Price pattern

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Price pattern
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Price pattern also known as chart patterns are the basic concepts in technical analysis. Price pattern is characteristic visualisation of goods (for example stocks, currencies, gold, oil, etc.) price on chart. Based on Dow Theory price patterns are indicatiors of future market movements. There are two types of price patterns: reversal patterns - suggest major market change (trend reversal) and continuation patterns - suggest that market only slows down for bigger accumulation/distribution[1].

Reversal patterns

The most popular reversal patterns are[2][3]:

  • Head and shoulders/reversal head and shoulders - formation head and shoulders is one of the basic reversal pattern formations. That price structure is build form three peaks on the top of ascending trend. Left and right peaks should be at lower level than middle peak. Formation is fully formed when price movement cross line which connects 2 low levels place between left shoulder - head and head - right shoulder (so called neckline). Similar situation observed during descending trend is called reversal head and shoulders.
  • Triple top/triple bottom - formation tripple top (ascending trend) or tripple bottom (descending trend) is one of the strongest reversal pattern. It's formed by 3 consecutives lows/highs drawed on price chart. It's very similar to head and shoulders, but the only difference is that middle peak is placed on the same level as neighboring peaks.
  • Double top/double bottom
  • V formation
  • Cup formation

Continuation patterns

The most popular continuation patterns are[4]:

  • Triangles:
    • Symmetrical - it's price pattern that occurs during both ascending and descending trend. It's recognized as pattern that indicates current trend continuation. It's build from 2 convergent lines upper resistance line and lower support line.
    • Ascending - ascending triangle it's a price pattern formed during ascending trend. It's build from upper horizontal resistance line and lower ascending support line. Signal for taking long position is when price breaks upper resistance line. Ascending triangle is bullish formation.
    • Descending - descending triangle it's a price pattern formed during descending trend. It's build from upper descending resistance line and lower horizontal support line. Signal for taking short position is when price breaks lower support line. Descending triangle is bearish formation.
    • Expanding - expanding triangle is considered as reversal pattern. It's usually formed at the end of ascending trend. Expanding triangle represents situation on market when many investors is involved and they are guided by pure emotions. It's build from two expanding lines: upper - resistance line and lower - support line.
  • Flag
  • Pennant
  • Weggie
  • Rectangle

Footnotes

  1. Murphy J., Technical analysis of the financial markets, 1999, p. 99 - 101
  2. Lim M. A., The Handbook of Technical Analysis: The Practitioner’s Comprehensive Guide to Technical Analysis, 2016, p. 503
  3. Murphy J., Technical analysis of the financial markets, 1999, p. 103 - 117
  4. Murphy J., Technical analysis of the financial markets, 1999, p. 129 - 141

References

Author: Agata Skalska