Chart Pattern

A chart pattern or price pattern is a pattern within a chart when prices are graphed. In stock
and commodity markets trading, chart pattern studies play a large role during technical
analysis. When data is plotted there is usually a pattern which naturally occurs and repeats
over a period. Chart patterns are used as either reversal or continuation signals.

chart patterns often signal transitions between rising and falling trends. A price pattern is a
recognizable configuration of price movement identified using a series of trendlines and/or
curves.

When a price pattern signals a change in trend direction, it is known as a reversal pattern; a
continuation pattern occurs when the trend continues in its existing direction following a brief
pause.
 Rectangle Chart Pattern
A Rectangle is a continuation pattern that forms as a trading range during a pause in the
trend. The pattern is easily identifiable by two comparable highs and two comparable lows.

The highs and lows can be connected to form two parallel lines that make up the top and
bottom of a rectangle. Rectangles are sometimes referred to as trading ranges, consolidation
zones or congestion areas.

In a rectangle pattern, investors will see the price of the security test the levels of support and resistance
several times before a breakout. Once the security breaks out of the rectangle’s range, in either direction,
it is considered to be trending in the direction of the breakout. Not all breakouts end up being successful.
 Triangle Patterns
Triangle patterns are a chart pattern commonly identified by traders when a stock price’s
trading range narrows following an uptrend or downtrend. Unlike other chart patterns,
which signal a clear directionality to the forthcoming price movement, triangle patterns can
anticipate either a continuation of the previous trend or a reversal.

Although triangles more frequently predict a continuation of the previous trend, it is

essential for traders to watch for a breakout of the triangle before acting on this chart
pattern.

Triangle patterns come in three varieties –

Ascending
Descending
Symmetrical
 Ascending Triangle
An ascending triangle is a breakout pattern that forms when the price breaches the upper
horizontal trendline with rising volume. It is a bullish formation.
The upper trendline must be horizontal, indicating nearly identical highs, which form a
resistance level.
The lower trendline is rising diagonally, indicating higher lows as buyers patiently step up their
bids.
Eventually, the buyers lose patience and rush into the security above the resistance price,
which triggers more buying as the uptrend resumes. The upper trendline, which was formerly
a resistance level, now becomes support.
 Descending Triangle
A descending triangle is an inverted version of the ascending triangle and considered a
breakdown pattern. The lower trendline should be horizontal, connecting near identical lows.

The upper trendline declines diagonally toward the apex. The breakdown occurs when the
price collapses through the lower horizontal trendline support as a downtrend resumes. The
lower trendline, which was support, now becomes resistance.
 Symmetrical Triangle
A symmetrical triangle is composed of a diagonal falling upper trendline and a diagonally rising
lower trendline.
As the price moves toward the apex, it will inevitably breach the upper trendline for a
breakout and uptrend on rising prices or breach the lower trendline forming a breakdown and
downtrend with falling prices.
 Double Top or Triple Top
This is an M-shaped pattern with two peaks with a moderate decline between them. This is a bearish
reversal pattern that usually signals the beginning of a downtrend.

The first peak is usually formed after a strong uptrend. The trend retraces to a ‘neckline’ level. Once it
reaches the neckline, it turns bullish and rises to form a second peak.

The pattern is finally completed when the price moves to the neckline after the second peak. Traders
look for the price to break through the neckline to confirm a bearish trend reversal.
 Double Bottom or Triple Bottom
This is a W-shaped pattern with two lows with a moderate incline between them. This is a bullish
reversal pattern that usually signals the beginning of an uptrend.

The first low is usually formed after a strong downtrend. The trend retraces to a ‘neckline’ level. Once it
reaches the neckline, it turns bearish and falls to form a second low.

The pattern is finally completed when the price moves to the neckline after the second low.
Traders look for the price to break through the neckline to confirm a bullish trend reversal.
 Head and Shoulders
A head and shoulders pattern has four components:

After long bullish trends, the price rises to a peak and subsequently declines to form a trough.

The price rises again to form a second high substantially above the initial peak and declines
again.

The price rises a third time, but only to the first peak level, before declining again.

The neckline drawn at the two low.

The first and third peaks are the shoulders, and the second peak forms the head. The line
connecting the first and second troughs is called the neckline.
 Inverse Head and Shoulders
The opposite of a head and shoulders chart is the inverse head and shoulders, also called
a head and shoulders bottom. It is inverted with the head and shoulders bottoms used to
predict reversals in downtrends.
This pattern is identified when the price action of a security meets the following
characteristics:

The price falls to a trough, then rises

The price falls below the former trough, then rises again

The price falls again but not as far as the second trough

Once the final trough is made, the price heads upward toward the resistance (the
neckline) found near the top of the previous troughs.
Cup and Handle Pattern
 Rounding Bottom
A rounding bottom looks similar to the cup and handle pattern, but does not experience the
temporary downward trend of the "handle" portion. The initial declining slope of a rounding
bottom indicates an excess of supply, which forces the stock price down.

The transfer to an upward trend occurs when buyers enter the market at a low price, which
increases demand for the stock.

Once the rounding bottom is complete, the stock breaks out and will continue in its new
upward trend. The rounding bottom chart pattern is an indication of a positive market
reversal, meaning investor expectations and momentum, otherwise known as sentiment, are
gradually shifting from bearish to bullish.
 Rounding Top
A rounding top pattern is similar to that of an inverse rounding bottom pattern. It is also
similar to, and may occur coincidentally with, a double top or triple top price pattern.

The main point of recognizing the rounding top pattern is to anticipate a significant change
in trend from upward trending prices to downward trending prices.

Recognizing this kind of a change can allow traders to take profits and protect themselves
from buying into an unfavorable market, or strategize to make money from falling prices
by short-selling.
The rounding top pattern has three main components:

A rounding shape where prices trend higher, taper off, and trend lower;

An inverted volume pattern (high on either end, lower in the middle of the pattern);

The support price level found at the base of the pattern.

 Rising Wedge Patterns
A rising wedge is formed by two converging trend lines when the stock’s prices have been
rising for a certain period.
Before the line converges the sellers come into the market and as the result, the prices lose
their momentum.
This results in the breaking of the prices from the upper or the lower trend lines but usually,
the prices break out in the opposite direction from the trend line.
 Falling Wedge Pattern
A falling wedge is formed by two converging trend lines when the stock’s prices have been
falling for a certain period.
Before the line converges the buyers come into the market and as the result, the decline in
prices begins to lose its momentum.
This results in the breaking of the prices from the upper trend line.
 Flag Pattern
A flag pattern is a type of chart continuation pattern that shows candlesticks contained in
a small parallelogram. It is an area of consolidation which shows a counter-trend move
that follows after a sharp price movement.
After a sharp price movement, either upward or downward when the prices enter in a
consolidation phase then the flag pattern may be formed.

It basically indicates that the prevailing trend is going to continue. This pattern allows
traders to enter the market in the middle of the trend.

The breakout of prices in its prior trend helps the traders to enter the market at lower
prices than the prices before the formation of the pattern.

Depending upon whether the market is in an uptrend or downtrend, it can either be

bearish or bullish.
 Bullish Flag Pattern
When the prices are in an uptrend a bullish flag pattern shows a slow consolidation lower
after an aggressive uptrend.
This indicates that there is more buying pressure moving the prices up than down and
indicates that the momentum will continue in an uptrend.
Traders wait for the price to break above the resistance of the consolidation after this
pattern is formed to enter into the market. The breakout indicates that the prior uptrend will
be continued.
 Bearish Flag Pattern
When the prices are in the downtrend a bearish flag pattern shows a slow consolidation
higher after an aggressive downtrend.
This indicates that there is more selling pressure moving the prices down rather than up and
indicates that the momentum will continue in a downtrend.
Traders wait for the price to break below the support of the consolidation after this pattern is
formed to enter in the short position.
 Pennants Pattern
Pennants are continuation patterns in which a large movement in the stock’s prices is
observed after which there is a consolidation phase and then the continuation of the
existing trend.

This indicates a sharp movement in the prices.

When identifying a consolidation phase traders should look for two converging lines.
After the consolidation phase, the breakout of the prices takes place in the same
direction as the prior trend.

The breakout of the prices is usually accompanied by an increase in the volume.

 Bullish Pennants
A bullish pennants pattern is formed after a sharp rise in the prices of the stock.
After a long uptrend, traders try to close their position with the assumption that reversal is
going to come.
The prices began to consolidate as the traders start exiting the stock.
But at the same time, new buyers start buying the stock which results in the breakout of the
prices in the same direction as the prior uptrend.
 Bearish Pennants
A bearish pennants pattern is formed after a sharp fall in the prices of the stock.
After a long downtrend, traders try to close their sell position with the assumption that
reversal is going to come.
The prices began to consolidate as the traders start exiting the stock.
But at the same time, new sellers start the shoals pharmacy.com selling the stock which
results in the breakout of the prices in the same direction as the prior downtrend.