Chart patterns are shapes that sometimes appear in the charts of securities prices. Some of them may prove useful to you.
Some frequently discussed chart patterns include Head and Shoulders, Double/Triple Bottom/Top, Cups and Saucers, Flags and Pennants, and others.
Generally, it can be useful to compare and connect the troughs to each other and the peaks to each other to see if there is a trend confirmation if the breadth is narrowing, or if a reversal might be imminent.
Double or Triple Bottoms and Tops appear occasionally after strong trends upward or downwards and are characterized by repeated peaks that do not break out to greater highs or troughs that do not break to new lows. They usually indicate that the support or resistance level for the time being has been reached and a trend reversal is on the way.
Head and Shoulders patterns are similar to a triple top or bottom, but the middle peak will be higher than the other two. The two peaks on either side are called the Shoulders and the two troughs in the middle are connected to form what’s called the Neckline. Once the neckline is broken by the current price movement after the right shoulder of the pattern, a reversal is said to be on the way. The head seems to indicate a point of maximum overbought or oversold conditions.
Cups and saucers are both bowl-shaped, but they tend to have different meanings. A cup is a shorter-term indicator, suggesting a bullish trend will resume after a breakthrough on the right side that surpasses the previous high water mark from the left side of the cup, and it’s normally characterized by a short “handle” shape after the breakout that goes horizontal or down before a larger uptrend. A saucer is taken to indicate consolidation at a support level, after a prolonged stagnant period with a moderate downtrend.
Using a connect-the-dots approach with the troughs and peaks can also indicate patterns known as Flags and Pennants, where a high is repeatedly touched and the troughs are consolidating upwards alongside a decrease in trading volume. These are indicative of a consolidation before a further move upward.
Further variations exist with names like Triangles, Wedges, and so forth. Candlestick charts have their own patterns, many of which were named by the Japanese traders who used them first. There are also patterns based on Elliot Wave Theory, harmonics, and Fourier analysis, which we’ll explain in other articles.
What Kind of Overlays are Used in Chart Patterns?
Who are Chartists?