Technical analysis is the study of past price patterns to identify market trends and make informed trading decisions. Chart patterns are one of the fundamental aspects of technical analysis and can be used to identify potential buy and sell signals in the market. In this blog post, we’ll take a look at some of the most common trading stock chart patterns and how you can use them to your advantage.
Head and Shoulders Pattern
The inverse head and shoulders pattern is created when there is a trough(the “head”), followed by a higher trough (the “left shoulder”), followed by another lower trough (the “right shoulder”). The right shoulder should be roughly equal to the left shoulder, and both should be higher than the head. A neckline is drawn by connecting the peaks above the two shoulders. The inverse head and shoulders pattern is considered complete when the neckline is breached to the upside.
Double Top/Bottom Pattern
The double top pattern is created when there are two consecutive peaks through similar levels with a moderate dip in between them. This chart pattern indicates that sellers are winning out over buyers and that downside momentum is gaining steam. The double bottom pattern is created when there are two consecutive troughs at similar levels with a moderate rally in between them. This chart pattern indicates that buyers are emerging victorious over sellers and that upside momentum is growing stronger.
Triangle formation can take on several different shapes, but all triangles will have price converging as it moves towards a point of breakout or breakdown. There are three main types of triangles-symmetrical, ascending, and descending:
Symmetrical triangles occur when two trendlines of equal slopes converge towards each other to form a triangle shape. Symmetrical triangles are neutral chart patterns that generally occur during periods of consolidation before a breakout in either direction.
Ascending triangles form when an upward-sloping trendline meets a horizontal resistance level. Ascending triangles are bullish chart patterns that occur during up trends and indicate continued buying pressure which could lead to an upside breakout.
Descending triangles form when a downward-sloping trend line meets a horizontal support level. Descending triangles are bearish chart patterns that occur during downtrends and indicate increased selling pressure which could lead to a downside breakout.
These are just some of the many stock trading chart patterns that you need to be aware of as you begin your journey into the world of technical analysis. Remember, it’s important to always do your own research and consult with a financial advisor before making any investment decisions. Happy trading!