Beginner’s Guide To Stock Market Charts: Understanding The Basics – Stock chart patterns often mark transitions between uptrends and downtrends. A price pattern is a known arrangement of price movements observed using a series of trends and/or curves.
If the price indicates a change in trend, it is called a reversal pattern; A continuation pattern occurs when a trend continues in the current direction after a short break. There are many patterns used by traders – here are some patterns and some of the most popular.
Beginner’s Guide To Stock Market Charts: Understanding The Basics
Since price patterns are identified by a series of lines or curves, it is important to understand trend lines and know how to draw them. Trendlines help technical analysts find areas of support and resistance on a price chart. A straight line is a straight line drawn connecting descending peaks (above) or ascending troughs (below) on a chart.
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A downward trend line, or upward trend line, occurs where the price moves up and down. An ascending line is drawn connecting ascending levels. On the other hand, a trend line that curves down, called a down line, is where the price is lower and lower.
Although there are different ways of thinking about the price part to use, the main part of the candlestick—the top and not the thin bottom of the candlestick body—generally represents the place where the most price action occurs. It provides more accurate points for plotting trend lines, especially on daily charts where there may be “outliers” (data points that are far from the “normal” range).
On a daily chart, chartists often use the closing price rather than the high or low to draw a trend line because the closing price represents traders and investors who are willing to take positions overnight or during the weekend. Movements with three or more points are usually more effective than those based on only two points.
A continuation pattern can be considered a stop during an ongoing trend. This happens when the bull takes a breather on the way up or the bear relaxes a bit on the way down. Even when a price pattern forms, there is no way to know whether the trend will continue or reverse. Therefore, careful attention should be paid to the trend line used to mark the price level and whether the price has broken above or below the continuation zone. Technical analysts generally recommend assuming that the trend will continue until a reversal appears.
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In general, the longer a price pattern develops and the larger the price action within the pattern, the more significant the action when price breaks above or below the continuation range.
If the price continues its movement, it is called a persistent price pattern. Common continuity patterns include:
A price pattern that shows a reversal of the current trend is called a reversal pattern. This pattern indicates when the bulls or bears have ended. An established trend stops, and then moves in a new direction because there is new energy from the other side (bull or bear).
For example, an uptrend that supports bullish enthusiasm may stall, indicating bullish and bearish pressure, and ultimately bearish. This is due to a change in the downward trend.
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Reversals at market tops are called spread patterns, in which trading instruments sell hotter than they are bought. On the other hand, the return that occurs at the end of the market, where the trading instrument was bought more than sold, is called a rally pattern.
The longer the pattern and the greater the price movement within the pattern, the greater the expected movement when the price breaks.
When the price reverses after a break, it is called a price reversal pattern. Examples of common conversion patterns include:
Pennants are continuous patterns drawn by two lines that join at the ends. An important feature of pennants is that the trend is in two directions – one will be a downward trend and the other will be an upward trend. The image below shows an example of a penny. Generally, volume decreases when money is formed, and increases when price is released.
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A bullish pennant is a bullish pattern – the pole is to the left of the pennant.
A bearish pennant is a pattern that indicates a downward trend in price. In the non-tilt form, the volume is reduced, and a pole is formed on the right side of the pan.
A flag is a continuous pattern formed by two parallel lines that can be up, down or horizontal. Typically, a bullish flag appears as a stop in a bearish market; A bearish flag indicates a break in an uptrend. Typically, volume decreases with the formation of a flag, which returns when the flag price is released.
Pan-like units are a continuous pattern because they are made on two conveyor lines; However, a part is distinguished by the fact that both move in the same direction, up or down.
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The downward slope part represents a break in the ascent; An upward sloping segment indicates a temporary break in a falling market. As with pins and flags, volume usually decreases when a pattern forms, as the price of a piece rises above or below the pattern.
Coins differ from triangles and pennies because they only show an increase in value, so coins often appear crooked.
An ascending triangle is a continuous pattern that shows a trend with specific entry points, profit targets and stop loss levels. The resistance line crosses the exit line, marking the entry point. An ascending triangle is a bullish trading pattern.
A descending triangle is the opposite of an ascending triangle, indicating that demand is falling, while an upward descending line indicates that a cut is likely.
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A symmetrical triangle occurs when two trend lines converge and simply indicates that a break is possible – there is no upward or downward trend. The size of the cut or frequency cut is equal to the height of the left vertical side of the triangle as shown in the figure below.
Cups and hands are clear continuation patterns where the uptrend has stopped but will continue once the pattern is confirmed. The “cup” part of the pattern should be a “U” shape like a collection of bowls rather than a “V” shape with equal height on both sides of the cup.
The “hand” to the right of the cup will be a short drawn shape that looks like a flag or pennant card. Once the hand is completed, the stock may break to a new high and continue its upward movement.
A head and shoulder is a reversal pattern that can appear as a series of three peaks at a market top or bottom: the first peak or trough, followed by a second and larger one, and then a push. The third is equal to the first.
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Rotational motion can change at the top of the head and shoulders, which can lead to backsliding. On the other hand, a decline of head and shoulders below (or head and shoulders) can lead to a return to the top.
As shown in the figure below, a horizontal or slightly inclined line can be added between the head and shoulders connecting the peak and the channel. Volume may decrease when a pattern develops and the action line resumes when price breaks (in the case of a head and shoulder low) or lower (in the case of a top and shoulder high).
A double high or low is a reversal pattern, indicating areas where the market has made two failed attempts to break support or resistance.
A double top usually resembles the letter M and consists of a first push at a resistance level and then a second failed attempt, resulting in a reversal.
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On the other hand, a double bottom looks like a wand letter appears when the price tries to push a support level, is rejected, and makes another unsuccessful attempt until the support level is reached. As shown in the image below, this often leads to relapse.
Three tops and bottoms are reversal patterns that are less common than heads and shoulders, two tops, or two bottoms. However, they work in the same way and can be powerful trading signals for reversals. A pattern is formed when the price tests the support or resistance level three times and fails to enter.
A double bottom occurs when both bars are at the same level, indicating that the trader is in a weaker position than before.
Gaps are the reverse pattern. It occurs when there is a gap between two trading periods as a result of price increases or decreases. For example, a stock may close at $5.00 and open at $7.00 after receiving positive earnings or other news.
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There are three main types
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