It’s all in the charts. Charts don’t lie. Charts make smarts….We’ve heard all the utterances. And while your chart may be your best friend, the chart alone can’t make you money. What a chart can do is provide specific patterns to elucidate market trends – but first, you must know how to analyze chart patterns to make sense of the data.
So where do you start? In the technical analysis milieu, chart patterns abound – flags, hammers, heads, shoulders, cups, saucers and more. While they can all reveal market trends, these two broad categories are widely used and can help you learn whether a trend is just beginning or about to end.
Continuation Patterns
A trend in motion tends to stay in motion, according to a rule of physics. In market language, trends tend to persist or at least move into a sideways pattern until a new force comes along to change it. But a market seldom goes straight up or straight down for an extended time. There are always periods when it has to catch its breath or reevaluate where it’s heading as traders adjust their thinking to new price levels. In general, these periods look like pauses or congestion areas in an ongoing trend on a chart. Often, after a relatively brief period of reflection, a market will break out of this congestion area in the same direction as the trend was going.
The flag is one of the most common continuation patterns. After breaking above previous highs and moving into an uptrend on the chart below, the market seems to need a little time to digest its new price plateau.
Prices set back for a few days before breaking out to the upside to resume the uptrend. Bullish flags like this may occur several times in an uptrend.
Both bullish and bearish flags can occur, as well as bearish and bullish triangle and wedges, two of the other common continuation patterns.
Reversal Patterns
While a continuation pattern suggests that a trend in place will continue in the same direction after a brief pause, a failed continuation pattern may well turn into a reversal pattern. Like their name implies, reversal patterns suggest that one trend is ending and the market is ready to begin another trend in the opposite direction or, perhaps more likely, to move sideways for a while.
As with continuation patterns, a trend line or key support or resistance areas are points to watch. If prices rebound from these areas, a continuation pattern remains intact. If prices break through a trend line or triangle boundary and then follow through with the breakout, this is the best evidence of a trend reversal.
Some of the main reversal patterns include:
- double tops and double bottoms
- M tops and W bottoms
- head-and-shoulders formation
- rounding bottom
- Cup-and-Saucer and diamonds.
How to Make Chart Patterns Work for Your Trading
Chart patterns provide clues about possible price direction but do not predict what prices will do. Their main value often comes from honing in on the price action to identify price parameters and points where a trader may want to take action.
Once you know how to analyze chart patterns – imagine that you could combine what the patterns reveal about market trends with a tool that actually predicts what prices will do?
VantagePoint Trading Software gives traders an advanced notice of changes in the markets. The scientifically proven technology uses patented, predictive indicators to forecast future price trends with up to 87.4% accuracy. Instead of being restricted to relying on what chart patterns tell you about past market movement, VantagePoint predicts what the market is likely to do 1-3 days in advanced. By combining the power of VantagePoint with simple pattern analysis you can have true chart smarts.
