Tuesday, October 2, 2012

Chart Patterns in Technical Analysis for Forex and Stocks

The chart pattern in technical analysis is a distinct formation on a stock or forex chart that shows a trading signal, we usually use these patterns to find the trends and thus we know whether to buy or sell.

The idea behind chart pattern is that some formations are seen quite often in the chart, and these patterns are seen as high probability that the stock price will move, therefore we have trading opportunities when we are able to identify correctly these patterns. On the other hand, it is never certain that a pattern will give a successful trading opportunity 100% of the time, and that's the use of several trading indicators to verify the pattern is important.

We can divide patterns into 2 parts: the reversal and continuation patterns. The reversal pattern is when the signal shows that the trend will change after the completion of the pattern, the continuation patterns shows that the trend will continue.

First Pattern: Head And Shoulders:

  It is considered as one of the most useful and reliable pattern, Head and Shoulders is into the category of the reversal pattern, once it is completed the trend is likely to reverse.
The Head and Shoulders Top (left side of the photo) occurs after an upward trend and signals that the price is likely to drop, Head and Shoulders Bottom is just the opposite and occurs after a downward trend, it signals the trend to become upward once the pattern is over. You can see that both of them have a Head and 2 shoulders which shows the weakening of the current trend and the high probability of a trend reversal.
Head and shoulders chart pattern, technical analysis

Second Pattern:  Cup and Handle

There is only one kind of Cup and Handle and it indicates the continuation of a bullish trend in the future, this trend is quite easy to identify as it forms a kind of cup which follows an upward trend, once the price hit the resistance of the handle (lower line) it is likely that the upward trend continues.
Cup and handle technical analysis and trend pattern

Third pattern: Double Bottoms and Double Tops:

This is a reversal pattern that works both with bullish and bearish trend, it is also heavily used in technical analysis and forex trading, as it is quite reliable and easy to identify.
The Double tops is formed after a bullish trend, and after the second bottom the trend is likely to turn bearish, on the other hand the Double bottoms appears after a bearish pattern.
As the price tried to push twice without success, the trend will reverse.
Double bottoms and double ups trend reversal, technical analysis



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