Watch our video on technical analysis patterns.
Technical analysis patterns are formed when data is plotted. The data gets repeated resulting in the pattern. Chart patterns play a huge role in technical analysis.
Charts are so important. There are different kinds of charts you can use but candlestick charts are the most popular. The candlesticks show the price movement of the time period you're watching.
Typically daily charts show patterns that can help you put together a watch list for the next day. On the daily chart you see the price movement from that day and the candlesticks begin to form patterns
There are millions of transactions daily in the stock market. Technical analysis patterns show you the big picture because it's impossible to decipher these traders motives. Patterns identify trading signals and future price movement.
Chart patterns can shift a market from optimism to fear. History repeats itself so when patterns consistently form and have the same outcome, it can move a market. If a bearish pattern emerges traders start selling and send the price lower. This is where it's important to learn shorting.
The opposite is true for a bullish pattern. When you see that bullish pattern forming, you know to buy. this sends the price higher.
Patterns have established criteria and definition but nothing is 100% certain. A bullish pattern may form but then breakdown. Technical patterns helps you identify trends and patterns (check out our stock market basics page).
The two popular technical analysis patterns are known as reversals and continuations. A reversal pattern signals that the trend is about to reverse after the pattern has completed itself.
A continuation pattern tells you the trend will continue once the pattern is complete. You can use chart patterns for day trading. Using chart patterns for swing trading is also pretty important.
Being able to read charts is critical. Patterns are always forming. When you're looking at a chart it isn't a bunch of candlesticks with no rhyme or reason. There are flags, head and shoulders, cup and handle, triangles, wedges forming. They can overlap or be separate.
You can always see patterns but you have to study. They're not going to be perfectly noticeable every single time. In this article we'll talk about some of the different patterns but will be going more in-depth in how to trade them in later articles.
Wedge technical analysis patterns are reversal patterns. There are falling wedges and rising wedges. A falling wedge is a bullish pattern (check out our stock market training page).
It starts wide at the top and contracts as price moves lower. It's a reversal pattern because the stock has been moving in a downtrend and is about to break resistance, reverse and head back up.
A rising wedge is a bearish pattern. It starts wide at the bottom and gets smaller as price moves up. The trading range has narrowed and price will begin to break down.
These patterns typically take 3-6 months to form.
Head and shoulders patterns are also reversal patterns. You have a left shoulder, head, right shoulder and neckline. There are 2 head and shoulders pattern. Inverse and the top.
The top head and shoulders pattern is also known as the F you pattern. The head looks like a middle finger. This is a bearish pattern. People can get trapped in an F you pattern because the pullbacks can look like dip buying.
The neckline of a head and shoulders pattern is support. Price is about to break below it and fall.
An inverse head and shoulders is a bullish pattern. The neckline in this pattern is resistance. When price breaks the neckline, it goes up.
Bull and bear flags are continuation technical analysis patterns. Bull flags are obviously bullish. You have the move up which is the flag pole.
It'll trade sideways for a bit which is the flag before continuing up. Just like a bear flag forms and then moves down. Flags are the easiest patterns to identify.
A cup and handle pattern is a bullish continuation pattern. This pattern forms with a consolidation period followed by a breakout. The cup forms a U shaped pattern.
The handle is formed when a trading range happens. It's the final consolidation before breaking out. Volume is needed to cause the breakout. Without volume the pattern breaks down.
Spotting technical analysis patterns can be daunting, especially at first. It's important to look at charts and study what the candlesticks are forming. No pattern is going to look 100% perfect with the exception of flags.
Multiple patterns can be found in one big one. Or a pattern could be seen as 2 different patterns. A cup and handle might also look like an inverse head and shoulders. Studying helps you to identity the different patterns so that you can send your order in.