subject: The Classic Chart Patterns Study [print this page] There exist two different categories of classic chart patterns: Bullish trend reversal and the Bearish trend reversal chart patterns.
Classic is a word used to identify a group of formations that in general have a longer-time horizon (greater than 13 days) and which have clear price swings such that the price swings form characteristic patterns. The names of classic patterns frequently mirror the outline of the pattern such as the Wedge, Double Bottom, Flag, Descending Triangle and so on.
Chart trading patterns are commonly recurring price patterns that are universal to all markets. Stock charts are used to determine a continuation, a reversal, or a consolidation of a trend. The majority of chart patterns have a more bullish or bearish bias. Other patterns necessitate a breakout confirmation before the direction of the trend can be determined.
Bullish Charts:
The Ascending Triangle Chart
Ascending triangles form in uptrends and are characterized by a series of higher lows but the similar highs. They have a unambiguous bullish bias and typically develop in 2 to 8 weeks.
Bears have lost the capacity to take the stock back down to the prior low whilst bulls are able to take the stock back to the preceding high.
The most excellent breakouts happen to in. Breakouts should be accompanied by a considerable increase in volume. Failure to complete this doesn't make the breakout null, but a red flag is raised as the formation becomes less trustworthy.
Cup and Handle Chart Pattern
Cup and handle patterns are continuation patterns that appear in uptrends and consequently have bullish implications. Their completion signals the end of a consolidation period and the continuation of its bullish uptrend.
The cup forms because many investors come to a decision that after the good rally, they now would like to book profits. This profit taking traps those who were late-to-the-party buyers who bought at the peak. Those who ran after the stock and bought high are upset or fearful and just want to "get out even." Months later when the stock trades close to the first peak, many investors leap at the chance and start selling. Therefore a second pullback begins. As soon as adequate time has passed (the formation of the handle), the stock is free to go higher for there is now an absence of investors who will sell at the first good occasion.
Cup and Handle patterns normally take a couple of months and every so often over a year to form.
The identical breakout requirements govern as with other breakouts. Volume ought to swell to confirm the breakout.
Double Bottom Chart Pattern
Volume in a double bottom is frequently higher on the left bottom than the right. Volume tends to be downward as the pattern takes shape. Volume does, however, increase as the pattern hits its lows. Volume increases all over again when the pattern completes, crossing through the confirmation mark.
Flag (Bullish) Chart Pattern
Bullish flags are small continuance patterns that symbolize short pauses within an already existing uptrend. They appear flat or trade with a minor downward slope and usually take place in the middle of a substantial rally or the instant after a stock has broken out of a basing period.
Whether a bullish flag pattern appears during a substantial rally or after crossing out of a consolidation period, the estimated price movement after the breakout is roughly equal to the prior move into the flag.
Head and Shoulders Bottom Chart Pattern
Bullish head and shoulders bottoms are reversal patterns that seem like large basing periods after a considerable downtrend. Its close signals a trend reversal. Three consecutive troughs describe the pattern with the center one being the deepest and the two outside ones being shallower and roughly equal.
The pattern is finished when the resistance marked by the neckline is broken. This happens when the price of the stock, rising from the low mark of the right shoulder moves up through the neckline. Many technicians only judge the neckline broken if the stock closes over the neckline.
It is key to watch volume at the level where the neckline is broken. For a genuine reversal, heavy volume is essential.
Pennant (Bullish) Chart Pattern
Pennants are little continuance patterns that stand for short pauses within an already existing trend. They are illustrated by converging trendlines and have a definite bullish or bearish partiality depending on the overall trend.
Bullish pennants usually appear in the center of substantial rallies or immediately after a stock has broken out of a basing period.
Bullish breakouts should be accompanied by a substantial increase in volume.
Symmetrical Triangle (Bullish) Pattern
Bullish symmetrical triangles correspond to neutral periods of uncertainty and vacillation. They are characterized by a string of higher lows and lower highs as the forces of supply and demand are nearly equal. Each rally is seen as a selling opportunity while each dip is met with buying. The pattern is in general significant and takes a couple of months or more than a year to develop.
The most excellent breakouts arise to of the way through the pattern. A stock seems to pick up energy as it is packed together into the triangle, but that energy dissipates beyond the level. It is recommended that traders abandon a stock that trades beyond the mark for very little movement is likely to occur. Volume normally diminishes as the pattern develops because traders become more and more uncertain as to the stock's forthcoming direction. Then, apparently without warning, the stock bursts out of the pattern.
Bullish symmetrical triangles form in uptrends and normally resolve themselves to the upside. Breakouts to the upside must include a substantial increase in volume to verify the breakout.
The anticipated price movement upon breakout is nearly equal to the widest part of the pattern.
Wedge (Bullish) Chart Pattern
Bullish wedges symbolize short-lived pauses within a previously existing uptrend. They are illustrated by converging trendlines and have a clear-cut bullish prejudice. They are similar to bullish pennants with the exception of where pennants are generally flat, wedges have a definite tilt against the overall trend.
Bullish wedges normally appear in the center of a substantial rally or the moment after a stock has broken out of a basing period.
Bullish breakouts should be accompanied by a considerable increase in volume with proper stops used if this is not seen.
