This introduction to chart patterns has provided a broad overview of chart pattern analysis and several of the largest patterns.
Here's a brief summary of what we've covered:
- Chart analysis is the technique of using patterns formed on a securities chart to formulate buy and sell signals.
- There are two types of chart patterns: reversal and continuation.
- A continuation pattern suggests that the prior trend will continue upon completion of the pattern.
- A reversal pattern suggests that the prior trend will reverse upon completion of the pattern.
- A head-and-shoulders top suggests a reversal in the prior uptrend.
- An inverse head and shoulders suggests a reversal in the prior downtrend.
- A cup-and-handle pattern is a bullish continuation pattern that suggests a continuation of the prior uptrend.
- A double top is a bearish reversal pattern, which suggests that the preceding up trend will reverse after confirmation of the pattern.
- A double bottom is a bullish reversal pattern, which suggests that the prior downtrend will reverse.
- There are three main types of triangle patterns - symmetrical, descending and ascending, which are constructed by converging trendlines.
- A symmetrical triangle, which is formed when two similarly sloped trendlines converge, typically suggests a continuation of the prior trend.
- A descending triangle, which is formed when a downward sloping trendline converges towards a horizontal support line, suggests a downward trend after completion of the pattern.
- An ascending triangle, which is formed when an upward sloping trendline converges towards a horizontal resistance line, suggests an uptrend after completion of the pattern.
- Flags and pennants are continuation patterns formed after a sharp price movement. The move consolidates, forming a flag shape or pennant share, and suggests another strong move in the same direction of the prior move upon completion.
- A wedge chart pattern suggests a reversal in the prior trend when the price action moves outside of the converging trend lines in the opposite direction of the prior trend.
- A gap is formed on a chart when there is an empty space between two time periods. Common gap patterns include: common, breakaway, runaway (measuring) and exhaustion.
- A triple top is a reversal pattern formed when a security attempts to move past a level of resistance three times and fails. Upon failure of the third attempt the trend is thought to reverse and move in a downward trend.
- A triple bottom is a reversal pattern formed when a security attempts to move below an area of support three times but fails to do so. Upon failure of the third attempt below resistance the trend is thought to reverse and move upward.
- A rounding bottom is a long-term reversal pattern that signals a shift from a downward trend to an upward trend.
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