What is a chart pattern ? Different types of chart patterns
Charts patterns provide an insight about the market trend and price action of an asset. Chart patterns help the market participants to understand the market behavior and to take informed decisions in financial market. chart patterns tend to repeat during certain market trend and market behavior. As traders we need to understand the best chart patterns to understand the logic behind for making intelligent trading decisions. There are different types of chart patterns that provide different insights to traders. Let’s understand the trend continuation chart pattern in detail and master it to generate fruitful returns from trading in financial market.
There are three different types of chart patterns, they are
Trend continuation chart patterns used in financial market
Trend continuation chart patterns provide insights to traders and investors when there is high probability for the trend in an asset to continue. These patterns represent the market trends and enable the market participants to take informed decisions. Trend continuation chart patterns tend to repeat over time as the investor sentiment repeats. Market participants can either take new positions or hold on to current positions when trend continuation chart patterns are formed in the price chart of an asset.
Bullish Rectangle and Bearish Rectangle chart pattern
- Let’s understand some characteristics to identify rectangle chart patterns
- The support and resistance levels of a rectangle pattern creating horizontal boundaries after a trend.
- Rectangle chart patterns will have almost similar Highs and Lows.
- pattern represents a consolidation in an asset price after a trend
- rectangle patterns can be short-term or long-term depending on the analyzed time frame.
A Bullish rectangle chart pattern is formed when the asset is in an uptrend and asset price consolidates in between support and resistance levels. The more the asset consolidates in a range, the breakout will be stronger from the range. The traders must wait for the asset price to breakout from the consolidation range to take a long position in market. This pattern tends to form frequently in an asset price after an uptrend, so traders who can master rectangle patterns will get great trading opportunities. The pattern indicates that there is high probability for the asset price to break the resistance and to continue the uptrend. Traders can use the support levels as stop loss for effective risk management.
Bearish rectangle pattern will be formed when the asset price consolidates between the support and resistance levels after a down trend. It indicates that there is high probability for the asset price break the support and to continue the down trend. Traders can use resistance levels as stoploss for entering a short position. All these patterns provide indication of price movement, clubbing price patterns with other indicators can help traders to take more confirmed entries. Traders must wait for the asset price to break from the consolidation range to capitalize the momentum.
Bullish pennant and Bearish pennant
- There will be a sharp and strong up move or down move before trend line consolidation.
- The pennant pattern is formed when the price consolidates in a converging trendlines forming a small symmetrical triangle after the strong up move or down move.
- Pennant patterns will be formed in any time frame. But longer time frame can provide stronger breakouts.
A Bullish pennant is a continuation pattern that is formed during an uptrend. Bullish pennant pattern initially provides a huge uptrend followed by a converging trend line consolidation forming a symmetrical triangle pattern. Bullish pennant pattern indicates that there is higher probability for the uptrend to continue after breaking out from the consolidation zone. Traders must wait for the asset price to break out from the consolidation zone to confirm the trend and can take high probable trades. Using technical indicators along with chart patterns helps to avoid false breakouts and enhance your trading journey.
Bearish pennant pattern initially provides a steep down move followed by a converging trendline consolidation forming a symmetrical triangle pattern. The pattern indicates that there is a high probability for a downtrend to continue after asset price breaks down from the consolidating range. It is better for traders to wait for a breakdown in asset price before entering a position. Traders can confirm the trend along with technical indicators like MACD, Moving Average, RSI etc. to avoid false breakouts.
Flag and pole chart pattern
The flag and pole chart patterns are like pennant pattern. Initially there will sharp price movement which is called the pole and followed by a period of consolidation. The pattern formation looks similar to a flag.
- The initial steep price movement that happens before the consolidation is called a pole.
- After the pole, the price consolidates in a trendline forming a flag pattern.
- Flag and pole forms usually in all time frames. Mainly during positivity in asset price during intraday.
Bullish Flag and pole chart Pattern
This pattern is formed when there is a steep up movement in an asset price followed by a consolidation. This pattern looks exactly like a flag. The up movement provides visual representation of a pole and consolidation zone looks like a flag on it. This pattern provides an insight to market participants that there is high probability for the uptrend to continue after breaking the trend line. Traders must enter trades with proper risk management as false breakouts are bound to happen in volatile market condition.
Bearish Flag and pole chart pattern
In Bullish flag and pole pattern there will be a steep down move initially followed by consolidation. This chart pattern provides insight to traders there is weakness in asset and there is high probability to continue the down trend. Traders must wait for the asset price to break down from the trend line to confirm weakness in the asset. Traders can enter short positions after confirming the breakdown keeping the trendline resistance as stop loss.
Cup and Handle patterns
Cup and handle pattern is an interesting chart pattern formed during an uptrend in an asset price. This pattern is a little complex to identify as compared to other chart patterns used in financial market. This pattern provides an insight about the strength in asset price. Traders can enter long position anticipating the asset price to move up along with good risk management to avoid losses.
- The cup formation resembles the rounded bottom, which represents consolidation in an asset price after a significant uptrend.
- handle is the slight downtrend formed in chart followed by the cup formation.
- The strength in the chart pattern increases as the depth and width of the pattern increases.