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Trade Less, But Wisely; Get Rich Step by Step
Master The Art of Trading
As said earlier, a chart pattern is a visual representation of price movement of a security. It guides the trader about collective behavior of human nature on price of a security and also about the next move of the price. In general, a chart pattern helps in finding out who is going to win the battle of price between bulls and bears.
Traders who have good chart reading skills and who can apply them in their trading activities are mostly on the right side of the trend. Hence for beginners, it is important to learn to spot and interpret chart pattern in a right way. A trader is required to train his eyes to spot the chart pattern by observing price movements closely and regularly. He should develop a habit of looking and studying chart patterns every day.
Reversal Chart Pattern signals a change in direction of the trend. In simple words, when a trader comes across a reversal pattern during uptrend, then it indicates that price is likely to go down. And when a trader spots a reversal pattern during downtrend, then it indicates that the price is likely to go up.
Continuation Pattern signals continuation in direction of the trend. When a trader comes across a continuation pattern during uptrend, then it indicates that the price is likely to continue to go up furthermore. And when a trader spots a reversal pattern during downtrend, then it indicates that the price is likely to continue to go down furthermore.
Neutral Pattern are formed depending on the direction of the breakout and they indicate either reversal or continuation of the previous trend.
Let us study some important chart patterns.
Reversal Chart Patterns
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Head and Shoulder
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Inverted Head and Shoulder
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Double Top
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Double Bottom
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Rounding Bottom
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Rounding Top
Continuation Chart Pattern
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Ascending Triangle
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Descending Triangle
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Bullish Rectangle Pattern
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Bearish Rectangle Pattern
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Cup and Handle Pattern
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Inverted Cup and Handle pattern
Neutral Chart Pattern
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Rising Channel
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Falling Channel
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Rising Wedge
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Falling Wedge
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Symmetrical Triangle
Head and Shoulder
Anchor 1.1
The head and shoulders pattern is considered one of the most reliable trend reversal patterns. It is the most popular and easy to spot pattern. It is a bearish reversal pattern formed after a defined ongoing uptrend and signifies a meaningful reversal on completion of the pattern. This pattern shows that the buyers have lost their battel and control and hence price is likely to go down from hereon.
This pattern is formed by three peaks. 1st peak is known as left shoulder, 2nd peak is known as head and 3rd peak is known as right shoulder. 1st and 3rd peaks are outside the 2nd peak and are more or less of the same height. Thus 2nd peak is the highest among all in this pattern. The line formed by connecting the bottom of the left and right shoulder is known as the neckline.
The head and shoulders pattern forms when a stock's price rises to a peak (1st peak) and then declines back to the base of the prior up-move. Then, the price rises again above the previous peak (1st peak) to form the highest peak (head), and then declines back to the original base. Finally, the stock price again rises to form another peak (3rd peak) at about the level of the 1st peak and from that 3rd peak start to decline. This pattern is said to be complete only when the price breaks the neckline on the downside.
A trader can take a short entry once the price breaks the neckline on the downside. The potential target would be considered below neckline equal to the difference of price between the high point (head) and the neckline. Stop loss can be placed at the edge of the right shoulder.When there is a significant volume below the neckline, then this pattern is considered to be more reliable.
Anchor 1.2
Inverted Head and Shoulder
As the name suggests, it is an inverted version of Head and Shoulder Pattern. Inverted Head and Shoulder pattern is considered one of the most reliable trend reversal patterns. It is the most popular and easy to spot pattern. It is a bullish reversal pattern formed after a defined ongoing downtrend and signifies a meaningful reversal on completion of the pattern. This pattern shows that the srllers have lost their battel and control and hence price is likely to go up from hereon.
This pattern is formed by three lows. 1st low is known as left shoulder, 2nd low which is the lowest of all) is known as head and 3rd low is known as right shoulder. 1st and 3rd lows are outside the 2nd low and are more or less at the same lower level. Thus 2nd low is the lowest among all in this pattern. The line formed by connecting the top of the left and right shoulder is known as the neckline.
The Inverted Head and Shoulder pattern forms when a stock's price declines to a certain low (Left Shoulder/1st low) and then rises back to the base of the prior down-move. Then, the price declines again below the previous low (Left Shoulder) to form the new lowest low (head), and then rises back to the original base. Finally, the stock price again declines to form another low (Right Shoulder) at near the level of the Left Shoulder and from that 3rd low price starts to go up. This pattern is said to be complete only when the price breaks the neckline on
the upside.
A trader can take a long entry once the price breaks the neckline on the upside. The potential target would be considered above neckline equal to the difference of price between the lowest point (head) and the neckline. Stop loss can be placed at the edge of the right shoulder. When there is a significant volume above the neckline, then this pattern is considered to be more reliable.
Double Top Pattern
Anchor 1.3
Double Top is a bearish reversal pattern formed after a defined uptrend and on completion of the pattern it signifies a meaningful reversal. This pattern is easy to spot on charts because it resembles with english alphabet "M". This pattern indicates that buyers have lost the control and the price is likely to go down from hereon.
This pattern is formed by two consecutive tops and followed by a decline between the two tops. In bullish trend price rises to the top and from that top retraces back to some extent and form bottom. From this bottom, price once again start rising and form the second top almost equal to the first top. When price declines from this this second top significantly and breaches the level of bottom (support level) previously made, this double top pattern is said to be formed. The horizontal line drawn at the bottom (support level) formed between the two tops is known as neckline.
A trader can take a short trade when price breaches the neckline on the downside. The potential target for this pattern may be considered below the neckline equal to the price difference between the high point of double top and the neckline.
Before breaching the neckline, some consolidation may happen and it may form minor swing high. The high made during this swing should be considered for stop loss level.
Double Top pattern becomes more reliable when there is significant rise in volume after the price breaches the neckline on downside.
Anchor 1.4
Double Botton Pattern
Double Bottom is a bullish reversal pattern formed after a defined downtrend and on completion of the pattern it signifies a meaningful reversal. This pattern is easy to spot on charts because it resembles with english alphabet "W". This pattern indicates that sellers have lost the control and the price is likely to go up from hereon.
This pattern is formed by two consecutive bottoms and followed by a up move between the two bottoms. In bearish trend price declines to the bottom and from that bottom rises back to some extent and form top at certain level. From this top, price once again start declining and form the second bottom almost equal to the first bottom. When price rises from this this second bottom significantly and breaches the level of top (neckline) previously made, this double bottom pattern is said to be formed. The horizontal line drawn at the top formed between the two bottoms is known as neckline.
A trader can take a long trade when price breaches the neckline on the upside. The potential target for this pattern may be considered above the neckline equal to the price difference between the high point of double bottoms and the neckline.
Before breaching the neckline, some consolidation may happen and it may form minor swing low. The low made during this swing should be considered for stop loss level.
Double Bottom pattern becomes more reliable when there is significant rise in volume after the price breaches the neckline on upside.
Anchor 1.5
Rounding Bottom Pattern
Rounding Bottom is a bullish reversal pattern formed after a defined downtrend, and after a long consolidation. It is easy to spot this pattern because its appearance is similar to the bottom of a bowl or a saucer.
This pattern shows that after a period of consolidation sellers have lost their control in the battle and the price is likely to move up from hereon.
As the price is trending lower, the rate of the decline will begin to slow down. This is followed by a range pattern, which ultimately shifts into a slow gradual increase. The price gradually switches from bearish to bullish. This increase ultimately leads to a bullish move.
The horizontal line drawn across the top of bearish and bullish sides of the rounding bottom is known as neckline. The patten is said to be complete only when the price breaks the neckline on the upside with high volume of trading.
A trader can take a buy entry when price breaks the neckline on the upside. Potential target for this pattern is considered above the neck line equal to the price difference between the low point of the rounding bottom and the neck line. Stoploss can be considered at the swing low occurred before the price breaks the neckline on upside.
This patten is considered to be more reliable if there is high volume during downtrend followed by flat or low volumes during the consolidation period and again increased volume when price breaks above the neckline.
Being a long term pattern, this round bottom pattern gives clear signal when formed on weekly and monthly charts.
Anchor 1.6
Rounding Top Pattern
Rounding Bottom is a bearish reversal pattern formed after a defined uptrend, and after a long consolidation. It is easy to spot this pattern. Its appearance is completely opposite to rounding bottom pattern and also known as an inverted saucer bottom pattern.
This pattern shows that after a period of consolidation buyers have lost their control in the battle and the price is likely to go down from hereon.
As the price is trending higher, the rate of the rise will begin to slow down. This is followed by a range pattern, which ultimately shifts into a slow gradual decline. The price gradually switches from bullish to bearish. This decrease ultimately leads to a bearish move.
The horizontal line drawn across the bottom of bullish and bearish sides of the rounding top is known as neckline. The patten is said to be complete only when the price breaks the neckline on the downside with high volume of trading.
A trader can take a short entry when price breaks the neckline on the downside. Potential target for this pattern is considered below the neck line equal to the price difference between the high point of the rounding top and the neck line. Stoploss can be considered at the swing high occurred before the price breaks the neckline on downside.
This patten is considered to be more reliable if there is high volume during uptrend followed by flat or low volumes during the consolidation period and again increased volume when price breaks below the neckline.
Being a long term pattern, this round top pattern gives clear signal when formed on weekly and monthly charts.
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