FOUR MOST HAPPENING CHART PATTERNS YOU SHOULD KNOW ABOUT

Here’s a simplified overview of four common chart patterns used in technical analysis:

Head and Shoulders

The Head and Shoulders pattern is a well-known reversal pattern in technical analysis that suggests a change in trend direction, usually from an upward (bullish) trend to a downward (bearish) trend.

The pattern has three peaks:

Left Shoulder Formation: The price goes up to a peak and then falls, creating the left shoulder.

Volume: Volume usually rises as the price increases, then decreases as it falls.

Head Formation: The price rises again, forming a higher peak than the left shoulder, then declines. This peak is the head.

Volume: Volume often peaks here, usually higher than during the left shoulder.

Right Shoulder Formation: The price rises again but only reaches a peak similar to the left shoulder before falling. This is the right shoulder.

Volume: Volume may decrease as it approaches this peak, often lower than during the head.

 

Entry line:

The  entry line is created by connecting the lowest points (troughs) between the left shoulder and the head, and between the head and the right shoulder.
This line acts as a support level, and breaking below it confirms the pattern.

Note:

Reversal Signal: When the Head and Shoulders pattern is complete, it suggests a possible shift from a bullish to a bearish trend.

Price Target: To estimate how far the price might drop after the breakout, measure the distance from the head to the neckline and project that distance downward from the breakout point.

Inverted Head and Shoulders:

This is the reverse of the standard pattern, indicating a possible change from a bearish trend to a bullish one.

Left Shoulder: A trough followed by a rise.

Head: A lower trough followed by a rise.

Right Shoulder: A trough similar to the left shoulder followed by a rise.
The neckline is drawn across the peaks, and breaking above this line confirms the pattern.

Note:

Time Frame: The Head and Shoulders pattern can form on different time frames, from short (intraday) to long (daily or weekly). Longer time frames are generally more reliable.

Volume Analysis: Monitoring volume can help confirm the pattern. Higher volume during the head formation and lower volume during the right shoulder can indicate a strong reversal.

Confirmation: A breakout below the neckline (for the standard pattern) or above the neckline (for the inverted version) should ideally happen with increased volume for stronger confirmation.

Limitation:-

False Breakouts:

These can happen, so it's wise to use other indicators (like RSI or MACD) or candlestick patterns for extra confirmation.
Patience Required: The pattern can take time to fully develop.

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Double Top and Double Bottom:

The Double Bottom is a bullish reversal pattern that appears after a downward trend. It shows that the price has tried to fall to a support level twice but failed, indicating a possible price increase.

First Trough:
The price drops to a low, creating the first trough. This low often comes with high volume as sellers push the price down.

Peak:
After the first trough, the price rises to a peak, marking a brief recovery before falling again.

Second Trough:
The price declines again to form a second trough, which is about the same level as the first one. This second trough may have lower volume, suggesting that selling pressure is weakening.

Entry line
The entry line is drawn at the peak between the two troughs and acts as a resistance level. A breakout above this neckline confirms the pattern.

[Note]:
Reversal Signal: When the Double Bottom pattern is confirmed, it suggests a possible change from a bearish trend to a bullish trend.

Price Target: To estimate how high the price might go after the breakout, measure the distance from the troughs to the neckline and project that distance upward from the breakout point.

Volume Confirmation: Higher volume during the first trough and lower volume during the second can make the pattern more reliable.

Time Frame: The Double Bottom can occur on different time frames, but longer patterns are usually more trustworthy.

Limitations

False Signals: Just like with the Double Top, false signals can happen. If the price quickly pulls back after breaking out, it can invalidate the pattern.

Use Additional Indicators: It's helpful to use other technical indicators for confirmation.

WEDGES

1. Rising Wedge:

A Rising Wedge is typically seen as a bearish pattern, suggesting that prices may fall. It forms during an upward trend when prices are reaching higher highs and higher lows, but the strength of the upward movement is decreasing.

Trend Lines: The pattern has two upward-sloping lines that come together.

Higher Highs: Prices continue to reach higher peaks.

Higher Lows: Prices also create higher lows, but the pace slows down, showing less buying pressure.

Volume Characteristics:

Usually, volume decreases as the pattern progresses, indicating weaker demand.

Breakout:
A breakout happens when the price drops below the lower trend line, often with increased volume, confirming a bearish reversal.

Key Points:
Trend Reversal: A breakout from a Rising Wedge typically means a shift from a bullish trend to a bearish one.

Price Target: To predict how far prices might drop, measure the height of the wedge at its widest point and extend that distance downward from where the breakout occurs.

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2. Falling Wedge:

A Falling Wedge is usually seen as a bullish pattern, indicating that prices may rise. It forms during a downward trend when prices make lower highs and lower lows, but the downward strength is weakening.

Trend Lines: The pattern features two downward-sloping lines that converge.

Lower Highs: Prices consistently reach lower peaks.

Lower Lows: Prices also form lower lows, but at a slower rate, showing decreasing selling pressure.

Volume Characteristics:
Volume may drop as the pattern develops, indicating less supply.

Breakout:
A breakout occurs when the price rises above the upper trend line, often with increased volume, confirming a bullish reversal.

Key Points:
Trend Reversal: A breakout from a Falling Wedge usually signals a change from a bearish trend to a bullish one.

Price Target: To estimate how far prices might rise, measure the height of the wedge at its widest point and project that distance upward from the breakout point.

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General Considerations for Wedges:
Time Frame: Wedges can appear on various time frames, from short-term (intraday) to longer-term (daily and weekly). Longer time frames are generally more reliable.

Confirmation: Always look for confirmation through volume and other technical indicators when trading wedge patterns. Increased volume during the breakout is crucial for confirming the signal.

Market Context: Assess the overall market situation and trends before relying on wedge patterns. Wedges can form in different market conditions, so it's important to see if the overall trend aligns with the expected reversal.

Limitations:

False Breakouts: Like other patterns, wedges can sometimes lead to false breakouts, where prices move as expected but quickly reverse, invalidating the pattern.

Subjectivity: Identifying wedges can be somewhat subjective, as different traders may interpret trend lines differently.

Cup and Handle:

The Cup and Handle pattern shows that the price has first dropped (forming the cup) and then consolidated (forming the handle) before likely moving up again.

Cup:
Formation: The cup looks like a rounded bottom and forms after a price decline, usually over several weeks or months.

Depth: Ideally, the cup shouldn't drop more than 30% from its highest point to its lowest.

Volume: Volume typically goes down as the price drops but starts to rise again as the price begins to increase.

Handle:
Formation: The handle appears after the cup and looks like a slight pullback or period of consolidation, lasting a few days to weeks.

Shape: The handle should ideally decline slightly and not fall more than 10% from the cup's peak.

Volume: Volume usually decreases during the handle's formation but may increase during the breakout.

Breakout:
A breakout happens when the price goes above the resistance level set by the cup's peak. This confirms the pattern and indicates a potential price increase.

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KEY POINTS:

Trend Continuation: The Cup and Handle pattern suggests that the previous upward trend will continue, signalling that buying pressure is likely to resume after the consolidation.

Price Target: To predict how much the price might rise after the breakout, measure the distance from the bottom of the cup to the peak. Then, add that distance to the breakout point to find the target price.

Time Frame: This pattern can form over different time frames, from daily to weekly charts. Longer patterns are generally more reliable.

Volume Confirmation: It's important to see increased volume during the breakout above the handle's resistance, as low volume may mean the breakout isn't strong.

Market Context: Always consider the overall market conditions before relying on the Cup and Handle pattern. The broader market trend should support a bullish outlook.

Limitations:

False Breakouts: Like other patterns, the Cup and Handle can have false breakouts, where prices go above resistance but then quickly drop back down, invalidating the pattern.

Subjectivity: Identifying the Cup and Handle can be subjective, as different traders may interpret its shape differently.