Chart patterns are visualizations of price changes over time. They give valuable insight into market sentiment and possible future price directions. Knowledge of the types of chart patterns is very essential for any trader.
3 Main Groups of Chart Patterns
The primary grouping of chart patterns has been broken down into three categories:
Continuation Patterns
Continuation patterns indicate the continuation of an already existing trend that has taken a break but will probably resume. These usually form in times of consolidation.
Flags and pennants are triangular formations that indicate that the trend is taking a temporary pause before it continues its upward or downward move.
Rectangles are formations in prices horizontally, indicating that once the price breaks out of the rectangle, the trend will continue.
Converging trend lines are what create triangles. An ascending triangle would indicate an upward breakout, while a descending triangle would indicate a downward breakout.
Reversal Patterns
Reversal patterns indicate a probable change in the direction of the existing trend. Contrary to the dominant trend, price action is primarily what distinguishes them.
Head and Shoulders includes three peaks, whereby the middle peak, called the head, is higher than the other two. A neckline connects the troughs that are in between the peaks. A break below the neckline confirms the pattern.
Double top and double bottom are the same as head and shoulders but have two peaks or troughs in them.
Triple Top and Triple Bottom are similar to double tops and bottoms except that they have three peaks or troughs.
Also Read: What Does Going Long And Short Mean?
Bilateral Patterns
Bilateral patterns are those after the completion of which pattern the price can move in either direction. They are often characterized by indecision in the market.
The symmetrical triangle pattern is formed when the trend lines are converging, hence forming a symmetrical shape. The breakout can be either way.
Wedges are triangular-shaped and can be either ascending or descending. The breakout direction, however, depends on the type of hedge.
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Conclusion
Learning these three broad categories of chart patterns will help you analyze the trend of the market better and make an informed trading decision.
