Pattern

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. Sanku (Three Gaps) Pattern

    The Japanese word for a candlestick pattern that consists of ...
Related Articles
  1. Trading

    Technical Analysis: Chart Patterns

    By Cory Janssen, Chad Langager and Casey MurphyA chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these ...
  2. Trading

    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.
  3. Trading

    Analyzing Chart Patterns: Double Top And Double Bottom

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com The double top and double bottom are another pair of well-known chart patterns whose names don't leave much to the imagination. ...
  4. Trading

    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.
  5. Trading

    Technical Analysis: Conclusion

    By Cory Janssen, Chad Langager and Casey MurphyThis introductory section of the technical analysis tutorial has provided a broad overview of technical analysis. Here's a brief summary of what ...
  6. Markets

    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.
  7. Trading

    Candlestick Charting: Perfecting The Art

    Take a look at continuation patterns and how they can confirm or deny trends.
  8. Trading

    Analyzing Chart Patterns: Triangles

    By Chad Langager and Casey Murphy, senior analyst of ChartAdvisor.com As you may have noticed, chart pattern names don't leave much to the imagination. This is no different for the triangle ...
  9. Markets

    Stock Chart Patterns Playing Out Right Now (WMT, TWC)

    Various chart patterns are playing out in these stocks right now. Here's how to trade them.
  10. Markets

    Stock Chart Patterns to Keep an Eye On

    Some of these stocks are exhibiting big chart patterns, so a breakout is likely to be significant.
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 most common continuation candlestick patterns?

    Learn about the four most common types of continuation patterns found in candlestick charts: triangles, rectangles, flags ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. What are the main opportunities that arise when a stock exhibits a continuation pattern?

    Learn about continuation patterns and the opportunities they can present. Use these trading strategies to profit from these ... Read Answer >>
  6. How are Multiple Tops patterns interpreted by analysts and traders?

    Understand how the multiple tops chart pattern is interpreted by traders and analysts and what makes it such a powerful reversal ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center