Chart patterns make an important part in the Technical analysis of stock trading. Understanding some basic stock chart patterns is essential for a stock trader.
In this article, you will learn about the 10 Essential and basic stock chart patterns that can definitely save your stock trades. You should definitely know these chart patterns before you proceed with your stock trading.
To know about the basics of stock trading, tradingcritique.com recommends you to read about Stock Trading: All you need to know about.
What are Stock Chart Patterns?
Stock chart patterns play an important role in any useful technical inquiry and can be a powerful asset for any trader at any level. The breakouts and reversals can give you profits when you learn to recognize the patterns early in your trading.
On a considerably basic level stock chart patterns are a way of looking at a series of price actions that occur during a stock trading period. The stock chart patterns can help you speculate the stock price movements in different times frames such as monthly, weekly, daily, intra-day, hours, minutes, and even seconds.
The important thing about the chart pattern is that they tend to repeat themselves over and over again. Stock chart patterns can contribute to identifying trend reversals and continuations.
The major stock chart patterns are Pennant, Cup and Handle, Ascending triangle, Descending triangle, Triple bottom, Inverse Head and shoulders, Bullish Symmetric triangle, rounding bottom, and Flag continuation.
Pennant
A pennant is created when there is a serious movement in the stock, followed by a period of strengthening, this creates the pennant shape due to the converging lines. As the stock graph moves according to the price direction, a breakout movement occurs in the same direction.
These are very much alike to flag patterns and tend to last between one and three weeks. There will be a significant volume at the initial stock movement, followed by weaker volume in the pennant section, and growth in volume at the breakout.
Cup and Handle
A cup and handle pattern gets its name from the understandable pattern it makes on the chart. The cup is a curved u-shape, while the handle slopes a little downwards. In general, the right-hand side of the diagram has a low trading volume, and it can last from 7 weeks up to around 65 weeks.
Ascending Triangle
This triangle usually appears during an upward trend regarded as an additional pattern. It is a Bullish pattern. Sometimes it can be created as part of a reversal at the end of a downward trend, but more commonly it is a continuation. Ascending triangles are eventually bullish patterns whenever they appear.
Descending Triangle
The descending triangle is another addition pattern, but this triangle is an irascible pattern and is usually created as a continuation during a downward trend. Now and then it can be seen as a reversal during an upward trend, but it is considered to be a continuation.
Triple Bottom
This triple bottom pattern is used in technical analysis as a predictor of an opposite position following a long downward trend. The triple bottom takes place when the price of the stock generates three distinct downward prongs, at around the same price level, before breaking out and reversing the trend.
Inverse Head and Shoulders
The reversal of a downward trend can be speculated using the stock chart pattern called the Inverse Head and Shoulders. It is also called the “head and shoulders bottom” or even a “reverse head and shoulders,” but all these names mean the same thing within technical analysis.
This stock chart pattern gets its name from its shape. The inverse head and shoulder pattern has one downward longer peak forming the head, followed by two downward level peaks on its either side which creates the shoulder.
Bullish Symmetric Triangle
The symmetrical triangle pattern is not difficult to spot, thanks to the different shape which is created by the two trendlines which converge. This pattern takes place by drawing trendlines, which connect a series of peaks and troughs. The trendlines create a barrier. A very sharp movement of price follows when it breaks through this barrier.
Rounding Bottom
This pattern is sometimes also called a “saucer bottom” and establish a long-term reversal showing that the stock is moving from a downward trend towards an upward trend instead. It can last anytime from several months to years. It is very much alike to the cup and handles, but in this case, there is no handle to the pattern, hence this name.
Flag Continuation
The flag chart pattern forms through a rectangle. The rectangle prospers from two trendlines which form the support and opposition until the price breaks out. The flag will have to slant trendlines, and the slope should move in a completely different direction to the original price movement. The buy or sell signal can be guessed when the price breaks through the support or resistance lines.
Heikin-Ashi (Average-bar) – A Better Candlestick
A candlestick chart tells you four numbers open, close, high, and low. But you use information from the past candles to create your Heikin-Ashi chart.
- Close price – The Heikin-Ashi candle calculates an average across the open, close, low, and high price.
- Open price – The candle will be the average of both the open and close of the previous angle.
- High price – The high price you see in your Heikin-Ashi candle is selected from the highest value of either the high, open, and close price.
- Low price – This time the high price in the candle is selected from either the high, open, and close price, but this time of the lowest value.
- The strategy also employs the use of momentum indicators. A simple stochastic oscillator with settings should do the trick.
- Short setup – If after several green candles, the price creates two successive red candles, the uptrend has extremely tired, and a reversal is on the cards. Short positions should be used.
- Long setup – If after a series of red candles, the price creates two successive green candles, the downtrend is extremely tired, and reversal again is on the cards. Long positions should be used.
- Filters – You also need to use other filters to avoid false signals and to improve performance.
- These charts, pattern and strategies may all be useful while buying and selling traditional stocks. But they also come in handy if you are interested in the less well-known form of stock trading .
One Final Conclusion
In conclusion, all the above-mentioned chart patterns are the basic chart patterns which you should thoroughly know being a stock trader. Finding out and predicting the future chart patterns is the key to make your stock trades successful.
Which of the chart patterns do you think is the most essential for stock trading? Comment your answers below. If you have any queries you can ask in the comments section below. Our Trading Critique Experts will answer it. Get answers to your personalized questions here. To get regular updates from tradingcritique.com, Subscribe to our Newsletter.
