Chart Patterns
For today's chart analyst, looking at a chart's price action and its patterns is comparable to a navigator reading a map. Chart patterns can help traders predict possible outcomes, identify trend continuation as well as market tops and bottoms, and give them greater confidence in their technical analysis. The following chart patterns were discussed in the webinar "Chart Patterns Every Trader Should Know" recorded on 04/17/2021.
Reversal Patterns
Double Tops
Double Top formations are trend reversal patterns signaling a strong resistance top.
The formation consists of two consecutive topping price actions (Highs) where the second top fails to close above the first top. A greater confidence can be achieved if the second topping action fails to rise above the first topping action (High). The downtrend confirmation occurs when price falls below the recent low between the two highs.
Double Bottom (W Pattern)
Double Bottom (W Pattern) is a reversal pattern signaling a strong supportive low. The pattern resembles the letter "W".
The formation starts with a swift angled downtrend that changes price direction price quickly, rises, and then falls swiftly to an area near the first low. This is followed by another quick rise in price, similar in volatility of the original downtrend. A stronger reversal indication can be gained if the second bottoming action is above the first low in price.
U Bottom
U Bottom formations are a strong reversal pattern. Sometimes they can indicate the beginning of a long-term uptrend.
The formations are typically found after a long extended downtrend or when the trading activity of the security has fallen in volume and range of price to resemble the letter "U". When the price rises above the left-side high price of the U, this indicates the beginning of the uptrend.
V Bottom
V Bottom formations are a strong indication of a reversal of trend.
The formation begins with a volatile drop in price. Price then quickly changes direction, and rises in a slow and methodical uptrend. If price can achieve a close above the original volatile drop, this formation now becomes a continuation confirmation pattern.
Head and Shoulders
Head and Shoulders formations are an indication of a reversal from an uptrend to a downtrend.
The formation is a series of three peaks that rise from a common base level (the Neckline). The two outer peaks are similar in height with the middle being the highest. When price breaks the Neckline after the third peak, this is a confirmation of the new downtrend.
Continuation Patterns
Flags
Bull Flag formations are a confirmation of a strong and continuous uptrend.
The formation itself looks like a pole and flag. Often the flag pattern is a consolidation of price that runs counter to the higher time frame trend.
Bear Flag formations are a confirmation of a strong and continuous downtrend.
The formation itself looks like an inverted pole and flag. Often the flag pattern is a consolidation of price that runs counter to the higher time frame trend.
Triangles
Ascending Triangles formations are typically a continuation pattern of an uptrend.
The formation is a consolidation of price where there are a number of similar highs and a series of higher lows. When price closes above the recent highs it will result in a continuation of the uptrend. Ascending Triangles can also be found in downtrends, though rarer, a breakout below the ascending lows will signal a continuation of the downtrend.
Descending Triangles formations are typically a continuation pattern of a downtrend.
The formation is a consolidation of price where there is a series of lower highs and number of similar lows. When price closes below the common lows it will result in a continuation of the downtrend. Descending Triangles can also be found in uptrends, though rarer, a breakout above the descending highs will signal a continuation of the uptrend.
Symmetrical Triangles formations are a convergence of two trends.
The pattern is a series of lower highs and higher lows of equal inclination. When price breaks out or breaks down from the converging trends it will signal the beginning of a new trend or a confirmation of the higher time frame trend currently in control.
Staircase Up Rectangles
Staircase Up (Rectangles) formations are typically found in slow and methodical uptrends.
The formation consists of areas of consolidations of equal highs and lows. When price breaks out above the recent high level it will then become the new support (floor) of the next step up.
Staircase Down Rectangles
Staircase Down (Rectangles) formations are typically found in slow and methodical downtrends.
The formations consist of areas of consolidations of equal highs and lows. When price breaks out below the recent low level it will then become the new resistance (ceiling) of the next step.
Unique Patterns
Three Candle Crash
Three Candle Crash formations are a reversal of trend patterns. The formation is a series of three cascading candles of greater ranges. (The range is defined as high price to low price).
The first down candle has to be the smallest in range of price and the third candle must be the largest. The size of the body of the third candle is irrelevant; the range is. The three crashing candles must be followed by a closing up (green) candle. Confirmation of the reversal pattern is gained when price closes above the first up candle.
Price target objectives are the values between the second and third candles, and the first and second candles as indicated by the dashed lines. A failure of price to achieve the value between the second and third candles now becomes a continuation confirmation of the original downtrend.
Twins (Pinchers)
Twins or Pincher formations are reversal of price momentum. The formation typically occurs after an extended uptrend or when price rises quickly in volatility.
The pattern contains two candles, the first being an up (green) candle and the second a down (red) candle. The down candle's opening price has to be similar to the up candle's closing price.
A greater confidence of price reversal is gained when the down candle's body engulfs the up candle's body. A reversal pattern can be achieved if two down (red) candles engulf (close) below the up candle's low.
