Very often, the direction of a rising or falling trend has changed. A price pattern, according to technical analysis, refers to a recognizable configuration of price action that can be identified by examining a series of trendlines and/or curves. There are hundreds of patterns applied by traders. Here’s how patterns are constructed and some of the most commonly used ones: Since price patterns are combinations of lines or curves, it is very useful to know what a trendline is and how to draw one. Trendlines fulfil an excellent function in technical analysis by providing possible support and resistance levels on a price chart. Simply stated, trendlines are nothing but drawn straight lines on a chart by wrapping a piece of string around a series of declining peaks-highs or rising troughs-lows. Where prices make a series of higher highs and higher lows, the trend lines slope up—often referred to as an uptrend line. The uptrend line connects upsloping lows. It is a “Cup and Handle” pattern as part of technical analysis in the form of an uptrend continuation “Cup and Handle”; it’s a “U”-shaped “cup” followed by a smaller sideways consolidation period called the “handle.” Watch for a rounded bottom “cup” formation to be followed by a smaller downward sloping consolidation phase forming the “handle,” where a breakout above the handle’s high marks an important bullish signal and entry point for a trade; high volume during the breakout puts the icing on the cake in confirming the strength of the pattern. An angled downward trend line would be called a downtrend line where prices have lower highs and lower lows. There are several theories regarding drawing the trend line from the top end of the price bar or the bottom end, but it is more often than not the body of the candle bar that indicates where the greater portion of the price action happened and thus can give a truer point from which to draw the trend line, especially in intraday charts in which “outliers” may exist. “Essential Chart Patterns” refer to the most common and accepted price patterns through technical analysis that a trader or investor uses to anticipate what is going to happen in future market movement. A price pattern that signals a temporary reversal of an already established trend is considered a continuation pattern. Continuation patterns can be viewed as a temporary halt of a prevailing trend. It is at a point where the bulls catch their breath in an uptrend or the bears catch their breath in a downtrend. In that regard, very close attention must be paid to the trendlines used to draw the price pattern and whether the price breaks above or below the continuation zone. Generally, technical analysts tend to hold on in hopes that a trend will continue until it is proved that the real deal indeed changes. A reversal pattern is one of price that foretells the alteration of the current trend. Such patterns depict times when bulls or bears have wasted their energy. The established trend stops, then reverses as the energy from one side of the market—supporting bulls or bears—leaps into the fray. In a bull-backed uptrend, it pauses to portray equal pressure between the bulls and the bears before finally yielding to the bears. It yields a trend change to the downside. The reversals that appear at the top of the markets are known as distribution patterns when the instrument traded sells more eagerly than it buys. On the other hand, those reversals that appear at the bottom of the markets are known as accumulation patterns when the traded instrument becomes more eagerly bought than sold. Pennants are continuation patterns drawn using two trend lines, which eventually converge. Another characteristic feature of pennants is that there are always moving trend lines in two directions—one will be a downtrend line, and the other will be an uptrend line. Following is an example of a pennant. Generally, volume decreases while it is making a pennant, and then it picks up on its breakout at last. Therefore, a sloping downward wedge is a pullback of an uptrend, while a positive sloping wedge is a demand to short-term stop the market down. Volume tends to dissipate during the formation of the pennants and flags, then it erupts once the price takes off above or below the wedge pattern. Wedges are not triangles and pennants; they only reflect the price fluctuation above and below. Therefore, in general, the wedge shows an angle. So, it looks like an upward trend has been paused; it will continue again when confirmation of the pattern is given. A head and shoulders pattern is a reversal pattern, an expression of the top or bottom of the market in the form of three pushes: a first peak or trough followed by a second, and larger one, and then a third push that looks like the first. A rising trend interrupted by a head and shoulders top may go into a trend reversal in the direction of decline. A downtrend, which will be completed as a head and shoulders bottom or an inverted head and shoulders, is likelier to change the trend upward.
