Patterns

What is a pattern?
The "trend" is the essential ingredient in chart analysis. The definition of trend is the tendency to move in a straight line. The theory is that once a trend is in motion, it will continue in that direction. To the technical analyst, this means that prices will move in trends. A technical analyst is, therefore, always trying to determine the direction, strength and duration of the trend. The earlier the trend can be identified, followed and traded upon, the more profit can be made.

The trendline, whether it be up (a bullish trend) or down (a bearish trend), is never a completely straight line. Prices usually zigzag along, waver around, and sometimes break the trendline.

That zigzag movement, experts says, is the foundation of all chart patterns, and is the key to their forecasting value.

The movements that prices make as they zigzag their way along a chart form "patterns." Studies over many years show that these patterns tend to repeat themselves. Technical analysts look to this history of repeating patterns as having a predictive value.

The patterns are given names which roughly describe the shapes they draw on the charts: head and shoulders top, head and shoulders bottom, symmetrical triangle, ascending and descending triangles, double tops, and double bottoms, for example.

Head and Shoulders

A chart formation resembling an ‘M’ in which a financial instrument price first rises to peak and declines, then rises to a higher peak and declines, then rises to the third peak, which is lower than the previous one and again declines.

The first and the third peaks are called shoulders, while the second peak forms the head.

This pattern is considered a very bearish indicator.

Double Bottom

Double Bottom pattern resembles a ‘W’ and occurs when a financial instrument price drops to the same or similar levels within certain period of time and bounces.

This pattern is considered a very bullish indicator.

Double Top

Double Top pattern resembles an ‘M’ and occurs when a financial instrument price rises to the same or similar level within certain period of time, and than falls.

This pattern is considered a very bearish indicator.



Triangle

Triangle is a technical analysis pattern created by drawing trendlines along with a price range that gets narrower over time because of lower tops and higher bottoms. Variations of a triangle include 'ascending' and 'descending' triangles.

Technical analysts see a breakout of this triangular pattern as either bullish (on a breakout above the upper line) or bearish (on a breakout below the lower line).

Ascending Triangle Chart



Descending Triangle Chart