Patterns vs. Trends: An Overview

The identification of patterns and trends are techniques used by analysts studying the supply and demand of an asset traded on an open market. A trend is the general direction of a price over a period of time. A pattern is a set of data that follows a recognizable form, which analysts then attempt to find in the current data.

Key Takeaways

  • A trend is the general direction of a price over a period of time.
  • A pattern is a set of data that follows a recognizable form, which analysts then attempt to find in the current data.
  • Most traders trade in the direction of the trend. Traders who go opposite the trend are called contrarian investors.
  • Trendlines are the foundation for most chart patterns.

Trends

In technical analysis, trends are identified by trendlines or price action that highlight when the price is making higher swing highs and higher swing lows for an uptrend, or lower swing lows and lower swing highs for a downtrend. The three basic types of trends are up, down, and sideways.

An uptrend is marked by an overall increase in price. Nothing moves straight up for long, so there will always be oscillations, but the overall direction needs to be higher.

A downtrend occurs when the price of an asset moves lower over a period of time. While the price may move intermittently higher or lower, downtrends are characterized by lower peaks and lower troughs over time.

Trends may be discovered in the short, medium, and long term. Generally, investors take positions in assets that will be profitable as long as the current trend continues. Taking positions that profit only if a trend reverses is riskier. Analysts use trendlines and channels, which are essentially boundaries for price fluctuations, in an attempt to spot and define trends. Upward trends are characterized by an asset price hitting a series of higher highs and higher lows, while downward trends are marked by lower highs and lower lows. Most traders trade in the direction of the trend. Traders who go opposite the trend are called contrarian investors.

Patterns

A pattern is a series of data that repeats in a recognizable way. It can be identified in the history of the asset being evaluated or other assets with similar characteristics. Patterns often include the study of sale volume, as well as price. Patterns can occur within a downward or upward trend, or they can mark the beginning of a new trend.

Patterns are the distinctive formations created by the movements of security prices on a chart. A pattern is identified by a line that connects common price points, such as closing prices or highs or lows, during a specific period of time. Chartists seek to identify patterns as a way to anticipate the future direction of a security’s price.

There are bottoming, topping, and continuation patterns. A "follow-through day" pattern is an example of a pattern used by some analysts to identify market bottoms. The "head-and-shoulders" topping pattern is popular among day and swing traders, while continuation patterns include the "cup-and-handle," "flat base," and "three weeks tight."

"The trend is your friend" is a common catchphrase among technical analysts. A trend can often be found by establishing a line chart. A trendline is the line formed between a high and a low. If that line is going up, the trend is up. If the trendline is sloping downward, the trend is down. Trendlines are the foundation for most chart patterns.