What is a Chart Pattern ?
Charts patterns formed in the chart of an asset indicate the trend and provide a visual representation of price action. Chart patterns help traders and investors to interpret market behavior to take intelligent trading decisions in market. There is high probability for Chart patterns formed in a chart to repeat the market trend and price movements. To make informed decisions we must identify and understand the chart patterns formed in an asset price. It is important for traders to maintain a great risk management for Chart Pattern based trading to avoid huge losses in trading.
Let us understand the logic behind the chart pattern-based trading. We can see that certain common chart patterns will be formed when there is certain market behavior and market trends. These chart patterns tend to repeat over time as the investor sentiment repeats. Chart patterns reflect the market psychology and investor sentiment.
There are three different types of chart patterns that represent the collective behavior of market participants. They are
Bilateral chart patterns
These chart patterns do not provide a clear direction of price movement. Bilateral chart pattern gives an indication that price can move either way. While trading chart patterns, it is important for traders to consider other technical indicators to take high probable trades. Traders can use technical indicators such as Volume, RSI, MACD, Moving Average etc., to confirm the trend and can take informed positions accordingly.
Triangle Chart Patterns
Triangle chart patterns are the most effective chart pattern formations used by traders in financial market. These patterns forms in a chart when the price action of an asset consolidates within converging trendlines creating a Triangle like shape. The pattern indicates that the price can move either direction, as an informed trader we must wait for a breakout and can take positions accordingly. Always use chart patterns with technical indicators to take high probable trading decisions. The three Triangle chart patterns are
The pattern is formed in an asset when the price creates higher lows and a horizontal resistance line. In the image we can clearly see that the that asset has formed an ascending triangle pattern and has broken out from the triangle pattern giving huge up movement towards upside direction. The pattern provides an insight that the price is nearing a potential breakout. This pattern indicates the traders and investors about the bullishness in an asset. But there is a chance for the asset to breakout in either direction.
Traders must trade triangle chart patterns keeping in mind that the price can move either direction breaking out from the pattern. So, it is better to wait for a clear breakout and trade accordingly.
This Pattern is formed in a chart when the price of an asset forms lower highs and a horizontal support line. In the image we can clearly see that the asset has formed a descending triangle pattern. When the chart pattern is broken out, we can see that there is a huge movement happening towards that direction. Descending triangle pattern indicates the traders and investors that the price is approaching a potential breakdown.
Breakout in descending triangle pattern can happen in either direction, so traders have to wait for a clear breakout to enter in a position.
Symmetrical Triangle pattern
This triangle pattern is formed in a chart when the price of the asset forms higher lows and lower highs and ends up consolidating towards a point. This pattern provides an insight to traders about clear indecision in asset. In the image we can see the asset price consolidating in between and forming a symmetrical triangle pattern. When the asset price breaks the upper trend line, we can see a huge movement towards upside.
Traders must wait for a breakout in the asset price above the upper trendline or below the lower trendline to confirm the trend and breakout to take informed decision accordingly.