Technical Analysis: What Is A Chart? There are millions of different investors transacting billions of aprender Forex Trading’ worth of securities each day and it’s nearly impossible to decipher everyone’s motivations. One of the three assumptions discussed earlier in this tutorial was that history repeats itself. For example, as market sentiment shifts from optimism to fear, a certain pattern might emerge before traders and investors start selling and send the stock price lower.
After all, the richest man in the world would be a trader in that case rather than an investor! The process of identifying chart patterns based on these criteria can be subjective in nature, which is why charting is often seen as more of an art than a science. For more insight, see Is finance an art or science? The two most popular chart patterns are reversals and continuations. A reversal pattern signals that a prior trend will reverse upon completion of the pattern, while a continuation pattern signals that the trend will continue once the pattern is complete.
These patterns can be found across any timeframe. In this section, we will review some of the more popular chart patterns. Head and Shoulders The Head and Shoulders is a reversal chart pattern that indicates a likely reversal of the trend once it’s completed. Cup and Handle The Cup and Handle is a bullish continuation pattern where an upward trend has paused, but will continue when the pattern is confirmed.
Double Tops and Bottoms The Double Top or Double Bottom pattern are both easy to recognize and one of the most reliable chart patterns, making them a favorite for many technically-orientated traders. The pattern is formed after a sustained trend when a price tests the same support or resistance level twice without a breakthrough. Triangles Triangles are among the most popular chart patterns used in technical analysis since they occur frequently compared to other patterns. The three most common types of triangles are symmetrical triangles, ascending triangles, and descending triangles. Ascending triangles are characterized by a flat upper trend line and a rising lower trend line and suggest a breakout higher is likely, while descending triangles have a flat lower trend line and a descending upper trend line that suggests a breakdown is likely to occur.
Pennants Flags and Pennants are short-term continuation patterns that represent a consolidation following a sharp price movement before a continuation of the prevailing trend. Flag patterns are characterized by a small rectangular pattern that slopes against the prevailing trend, while pennants are small symmetrical triangles that look very similar. These patterns typically last no longer than a few weeks, since they would then be classified as rectangle patterns or symmetrical triangle patterns. Wedges The Wedge pattern is a reversal or, less commonly, continuation pattern that’s similar to the symmetrical triangle except that it slants upward or downward. Rising wedges are bearish chart patterns that occur when trend is moving higher and the prices are converging and the prevailing trend is losing momentum.