Technical Analysis-Analyzing the chart patterns

Technical analysis - analyzing the chart patterns
Identification of chart patterns may reveal the future market behavior basing on the assumption that the way the market forces interact does not change significantly with time and may be analyzed on the historical charts. As a complete pictorial record of all trading, chart patterns provide a framework to analyze the battle raging between bulls and bears. What is more important, chart patterns and technical analysis can help determine who is winning the battle, allowing traders to take a proper market position. It may be observed that chart patterns constitute a more complex variation of trend lines .

Rectangle




Chart 1. Rectangle pattern

A Rectangular pattern signals a continuation in the market trend and constitutes a trading range during a pause in the trend. The pattern is easily identifiable by two highs and two lows, that can be connected by two parallel lines, thus forming the top and bottom of a rectangle. Rectangles are sometimes referred to as trading ranges, consolidation zones or congestion areas.

Head and Shoulders

Chart 2 Head and Shoulders Top (Reversal)

Head and Shoulders reversal pattern forms after an uptrend, and its completion marks a trend reversal. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline.



Chart 3 Head and Shoulders Bottom (Reversal)

The Head and Shoulders bottom is sometimes referred to as "an inverse head and shoulders". The pattern shares many common characteristics with the classical H&S formation, but relies more on volume patterns for confirmation.
As a major reversal pattern, the Head and Shoulders bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three successive troughs with the middle trough (head) being the deepest and the two outside troughs (shoulders) being more shallow. In its most classical form, the two shoulders should be equal in height and width. The neckline that connects the lows forms resistance.

Double Bottom (Reversal)


Chart 4 Double Bottom (Reversal)

Although there can be variations, the classic double bottom usually marks an intermediate or long-term change in the underlying trend. Many potential double bottoms can form along the way down, but until the key resistance is broken, a reversal cannot be confirmed. The double bottom is a major reversal pattern that forms after an extended downtrend. As its name implies, the pattern is made up of two consecutive troughs that are roughly equal, with a moderate peak in between.

Symmetrical Triangle, Ascending Triangle, Descending Triangle


Graph. 5 Symmetrical Triangles

The symmetrical triangle, which can also be referred to as a coil, usually forms during a trend as a continuation pattern. The pattern contains at least two lower highs and two higher lows. When these points are connected, the lines converge as they are extended and the symmetrical triangle takes shape. You could also think of it as a contracting wedge, wide at the beginning and narrowing over time.

The ascending triangle is a bullish formation that usually forms during an uptrend as a continuation pattern. There are instances when ascending triangles form as reversal patterns at the end of a downtrend, but they are typically continuation patterns. Regardless of where they form, ascending triangles are bullish patterns that indicate accumulation.

The descending triangle is a bearish formation that usually forms during a downtrend as a continuation pattern. There are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution.

Flag and Pennant


Chart 6 Flag&Pennant

Flags and Pennants are short-term continuation patterns that mark a small consolidation before the previous move resumes. These patterns are usually preceded by a sharp advance or decline with heavy volume, and mark a mid-point of the move.