An integral part of technical analysis revolves around knowing and understanding chart patterns. But they aren’t so easy to grasp at first. For this reason, we have curated a list of 3 chart patterns that’ll help you to use them effectively in trading.
What is the chart pattern?
To begin with, a chart pattern is a figure within a price chart that hints at future price movements based on their performance in the past. To trade successfully, a trader must know what type of chart he’s dealing with and what results he’s aiming for.
There are a couple of different chart patterns which traders can hunt to spot trading opportunities.. 3 of the charts we’ll be discussing are as follows:
- Head and shoulders
- Double top
- Double bottom
One of the most common uses of such charts is in candlestick trading. This helps in discerning the past opening and closing of the market.
These patterns have different purposes, some are used in the volatile market while others are more suitable for the bullish market. Similarly, some other patterns work best for the bearish market. It is crucial to understand the workings of the patterns. If someone uses the wrong patterns, they might end up losing a chance to trade big.
The first step of understanding chart patterns is to comprehend the support and resistance levels.
Support level
This term suggests the level where an asset value stops falling and starts rising again.
Resistance level
This is essentially the opposite of the support level. The resistance levels mark a point where a certain asset’s value stops rising and begins to drop.
These levels exist because of the presence of the demand and supply model. In other words, if there are more buyers than sellers, the asset value rises. In the converse, the value falls.
The 3 different types of chart patterns.
Head and shoulders
This pattern is marked by a chart peak having a small peak of its own on either side of it. This pattern helps traders to identify and foresee a possible bullish to bearish transition.
Generally, the 2nd peak is bigger than the 1st and 3rd ones. However, all of these peaks will drop down to the same support level. When the 3rd peak has dropped, the pattern confirms and the transition to a bearish trend will commence.
The Double top pattern
Like the head and shoulders, the Double top also signifies a bullish to a bearish trend reversal. This pattern is marked by the value of the assets rising to a certain point before dipping down a support level. The value will then rise again, after which it will retract permanently; going against the previous trend.
The Double bottom pattern
This pattern marks the period of selling an asset. As a result, the asset value drops below the support level. The value will rise once more hitting a resistance level, after which it will dip for one last time. When this is done, the value will begin to climb, indicating a bullish trend ahead.
Opposite to the Double top trend, the Double bottom trend marks the end of a bearish downtrend pattern as it signifies a bullish reversal.