DEFINITION of 'Pattern'

In technical analysis, patterns are the distinctive formations created by the movements of security prices on a chart. A pattern is identified by a line connecting common price points (such as closing prices, highs or lows) over a period of time. Chartists try to identify patterns to anticipate the future price direction.

BREAKING DOWN 'Pattern'

Also known as trading patterns, patterns in security prices can occur at any point or measure in time. Although price patterns may be easy to see in hindsight, they are much harder to spot in real time. There are many different kinds of patterns in technical analysis, including the cup and handle, ascending/descending channels, and the head-and-shoulders pattern.

There are two types of analysis for stocks: fundamental and technical. Fundamental analysis looks at company performance. If revenues have gone up over the past three years, it may be safe to assume they will go up next year. Technical analysis is primarily concerned with patterns, regardless of performance. These patterns are then used to find trends in pricing. Fundamental analysis is used to determine what to buy, whereas technical analysis is used to determine when to buy it.

Technical analysts use chart patterns to find trends in a company's price. The analyst looks for trends in the movement of the stock. Patterns can be based on seconds, minutes, hours, days, months or ticks and can be applied to bar, candlestick and line charts. The most basic form of chart pattern is a trend line.

Trend Lines

"The trend is your friend" is a common saying among technical analysts. The trend is often located by forming a trend line. A trend line is the line formed between a high and a low. If the trend line is going up, the trend is up. If the trend line is going down, the trend is down. Trend lines form the foundation for most chart patterns. Trend lines are also used to locate support and resistance levels, which are also part of pattern recognition. A line of support is a level a stock price won't go below; a line of resistance is a level the stock won't go above.

Pattern Types

There are two basic types of patterns: continuation and reversal. Continuation patterns are used to find opportunities for traders to continue with the trend. These are retracements or temporary consolidation patterns. Different names have been given to the most common continuation patterns, such as ascending triangles, descending triangles, flag patterns, pennant patterns and symmetrical triangles.

Reversal patterns are the opposite of continuation patterns. They are used to find opportunities to enter a trade on the reversal of a trend. In other words, reversal patterns find areas where trends have ended. Common reversal patterns are the head-and-shoulders patterns, triple tops and bottoms, or double tops and bottoms.

RELATED TERMS
  1. Continuation Pattern

    A technical analysis pattern that suggests a trend is exhibiting ...
  2. Diamond Top Formation

    A technical analysis reversal pattern that is used to signal ...
  3. Hook Reversal

    A short-term candlestick pattern, occurring in either an uptrend ...
  4. Double Bottom

    A charting pattern used in technical analysis. It describes the ...
  5. Technical Analysis of Stocks and ...

    The academic study of historical chart patterns and trends of ...
  6. Mat Hold Pattern

    A pattern found in the technical analysis of stocks that ultimately ...
Related Articles
  1. Investing

    How To Interpret Technical Analysis Price Patterns: Triple Tops And Bottoms

    Triple and double tops and bottoms may be tough to spot, but once you learn them, they can be powerful patterns.
  2. Trading

    Continuation Patterns: An Introduction

    Those random movements in the charts actually form patterns. Learn the basics of what these patterns are.
  3. Investing

    Introduction To Technical Analysis Price Patterns

    To "find your game" in technical analysis, you need to be able to recognize reversals and continuations as they form.
  4. Trading

    Advanced Candlestick Patterns

    Go beyond the basics! Learn to identify and trade island reversals, kicker patterns and more.
  5. Trading

    Most Commonly Used Forex Chart Patterns

    These chart patterns provide entries, stops and profit targets that can be easily seen.
  6. Trading

    Breakout Stocks to Watch Right Now

    These three stocks are near major breakout points, which will affect the short-term, and potentially the long-term direction of the stocks.
RELATED FAQS
  1. Are continuation patterns useful in forex trading and stock trading?

    Learn what a continuation pattern is in technical analysis and why it is useful in forex and stock market trading, and discover ... Read Answer >>
  2. What are the differences between patterns and trends?

    Learn the difference between a pattern and a trend. Explore how technical analysts use patterns and trends to identify trading ... Read Answer >>
  3. What are the most common continuation candlestick patterns?

    Learn about the four most common types of continuation patterns found in candlestick charts: triangles, rectangles, flags ... Read Answer >>
  4. Where do I place my target when the price of a stock breaks out of a technical chart ...

    Technical chart patterns such as ascending triangles, head and shoulders and double bottoms have rapidly grown in popularity ... Read Answer >>
  5. What is a common price target when identifying a double bottom?

    Learn how to identify a double bottom stock pattern and where to set a target selling price point to get the most out of ... Read Answer >>
  6. What are the fundamental differences between a pennant pattern and a flag pattern?

    Understand the basics of both the flag and pennant continuation patterns, their similarities and differences, and how each ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center