A chart or price pattern is a graphical presentation of all buying and selling that’s occurring in the equity market using a series of trend-lines and curves. They are crucial part of technical analysis that help a trader improve their view while operating in the stock market.
Essentially, there are four key elements to form the price patterns, which include: old trend, consolidation zone, breakout point and new trend.
The old trend signifies that the stock is in as it starts to form the new price pattern. The consolidation zone is a range-bound area recognised by the support and resistance level. The point at which the stock price breaks out of the consolidation zone is referred to as breakout point. The new trend is when the stock price becomes when it exits out of the consolidation zone.
Ideally, there are two main categories related to chart patterns: continuation and reversal.
A continuation pattern indicates the trader that the new trend will continue to remain in the same direction that the old trend was moving. Continuation patterns tend to signify as both bullish and bearish signals
On the other hand, reversal pattern highlights that the new trend will resort to reversing directions and move in the opposite direction vis-a-vis to the movement of old trend.
The key difference between the continuation and reversal pattern is which direction the new trend is moving. However, both these patterns have an old trend, continuation zone, a breakout point and a new trend. Also, both these patterns are used in forex and stock trading.
There are various types of traditional chart patterns and a few forms include rectangle patterns, head and shoulders patterns, wedge pattern and triangle pattern, among others.
Rectangle patterns are formed when price tends to hit horizontal support and resistance levels, many times.
Head and shoulders pattern indicates a shift from an upward trend to a downward trend. It is depicted as three humps, with the middle one being the highest.
A wedge pattern forms when the price consolidates between two converging trendlines, creating a narrowing price range resembling a wedge.
Similarly, a triangle pattern forms when the price consolidates between two converging trendlines, creating a contracting price range resembling a shape of a triangle.
A price pattern may last for seconds, minutes or even weeks. So, depending on the trading style, traders are required to analyse many different timeframes and find out what works the best.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.
