Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets. As can be seen, these chart patterns might help you determine trend direction, but you should not rely solely on them.
Chart patterns are specific price formations on a chart that predict future price movements. As technical analysis is based on the assumption that history repeats itself, popular chart patterns have shown that a specific price movement is following a particular formation of price (chart pattern) with high probability.
Types of chart patterns
Chart patterns fall broadly into three categories: continuation patterns, reversal patterns and bilateral patterns.
- A continuation signals that an ongoing trend will continue
- Reversal chart patterns indicate that a trend may be about to change direction
- Bilateral chart patterns let traders know that the price could move either way – meaning the market is highly volatile.
Reversal Chart Patterns:
Reversal patterns are those chart formations that signal, that the ongoing trend is about to change course.
If a reversal chart pattern forms during an uptrend, it hints that the trend will reverse and that the price will head down soon.
1. Double Top
2. Double Bottom
3. Head and Shoulders
4. Inverse Head and Shoulders
5. Rising Wedge
6. Falling Wedge