Chart Pattern 2

9)  Bump and Run Reversal

The second phase of the pattern is the bump phase, in which prices move up faster than the first phase. During this phase, the trend line becomes at least 50% faster than the lead-in trendline. Traders should validate the bump pattern by checking the maximum height of the bump in relation to the lead-in trendline. The distance from the highest point of the bump to the lead-in trendline should be twice (or more) the distance from the highest height to the lead-in line in the lead-in phase.

The chart starts showing the right side of the collision once the prices reach their peak and start declining toward the trend line. The volume expands after the advance forms on the left side of the bump. The run phase begins when prices reach the lead-in trendline. 

After crossing the trendline, sometimes the price reverts back to the trendline, which is now also a resistance level. Bump and Run Reversal Patterns can be used for all types of trading from daily, weekly to monthly, with the understanding that the movement is volatile over the long term.

How does bump and run reversal happen?

The setup works like this; The stock is making an upward-sloping signal to investors that they should acquire the stock, as the day progresses, investors keep bidding for the stock and the price rises. Then an event occurs, such as earnings, that causes traders to jump on the bandwagon and bid for even more stocks. As momentum picks up, the price moves up to form a new higher-sloping trend line. However, that is when things start going wrong.

 Here supply catches up with demand, traders find that the stock's bid has gone too high, and sellers come in and push the stock down. During the lead-in phase,  the volume is often initially high, and then the volume decreases until the onset of the percussion, which then increases suddenly.

Pattern Type: Nondirectional

Hint: Bearish

Breakout Confirmation: Confirmation of this pattern is below the lower trendline drawn at a low level during the lead-in phase, with above-average trading volume.

Measuring: The price target is the lowest point in the lead-in phase.

Volume: Volume is usually high at the beginning of the phase and decreases throughout the pattern.

 

The Bump and Run Reversal Pattern is a high-probability trade that is being used by many professional traders. It can be applied to any chart period, daily, weekly or monthly. The pattern is an excellent indicator designed to identify speculative demand that is likely to come to an end allowing traders to profit from the stock. To learn more about stock chart patterns and to fully take advantage of technical analysis, be sure to check out our complete library of predictable chart patterns. These include comprehensive descriptions and images so that you can identify important chart pattern scenarios and become a better trader.

10) Cup And Handle Pattern

A cup and handle pattern occurs when the underlying asset forms a chart that resembles a cup in the shape of a U and represents a handle slightly downward after the cup.

The shape is formed when a price wave is down, followed by a stabilization period, followed by a rally of roughly the same size as the prior trend. This price action identity makes up the cup and handle sizes.

The formation is usually initiated by low-trade volume, followed by high volume at the left lip, declining volume at the bottom of the cup, which then exits with increasing volume towards the right lip and a breakout. This process can last anywhere from a few minutes to sixty-five weeks, beginning with a period of stabilization followed by downward price volatility, then a rally that returns to nearly or equal to the previous level before the price drops. brings.

Once this happens, the cup moves forward and forms a U, and the price curves slightly downwards to form the handle.

The handle should be shorter than the cup and should only point slightly down within the trading range - not less than a third of what is in the cup. Investors who see a similar pattern where the handle goes deep may want to try to avoid it.

However, when the handle is in the proper proportion to the edge of the cup, a breakout that crosses the handle is a sign of an increase in price. In addition, it is important to note that this is not always the case, and investors should use certain measures to minimize losses when investing in these types of patterns.

The image above displays the standard cup and handle pattern. To trade this formation correctly, a trader should place a stop-buy order slightly above the upper trendline that forms the handle. This way, the buy order will be executed only if the price breaks above the upper resistance level. This will avoid jumping into a cup by entering a false breakout and handling the pattern too early. For traders who want to add a little more certainty to their trades, they should wait for the price handle to close above the upper trend line.

Often traders try to buy a stock at a lower price, when it breaks the upper trendline, hoping that the price will temporarily move back down, but here they run the risk of moving the price upwards, risking the trade. completely disappear.

The Cup and Handle pattern features a lower failure rate than other chart patterns, which means it is a good indicator of what is to come. The patterns were short handles that had a higher success rate than patterns with longer handles. A slightly higher upper left lip versus a right lip with a more bottomless cupped pattern also has a higher success rate.

Pattern Type: Continuity

Sign: Bullish

Breakout Confirmation: When there is above-average volume, and the stock closes above the upper trendline drawn from the top of the handle.

Measuring: The price target is achieved by measuring the distance from the right lip to the bottom of the cup and then connecting it to the price level of the right lip. 

Volume: Increased volume is normal after cup sizing, with volume as high as the left lip, decreasing volume at the bottom of the cup, and increasing the volume towards the right lip which continues on breakouts.

The cup and handle pattern was popularized by William O'Neill and has now expanded to all kinds of trading scenarios. Traders refer to the cup and handle as a bullish continuation pattern that is a highly accurate predictor of sizable breakouts. To learn more about stock chart patterns and to fully take advantage of technical analysis, be sure to check out our complete library of predictable chart patterns. These include comprehensive descriptions and images so that you can identify important chart pattern scenarios and become a better trader.

 11)  Double Bottom Pattern

When using technical analysis, the double bottom pattern indicates a long-term or intermediate reversal in the overall trend. It is defined by a drop in price in a stock or index that is preceded by a rebound, then another decline at roughly the same level as the first drop, followed by a more significant rebound. The double bottom pattern resembles the look of a W, where the low is considered a support level.

The prerequisite for a double bottom pattern is a significant downward trend that continues over an extended period of time - several months. The first bottom or trough of the trend should be the lowest point of the current downward trend. The first trough is followed by a 10 to 20% advance and, occasionally, a drawn peak.

The second trough follows the advance and finds support from the first lower. This formation can take weeks and months to form. Two cisterns can be considered double bottom if the difference between them is within the range of 3%.

Volume is the most important factor for the double bottom pattern. Traders should ensure that buying pressure and volume build up during the second trough advance. Traders should take note if volume is not down in the second leg of this pattern as the stock or index is at risk of falling below the current resistance level. When volume increases in the second leg of the pattern, buyers finally rush in and push the stock up through the confirmation point.

Double bottom reversal is completed when the trend breaks the resistance from the highest point between the two bottoms. Now resistance becomes support. This support is sometimes tested with improvements first.

To set a target, a trader should consider the distance from the resistance breakout to the lower points below and add those values to the resistance breakout. With double-bottom patterns, it is a good idea to trade patterns that have at least four weeks between lows.

Why is the double bottom pattern important?

When correctly identified, the double bottom pattern indicates that an investor has an opportunity to enter the market with a bullish trade as there is now significant support on the downside, preventing the stock from falling below the resistance level. And now one is setting up upwards. Step. As soon as the double bottom pattern is identified, a trader can initiate a well-timed bullish investment to make some quick profits. However, if they are wrong about the movement and the stock breaks the lower support level, they can quickly exit for a small loss.

Pattern Type: Reversal

Sign Bullish Breakout Confirmation: Confirmation for this pattern is above the horizontally drawn upper trendline between the lows and the middle highs with above-average volume.

Measuring: Take the distance between two lows and one high and add it to the breakout level.

Volume: Volume decreases during formation and increases on the breakout. The double bottom pattern is highly effective when identified correctly. However, traders should keep a close eye on the volume to ensure that it is rising throughout the pattern. Therefore, it is important to ensure that all elements of the pattern are correctly identified before jumping in and executing a trade. To learn more about stock chart patterns and to fully take advantage of technical analysis, be sure to check out our complete library of predictable chart patterns. These include comprehensive descriptions and images so that you can identify important chart pattern scenarios and become a better trader.

Understanding the Double Top Pattern 

 

12) Double Top Pattern

The Double Top Pattern is a twin-peak chart pattern that represents a bearish reversal in which the price reaches the same level twice with a small drop between the two peaks. A double-top pattern usually signals an intermediate or long-term change in trend. When identifying patterns, traders need to understand that peaks and troughs do not need to form an ideal M shape for the pattern to emerge.

Before the pattern emerges, there is a significant upward trend for several months. The first top is the highest price the trend has reached during the current trend. After the first top, there is usually a 10 to 20% price bearish. This drop in asset value is generally negligible; However, sometimes the decline can be prolonged due to a decrease in demand. 

The movement towards the second peak is usually a small amount. Once the value reaches the first peak level, it opposes an upward move. It may take 1-3 months for the price to reach this level. A difference of 3% between the two heads is generally acceptable. After the second peak, there should be an increase in volume with a quick decline.

At this stage, the double top still needs to be confirmed. For this purpose, the trend should break through the lowest point between the two peaks with an increase in acceleration and volume. To set a price target, traders must subtract the distance from the breakpoint to the top of the break. If the gap between the peaks is too small, the pattern may not indicate a long-term change in asset price.

 Understanding the Double Top Pattern

Some argue that the hardest part of trading chart patterns is recognizing them when they occur. Double tops make it easy, but there are rules to help with the process. Otherwise, this indicator may misinterpret fake outs or reversal trends. Although there are variations, the classic double top pattern marks a bullish bearish trend change. Multiple double-top patterns are likely to form throughout the chart, but unless an important level of support is broken, the reversal pattern cannot be confirmed and should not be acted upon. 

The most important aspect of the double-top pattern is to avoid pulling the trigger too early on a trade. Any investor should wait for the support level to break before jumping in. It is not uncommon to apply a price or time filter to differentiate between confirmed and false support breaks.

Pattern Type: Reversal

Hint: Bearish

Breakout Confirmation: This pattern is confirmed when there is a close below the horizontally drawn lower trendline in the middle of the high with above-average volume.

 Measurement: Take the distance between two of the following highs, and then subtract that from the breakout level.

Volume: Volume declines during formation, and expands on a breakout.

A double-top reversal pattern is usually followed by a failed move to the upside. This indicates that the market is unable to break the upper resistance level. When the pattern occurs, traders should avoid taking long positions; Instead, the focus should be on finding a bearish entry point. To learn more about stock chart patterns and to fully take advantage of technical analysis, be sure to check out our complete library of predictable chart patterns. These include comprehensive descriptions and images so that you can identify important chart pattern scenarios and become a better trader. 

13) Falling Wedge Pattern

A falling wedge pattern is a bullish pattern that starts widening from the top and continues to shrink as the price declines. Like rising wedges, trading falling wedges is one of the more challenging chart patterns to trade. A falling wedge pattern indicates continuation or reversal depending on the prevailing trend. However, in most cases, the pattern indicates a reversal. In terms of its appearance, the pattern is widest at the top and narrows as it moves downwards with tighter price action.

In an ideal scenario, an extended downward trend with a fixed bottom should be preceded by a wedge. This decline should be maintained for at least 3 months. It usually takes a quarter to half a year for the wedge pattern to form. The upper trend line must have at least two high points and the second point must be lower than the previous and so on. Similarly, there must be at least two lows, each lower than the previous one.

Resistance and support should converge as the pattern continues to develop. A change in lows indicates a decline in selling pressure, and it forms a support line with a smaller slope than the resistance line. The pattern is confirmed when resistance is strongly broken. In some cases, traders should wait for the previous high to break through.

Another important factor in pattern confirmation is volume. If there is no expansion in volume, the breakout will not be convincing. A falling wedge is not an easy pattern to trade as it is difficult to identify. When a stock or index price move falls over time, it can form a wedge pattern as the chart begins to converge on a downward path. Investors can look at the beginning of a descending wedge pattern and measure the peak-to-trough distance between support and resistance to see the pattern. As the price continues to decline and loses momentum, buyers begin to step in and slow down the rate of decline. Once the trend lines converge, this is where the price breaks through the trendline and moves upward.

A falling wedge indicates a bullish reversal pattern in the price. It has three general characteristics that traders should look for: First, it has convergent trendlines. Thereafter, a pattern has declining volume as the trendline progresses. Finally, it will be preceded by a breakout through the upper trendline. Should all these things come together, you have a falling wedge pattern, and a breakout to the upside should be anticipated.

The descending wedge pattern, as well as the rising wedge pattern, converges into smaller price channels. This means that the distance between where a trader will enter a trade and the price where they will open a stop loss order is relatively tight. Here it can be relatively easy to exit the trade for minimal loss, but if the stock moves to the trader's advantage, it can result in excellent returns.

Pattern Type: Reversal and Continuation Patterns 

Sign: Bullish 

Breakout Confirmation: The confirmation for this pattern is above the upper trend line drawn at a higher level with volume above the average.

Measurement: The project target for the falling wedge pattern is the highest high at the beginning of the price formation.

Volume: Volume decreases during formation and increases on the breakout. 

A falling wedge pattern can be an excellent tool for identifying market reversals. Here traders can use technical analysis to combine lower lows and lower highs to form a lower wedge pattern. In addition, the trader must meet certain conditions before they can act. These include understanding the volume indicator to see if the volume has increased when it goes up. Once the requirements are met, and resistance is a close above the trendline, it signals traders looking for a bullish entry point into the market. To learn more about stock chart patterns and to fully take advantage of technical analysis, be sure to check out our complete library of predictable chart patterns. These include comprehensive descriptions and images so that you can identify important chart pattern scenarios and become a better trader.