In technical analysis, it is believed that price movements are repeated sooner or later. What you see on the chart today already happened, for example, a week ago. And something else will happen, for example, in a month. The same repeating patterns and combinations are called patterns or chart patterns in trading.
The vast majority of trading strategies in trading involve finding and using chart patterns. Every trader should be able to define them - from beginner to professional. The difference is that a beginner will be able to open one profitable order on one figure, while an experienced one will take into account the general situation with many additional factors and will have time to earn several times. The second option is, of course, better. And it is always safer to consider the figure not by itself, but in the context of the entire state of the market. So, if a pattern is formed on a fifteen-minute time frame, then be sure to look at the half-hour, hour, four-hour timeframes.
Depending on what happened to the trend before and after the formation of the pattern, the patterns are divided into 3 types:
- Trend Continuation Patterns
- Trend reversal patterns, or reversal
- Bilateral, or indefinite
The main types of patterns
There are many figures, but the main ones can be called classic.
Rectangle. The easiest figure to understand. The price moves between parallel support and resistance levels, bouncing from them several times until a breakout occurs, most often with the continuation of the trend.
Flag. It is also rectangular, but tilted. There are several price fluctuations from the top of the flag and towards the base of the flagpole, which ends with a strong movement in the direction of the main trend.
Triangle. This is a lateral canal that gradually narrows. Distances from lows to highs within the pattern are gradually getting smaller. And then a breakout follows in the direction of the main trend.
Pennant. It is a cross between a triangle and a flag. With the first it has in common a gradual narrowing from the base to the end, with the second - an inclined arrangement. As in the previous cases, the trend continues after the pattern has been completed.
Double or triple top. Within this figure, the price reaches the resistance level twice or thrice, after which it goes down on the chart, the trend changes.
Double or triple bottom. It is an inverted figure with tops. The price consecutively reaches the resistance level two or three times and, having pushed off from it, goes up. The trend is also changing.
Head and shoulders. Consistent achievement at the price of three peaks, the central of which is higher than the right and left of it. The figure looks like a triple top with the difference only in the height of the central peak.
The undoubted advantages of working with shapes are clarity and the fact that you can analyze them without additional tools. The main disadvantage is subjectivity. When a pattern is emerging, no trader can be sure what will happen in the end. Several people will look at the same chart and make different predictions.