A study of chart patternsby J Victor on December 8th, 2010
One of the basic assumptions of technical analysis is that- history repeats itself, mainly in terms of price movement. Chart patterns are graphical representations of historical price movements of stocks. So, when you analyse those price movements on chart , it reveals certain repeating patterns .It shows where the prices have been, where the buyers and seller lurk and often times the trading psychology at work in the market. If human emotions drive buying and selling behavior, then careful analysis of the chart patterns can help to determine where such emotions may next surface. Chart patterns depict trading psychology in motion.
However it should be remembered that identifying chart patterns and their subsequent signals is not an exact science. While there is a general idea and components to every chart pattern, in our opinion, the price movement does not necessarily correspond to the pattern suggested by the chart.
TYPES OF CHART PATTERNS
There are two basic types of patterns – continuing patterns and reversal patterns.
A continuing pattern indicates that the prior trend will continue onward upon the pattern’s completion. A reversal pattern signals that a prior trend will reverse on completion of the pattern. The main patterns are discussed below.
Types of continuing Patterns
- Flag, Pennant
- Triangles- Symmetrical Triangle , Ascending Triangle and Descending Triangle
- Cup with Handle
Types of reversal patterns
- Double Top and Double Bottom
- Head and Shoulders and Inverse Head and Shoulders.
- Falling Wedge and Rising Wedge
- Rounding Bottom
- Triple Top and Triple Bottom
In the next few pages we’ll look in detail about each of the above patterns.
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