example of a bullish reversal pattern that shows the price bottoming out twice and finally continuing with a higher top. It should be similar to a double top and the retracement between the two lows should be midway. The formation occurs when the price rises higher than the pullback between the two lows.
SHOULDER HEAD SHOULDER PATTERN (OBO)
The shoulder head and shoulders pattern is an example of a bearish reversal pattern consisting of a baseline and three tops. The two side peaks should be approximately the same price level, while the middle peak should be higher than the other two. The formation takes place when the price breaks the neckline support.
REVERSE SHOULDER HEAD SHOULDER (TOBO)
Shoulder is the reverse of the head shoulder formation. The bull indicates its reversal. An inverted head-shoulder occurs when the price makes a lower low while in a downtrend, then bounces off and finds support at about the first low. The pattern occurs when the price breaks the neckline resistance and continues to rise.