8 Classical Chart Patterns in Trading
There are so many techniques for utilizing the technical analysis to analyze financial markets. Traders tend to lean towards using popular tools like indicators, price action, and oscillators. Classical chart patterns have long been used to observe present market movements and forecast future movements.
The transition between falling and rising trends are usually signaled by price patterns. Any recognizable format for price movement using a series of trendlines may be defined as a price pattern. Candlestick charts are a mainstay in presenting a historical overview of prices over a period of time. Studying an asset's price action could lead to the identification of patterns that repeat methodically. So what are these patterns?
What Are The Classical Chart Patterns?
Technical patterns are not necessarily scientific by nature, the use of its principles are largely based on a certain 'crowd psychology', which gets more effective the more traders pay attention to them.
Classical chart patterns are a collective of popularly observed candlestick patterns used to take advantage of different markets like forex, stock, and cryptocurrency. These well known classical patterns are seen by many traders as reliable trading indicators. There are two major categories of these classical chart patterns, they are;
• Reversal patterns: they are identified when there is a signal of a change in direction of a price pattern
• Continuation patterns: these are identified as when after a brief pause, the trend continues in its present direction
This is an area of merge going against the longer term's trend direction. It resembles a flag pole when viewed on a chart, where the flag is the consolidated area and the pole is known as the impulsive move.
Flags usually occur after a sharp price movement in the charts. These flags are regularly used to find out the potential continuation of a trend. It is also vital to observe the volume accompanying the pattern as they are very important.
If all factors responsible are ideal, there should be lowering and decreasing of volume during consolidation phases and much higher volume during impulse move. The formation of a flag in the price chart usually leads to a decline in volume until it breaks out of flag formation, then it slowly recovers. The flag pattern possess five(5) main characteristics, namely;
• A breakout
• A preceding trend
• The consolidation channel
• The volume pattern
• A confirmation of the price moving in the same direction as the breakout
Upward trending flag patterns are referred to as bullish flags. The volume pattern of a bull flag increases in a preceding trend and the consolidation, it decreases. In the price chart, the bull flag occurs in an uptrend, followed by a sharp move upwards and the preceded usually by the further continued movement towards the upside.
The bearish flag on the other hand is characterized by downward flag patterns. A bear flag volume pattern increases and then plateaus at a certain level because bearish trends usually increase in volume with time. Unlike the bullish flag pattern, the bear flag doesn't always decline during consolidation since downward trends are caused by investor anxieties over falling prices, this thus leads to remaining investors getting proactive.
They are a variant of flags where the consolidated area has convergent trendlines. Its formation is largely neutral, meaning its interpretation is dependent on the context of the pattern. Pennant patterns are continuation patterns formed when there is a large security movement, referred to as flagpole.
This is then preceded by a consolidation period with converging trendlines, followed by a breakout moving in the same direction as the previous large movement. It is normal to see traders enter new positions, short or long, after a breakout from the pennant chart pattern.
Triangles are characterized by drawing trendlines along a convergent price range, this implies a pause in the prevailing trend. They are widely categorized by technical analysts as continuation patterns.
The triangle pattern in the price charts indicates a pause in the underlying trend but may also show a continuation or reversal. These patterns are similar to the pennant. They can also be classified as a reversal pattern in the event of failure. There are three types of triangle patterns, namely;
• The ascending triangle
• The descending triangle
• and the symmetrical triangle
An ascending triangle is a chart breakout pattern creates when the upper horizontal trendlines are breached by the price with rising volume. It is formed when price allows a rising trendline to be drawn along the swing highs and a horizontal line to be drawn along the swing lows. The convergence of these lines forms a triangle.
Ascending triangles are usually referred to as continuation patterns because the price will usually breakout in the exact direction of the previous trend before the triangular form. Once the breakout forms the triangle happens, there is an aggressive sale and purchase of assets largely dependent on what direction it broke out.
The descending triangle is the opposite of the ascending triangle both in shape and pattern. It is considered a breakdown pattern. It is a bearish chart pattern formed by drawing a trend line connecting a series of lower highs and another trendline connecting a series of lows.
A move below the lower support trendline that the downward momentum is building and breakdown is imminent. This is what traders usually look out for, and the breakdown occurs, they enter into short positions and proactively push the asset prices lower.
Descending triangles are very popular among traders because they show clearly the weakening of the demand for an asset, commodity, or derivative.
This chart pattern is characterized by two convergent trendlines connecting a succession of troughs and peaks. These lines usually converge at a roughly equal slope. They represent a consolidating period before the forceful breakdown or breakout of the price. A breakout from the upper trendlines signals the beginning of a new bullish trend, while, a breakdown from the lower trendline indicates the start of a new bearish trend.
Classical chart patterns are very popular among traders because of their acknowledgment by fellow professionals. Although it is dependable, just like all other technical analysis tools, it is subject to the market trends. Methods that may work in a certain market may flop in another, this is why trendlines are very important. Also, make it a habit to exercise good risk management and search for confirmation.
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