Chart Pattern

 There are many chart patterns in the stock market. But we can categorize it into two major types. 

 1) Continues Pattern

A continuation pattern can be considered a pause during a prevailing trend. This is when the bulls catch their breath during an uptrend or when the bears relax for a moment during a downtrend. While a price pattern is forming, there is no way to tell if the trend will continue or reverse. As such, careful attention must be placed on the trendlines used to draw the price pattern and whether the price breaks above or below the continuation zone. Technical analysts typically recommend assuming a trend will continue until it is confirmed that it has reversed.

If the price continues on its trend, the price pattern is known as a continuation pattern. Common continuation patterns include:

• Pennants, constructed using two converging trendlines
• Flags, drawn with two parallel trendlines
• Wedges, constructed with two trendlines that would converge if they were long enough, where both are angled either up or down
• Triangles are among the most popular chart patterns used in technical analysis since they occur frequently compared to other patterns. The three most common types of triangles are symmetrical triangles, ascending triangles, and descending triangles. These chart patterns can last anywhere from a couple of weeks to several months.

2) Reversal Patterns

A price pattern that signals a change in the prevailing trend is known as a reversal pattern. These patterns signify periods where the bulls or the bears have run out of steam. The established trend will pause, then head in a new direction as a new energy emerges from the other side (bull or bear).

For example, an uptrend supported by enthusiasm from the bulls can pause, signifying even pressure from both the bulls and bears, then eventually give way to the bears. This results in a change in trend to the downside.

Reversals that occur at market tops are known as distribution patterns, where the trading instrument becomes more enthusiastically sold than bought. Conversely, reversals that occur at market bottoms are known as accumulation patterns, where the trading instrument becomes more actively bought than sold.

When a price reverses after a pause, the price pattern is known as a reversal pattern. Examples of common reversal patterns include:

• Head and Shoulders, signaling two smaller price movements surrounding one larger movement
• Double Tops, representing a short-term swing high, followed by a subsequent failed attempt to break above the same resistance level
• Double Bottoms, showing a short-term swing low, followed by another failed attempt to break below the same support level.

3) Pennant

Pennants are continuation patterns drawn with two trendlines that eventually converge. A key characteristic of pennants is that the trendlines move in two directions—one will be a down trendline and the other an up trendline. The figure below shows an example of a pennant. Often, the volume will decrease during the formation of the pennant, followed by an increase when the price eventually breaks out.

A bullish pennant is a pattern that indicates an upward-trending price—the flagpole is on the left of the pennant.

A bearish pennant is a pattern that indicates a downward trend in prices. In a bearish pattern, volume is falling, and a flagpole forms on the right side of the pennant.

4) Flag

Flags are continuation patterns constructed using two parallel trendlines that can slope up, down, or sideways (horizontal). Generally, a flag with an upward slope (bullish) appears as a pause in a down-trending market; a flag with a downward bias (bearish) shows a break during an up trending market. Typically, the flag's formation is accompanied by declining volume, which recovers as the price breaks out of the flag formation.

5) Wedge

Wedges are continuation patterns similar to pennants in that they are drawn using two converging trendlines; however, a wedge is characterized by the fact that both trendlines are moving in the same direction, either up or down.

A wedge angled down represents a pause during an uptrend; a wedge angled up shows a temporary interruption during a falling market. As with pennants and flags, volume typically tapers off during pattern formation, only to increase once the price breaks above or below the wedge pattern.

Wedges differ from triangles and pennants in that they reflect only upward and downward price movements, so the wedge generally appears angled.

All other chart pattern covers in the next blog posts.