Classic Chart Patterns

jason bond Classic Chart Patterns

Classic Chart Patterns

There are two different categories of classic chart patterns: Bullish trend reversal and the Bearish trend reversal chart patterns.

Classic is a name used to identify a collection of formations that typically have a longer-time horizon (greater than 13 trading days) and that have noticeable price swings such that the price swings shape characteristic patterns. The names of classic formations usually indicate the shape of the formation such as the Wedge, Cup and Handle, Head and Shoulders Top, Descending Triangle and so on.

Chart trading patterns are commonly habitual price patterns that are common to all markets. Stock charts are used to ascertain a continuance, a reversal, or a consolidation of a trend. Most chart patterns have a more bullish or bearish prejudice. Other patterns require a breakout confirmation before the direction of the trend can be established.

Bullish:

Ascending Triangle Chart Pattern

ascending triangle pattern Classic Chart Patterns

Ascending triangles develop in uptrends and are characterized by a sequence of higher lows but the same highs. They have a clear-cut bullish prejudice and in general appear in 1 to 7 weeks.

Bears have lost the capacity to take the stock back down to the preceding low whilst bulls are able to take the stock back to the preceding high.

The better breakouts take place ½ to ¾ in. Breakouts should be accompanied by a large increase in volume. Failure to achieve this does not make the breakout null, but a red flag is raised as the pattern gets less reliable.

Cup and Handle Chart Pattern

cup and handle pattern Classic Chart Patterns

Cup and handle patterns are continuance patterns that form in uptrends and consequently have bullish implications. Their completion signals the end of a consolidation period and the continuance of its bullish uptrend.

candlestick trader Classic Chart Patterns

The cup forms because many stock traders make a decision that after the good rally, they now would like to take profits. This profit taking traps those who were late-to-the-party buyers who purchased at the peak. Those who ran after the stock and went long high are angry or worried and just want to “get out even.” Weeks later when the stock trades close to the first climax, many stock traders leap at the chance and start selling. Thus a second pullback begins. When an adequate amount of time has passed (the formation of the handle), the stock is free to trade higher for there is now an absence of stock traders who will sell at the first good occasion.

Cup and Handle patterns often take several months and on occasion over a year to develop.

The same breakout requirements govern as with other breakouts. Volume ought to increase to authenticate the breakout.

Double Bottom Chart Pattern

double bottom pattern Classic Chart Patterns

Volume in a double bottom is often higher on the left bottom than the right. Volume tends to be downward as the pattern forms. Volume does, however, increase as the pattern hits its lows. Volume picks up all over again when the pattern completes, breaking through the confirmation level.

Flag (Bullish) Chart Pattern

flag pattern Classic Chart Patterns

Bullish flags are small continuance patterns that correspond to short pauses within a previous existing uptrend. They look flat or trade with a minor downward tilt and typically take place in the middle of a substantial rally or the instant after a stock has broken out of a basing period.

Whether a bullish flag pattern forms during a significant rally or after breaking out of a consolidation period, the expected price action upon breakout is approximately equal to the earlier move into the flag.

Head and Shoulders Bottom Chart Pattern

head and shoulders pattern Classic Chart Patterns

Bullish head and shoulders bottoms are reversal patterns that look like substantial basing periods after a significant downtrend. Its completion signals a trend reversal. Three successive troughs illustrate the pattern with the center one being the deepest and the two outside ones being shallower and just about equal.

The pattern is complete when the resistance marked by the neckline is broken. This occurs when the price of the stock, rising from the low point of the right shoulder moves up through the neckline. Many technical analysts only judge the neckline broken if the stock closes above the neckline.

It is critical to watch volume at the point where the neckline is broken. For a true reversal, strong volume is necessary.

Pennant (Bullish) Chart Pattern

pennants Classic Chart Patterns

Pennants are tiny continuance patterns that stand for short pauses within an already existing trend. They are characterized by converging trendlines and have a definite bullish or bearish partiality depending on the overall trend.

Bullish pennants on average appear in the center of large rallies or the moment after a stock has broken out of a basing period.

Bullish breakouts should be accompanied by a substantial increase in volume.

Symmetrical Triangle (Bullish) Chart Pattern

pennants Classic Chart Patterns

Bullish symmetrical triangles stand for neutral periods of uncertainty and vacillation. They are illustrated by a string of higher lows and lower highs as the forces of supply and demand are nearly equal. Each rally is seen as a selling chance whilst each dip is met with buying. The pattern is typically big and takes several months or more than a year to form.

candlestick trader Classic Chart Patterns

The top breakouts happen ½ to ¾ of the way through the pattern. A stock seems to gain energy as it is squeezed together into the triangle, but that energy vanishes beyond the ¾ level. It is suggested that investors discard a stock that trades beyond the ¾ mark for very little movement is likely to take place. Volume as a rule diminishes as the pattern develops because stock traders become more and more uncertain as to the stock’s forthcoming direction. Then, seemingly without warning, the stock explodes out of the pattern.

Bullish symmetrical triangles appear in uptrends and in general resolve themselves to the upside. Breakouts to the upside must include a considerable increase in volume to confirm the breakout.

The expected price movement upon breakout is roughly equal to the widest part of the pattern.

Wedge (Bullish) Chart Pattern

wedge chart pattern Classic Chart Patterns

jason bond Classic Chart Patterns

Bullish wedges characterize short-lived pauses within a previously existing uptrend. They are characterized by converging trendlines and have a clear-cut bullish partiality. They are similar to bullish pennants with the exception of where pennants are generally flat, wedges have a definite slant against the overall trend.

Bullish wedges, in general, appear in the center of a large rally or the moment after a stock has broken out of a basing period.

Bullish breakouts should be accompanied by a significant increase in volume with correct stops used if this is not seen.

Bearish:

Descending Triangle Stock Chart Pattern

descending triangle pattern Classic Chart Patterns

Descending triangles appear in downtrends and are characterized by a string of lower highs but similar lows. They have a definite bearish prejudice and normally form in 2 to 9 weeks.

The better breakdowns take place ½ to ¾ of the way through the pattern. Breakdowns that are deferred until prices crowd into the apex regularly fail or are mediocre at best.

The top downside breaks occur on typical volume followed by the stock drifting lower for a few days. Volume then picks up as stock traders throw in the towel, and the stock falls.

Double Top Stock Chart Pattern

double top pattern Classic Chart Patterns

A double top takes place when prices form two definite peaks on a chart. A double top is only complete, however, when prices decline below the lowest low.

The double top is a reversal pattern of an upward trend in a stock’s price. The double top marks an uptrend in the process of becoming a downtrend.

Occasionally called an “M” formation because of the pattern it forms on the chart, the double top is one of the most often seen and common of the classic chart patterns.

Volume in a double top is frequently higher on the left top than the right. Volume has a tendency to be downward as the pattern takes shape. Volume does, however, pick up as the pattern hits its peaks. Volume increases again when the pattern completes, breaking through the confirmation mark.

Flag (Bearish) Stock Chart Pattern

bearish flag pattern Classic Chart Patterns

Bearish flags are little continuation patterns that symbolize short pauses within an already existing downtrend. They look flat or trade with a slight upward slope and take place in the center of a large drop or immediately after a stock has broken down from a considerable rally.

Whether a bearish flag pattern forms during a large fall or after breaking down from a distribution period, the projected price movement upon breakout is approximately equal to the preceding move into the flag.

Head and Shoulders Top Stock Chart Pattern

head and shoulders top pattern Classic Chart Patterns

A bearish head and shoulders top is a reversal pattern that forms as a substantial distribution period after a large uptrend. Its completion signals a trend reversal. Three succeeding peaks distinguish the pattern with the center one being the tallest and the two outside ones being shorter and roughly equal.

Breakouts to the downside do not have the identical volume or movement necessities as their bullish counterparts. In actuality, when stock breaks support with a massive volume rise, it often signals that of a capitulation sell-off and the stock rebounds shortly after. The greatest downside breaks arise on regular volume followed by the stock wandering lower for a few days on increasing volume. Psychologically, when a stock first breaks support, stockholders become alarmed; many of them show a loss and some sell. As the stock trades lower, anxiety becomes panic and the selling accelerates. After fear becomes panic, stock traders sell regardless of price. This is why there, on average, is a delayed volume rise with breaks to the downside.

Pennant (Bearish) Stock Chart Pattern

bearish pennants Classic Chart Patterns

Pennants are small continuance patterns that stand for brief pauses within an already existing trend. They are illustrated by converging trendlines and have a unambiguous bullish or bearish partiality depending on the overall trend.

Bearish pennants take shape in the center of significant drops or the moment after a stock has broken down from a significant rally.

Downside breaks do not have the similar volume requirement as their bullish counterparts. Like other bearish breaks, there often is a delayed volume increase.

Symmetrical Triangle (Bearish) Stock Chart Pattern

bearish pennants Classic Chart Patterns

Bearish symmetrical triangles represent neutral periods of hesitation and vacillation. They are illustrated by a string of higher lows and lower highs as the forces of supply and demand are nearly identical. Each rally is seen as a selling opportunity whilst each dip is met with buying. The pattern is usually large and takes a couple of months or more than a year to form.

The best breakouts happen ½ to ¾ of the way through the pattern. A stock seems to gain energy as it is compressed into the triangle, but that energy dissipates beyond the ¾ mark. Volume on average falls off as the pattern forms because traders become more and more uncertain as to the stock’s future direction. Then, apparently without forewarning, the stock explodes out of the pattern.

Breakdowns do not have the same volume or movement requirements as their opposite upside breaks. In reality, when a stock breaks support with a massive volume swell, it often signals that of a capitulation sell-off and the stock rebounds shortly after. The greatest downside breaks arise on normal volume followed by the stock drifting lower for a few days on increasing volume. Psychologically, when a stock first breaks support, investors become concerned; many of them show a loss and some sell. As the stock trades lower, concern becomes fear and the selling picks up. Then fear becomes terror, and people sell regardless of price. This is why there usually is a delayed volume increase with breaks to the downside.

Wedge (Bearish) Stock Chart Pattern

bearish wedge pattern Classic Chart Patterns

Bearish wedges are tiny continuance patterns that correspond to transitory pauses within an already existing downtrend. They are illustrated by converging trendlines and have a unambiguous bearish bias. They are similar to bearish pennants with the exception of where pennants are generally flat, wedges have a definite slant against the preceding trend.

Downside breaks do not have the similar volume requirement as their bullish counterparts. Like other bearish breaks, there often is a late volume increase.

The projected price movement upon breakout is just about equal to the distance of the move into the pattern.


Classic Chart Patterns