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What Is Chart Pattern?

Chart patterns are specific price formations on a chart that predict future price movements based on historical trends. Key elements for formation include breakout points, new and old trends, and consolidation zones, with types categorized as reversal, continuation, and bilateral patterns. Common reversal patterns include double tops, triple tops, double bottoms, and head and shoulders, which signal potential changes in price direction.

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18 views5 pages

What Is Chart Pattern?

Chart patterns are specific price formations on a chart that predict future price movements based on historical trends. Key elements for formation include breakout points, new and old trends, and consolidation zones, with types categorized as reversal, continuation, and bilateral patterns. Common reversal patterns include double tops, triple tops, double bottoms, and head and shoulders, which signal potential changes in price direction.

Uploaded by

Sefania
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CHART PATTERN

What is chart pattern? Are specific price formations on a chart that


predict future price movements. As technical analysis is based on the
assumption that history repeats itself, popular chart patterns have
shown that a specific price movement is following a particular
formation of price pattern with high probability.

There are four key elements that are needed for formation of pattern

Breakout point: The breakout point is the point at which the


instrument’s price breaks out of the support or resistance level. The
breakout can occur at a horizontal level or a diagonal level, depending
on the price action.

New trend: The new trend is the reversal of the old trend that the
instrument’s price becomes when it exists out of the trendline area.

Old trend: Is the trend that the instrument price is in as the new
pattern begins to form.

Consolidation zone: The consolidation zone is the constricted area


recognized by the support and resistance levels.

Types of chart pattern

 Reversal Chart Pattern


 Continuation Chart Pattern
 Bilateral Chart Pattern

Reversal Chart Pattern

Are chart formations that indicate a change in the direction of the price
trend and they can signal the end of an uptrend or a downtrend, and
the start of a new move in the opposite direction. Reversal chart
patterns can help you identify and trade potential price reversals and
its formations reflect the shift in the balance of power between buyers
and sellers.

Common Reversal Chart Patterns Are:-

1. Double Top
2. Triple Top
3. Double Bottom
4. Triple Bottom
5. Head and Shoulders
6. Inverse Head and Shoulders
7. Rising Wedge
8. Falling Wedge
9. Triple Top
10. Triple Bottom

Double Top is a chart pattern where the price reaches a high twice and
fails to break out higher during the second attempt. The pattern is
completed when the price breaks below the support level and
considered a bearish reversal chart pattern. Double Tops appear in an
uptrend and reverse it to the downside as price breaks through the
support line (Neckline)

Triple Top Is a charting pattern used in technical analysis that signals a


potential bearish reversal. It consists of three similar price highs with
price pullbacks between the peaks which resembles the shape of the
letter M. When triple top formation occurs, it implies an asset may
have concluded a recent rally and is likely to reverse course and begin
to fall more substantially than previous legs.
Double Bottom is a chart pattern where the price holds a low two times
and fails to break down lower during the second attempt, and instead
continues higher. It is considered a bullish reversal chart pattern since
the price holds a low two times and eventually continues with a higher
high.

Triple Bottom Is a bullish reversal chart pattern that is formed at the


end of a downtrend. It consists of three distinct lows that are roughly
equal in price and separated by two intermediate highs. This forms the
distinctive W-shape of the pattern. The triple bottom pattern is best
suited to swing trading, as the months-long formation of the pattern
signals that the bears have run out of steam.
Head and Shoulder It consists of three peaks, with the middle one (the
head) being higher than the other two (the shoulders). The pattern is
completed when the price breaks below the neckline, which is a
horizontal line that connects the lows of the two shoulders. The head
and shoulders indicate a reversal from an uptrend to a downtrend. The
Head and Shoulders chart pattern is considered by many traders and
analysts to be one of the most reliable and accurate of all reversal
chart patterns.

Inverse Head and Shoulder is a technical chart pattern that signals a


potential trend reversal from a downward trend to an upward trend in
the price of a security or asset. The pattern resembles the shape of a
person’s head and two shoulders in an inverted position, with three
consistent lows and peaks. The chart aims to identify a potential
reversal in a downtrend, indicating a possible bullish trend.

Rising Wedge is a chart pattern formed by drawing two ascending


trend lines, one representing highs and one representing lows and it is
categorized as a bearish reversal chart pattern. The rising wedge can
be one of the most difficult chart patterns to accurately recognize and
trade. While it is a consolidation formation, the loss of upside
momentum on each successive high gives the pattern its bearish bias.
However, the series of higher highs and higher lows keeps the trend
inherently bullish. While though this article will focus on the rising
wedge as a reversal pattern, the pattern can also fit into the
continuation category.

Falling Wedge is a bullish chart pattern that can indicate a potential


continuation of an uptrend or a reversal of a downtrend. It is formed by
a series of lower highs and higher lows, indicating a weakening
downtrend and potential bullish sentiment.

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