Chart Pattern

Home > Glossary

Chart Pattern

A graphical presentation of price movement by using a series of trend lines or curves is called chart pattern.
Chart patterns are actually natural phenomenon of fluctuations in the price of a financial asset that is caused by a number of factors, including human behavior.
Chart patterns are the foundation of technical analysis.
Technically, chart patterns are used to find trends in the movement of an asset’s price.
A trader having knowledge required to recognize patterns, along with the skill to apply them to their decision-making process can increase their odds of anticipating where the price will move next.
The skill required to interpret the chart patterns correctly takes practice and commitment to acquire.
There are many different chart patterns that are used in technical analysis.
The most basic form of chart pattern is a trend line.
Popular chart patterns include head and shoulder formations, double and triple tops and bottoms, pennants, flags, and wedges.
Patterns can be based on seconds, minutes, hours, days, months, or even ticks and can be applied to a line, bar, candlestick charts.
Chart patterns aren’t bound by any scientific principle or physical law, their effectiveness highly depends on the number of market participants paying attention to them.

Pattern Types

There are two basic types of patterns: continuation and reversal.

Continuation Chart Patterns

Continuation patterns identify opportunities for traders to continue with the trend.
Triangle patterns, Flag patterns, and Pennant patterns are the most important chart patterns.

Reversal Chart Patterns

Reversal pattern is the opposite of a continuation pattern. These are used to look for scenarios to trade the reversal of a trend.
Reversal patterns seek to find where trends have ended.
“The trend is your friend until it bends.” is another phrase for those looking for a reversal in a trend.
Common reversal patterns are Double Tops and Double Bottoms, Head-and-Shoulders and Inverse Head and Shoulder patterns, and Triple Top and Triple Bottoms.

Why Do Chart Patterns Work?

Chart patterns work across all time frames because markets are fractal.
A recurring pattern that occurs amid larger price movements is called Fractals.
Trader Psychology is the main driving force behind price action, so these chart patterns work in all asset classes, from stocks, bonds, currencies, commodities, and cryptocurrencies.
Technical traders believe that price reflects all basic information, including market sentiment and perceived fair price.
If true, the chart pattern should be the ultimate predictor of future market movements.
Chart patterns need to be analyzed in the context of the trend which is key to successfully trading chart patterns.
The chart patterns, we can use to know the continuity or reversal of the trend because determining a dominant trend is paramount.
It is important to look at the psychology behind the price and the supply and demand forces that give these chart patterns their shapes to understand the reason behind the functionality of the chart pattern.

The Psychology behind Chart Patterns

To understand the price action, you need to read the charts through a lens that shows what other market participants are thinking.
Market psychology is the base of chart pattern because these price formations reflect the buying and selling pressures in a visual format.
The supply and demand forces are the ones that shape these price patterns.
A chart provides a complete pictorial record of all trading activity and can provide us with a framework to analyze the battle raging between the bulls and the bears.
Significantly, chart patterns can assist us in finding out who is winning the bulls and bears battle.
Trading tells who is winning this battle because it will allow you to trade according to market sentiment.
No matter the time frame you use to trade these chart patterns, they still work because emotions and demand and supply are universal laws.
Because orders are collected by humans, the thing that forms the price chart is the buying and selling orders or the forces of supply and demand.
Each chart pattern has a story that forms the current shape of the pattern.
For example, a bull flag indicates that bulls are no longer buying, but they hold and defend their position by keeping the price within a narrow range.
Flag patterns are a powerful price action because it incorporates the trend in the price structure.
A top-down approach to trading chart patterns incorporates three main steps.

Determine the time in which you want to trade, which reflects the type of your trader. Intraday charts such as 5 and 15 minutes are commonly used to scale the day trade or market. The 4 hour and daily chart can be used for weekly and monthly time frames for swing trading and position trading.
Identify the dominant trend of your preferred time frame.
Once you see the dominant trend, you can then spot chart patterns to time the market.

You have to avoid trading based entirely on chart patterns without establishing a framework as you will end up trading on pure emotion.
Context and planning are the backbone of good business decisions.

Chart Pattern vs. Candlestick Pattern

What’s the difference between a candlestick pattern versus a chart pattern?

CANDLESTICK PATTERN	CHART PATTERN
A mix of one or more candlesticks gives rise to a candlestick pattern.	When the price changes as a result of psychological and fundamental aspects over a long time period, it gives rise to chart patterns.
Candlestick patterns appear over a short time span.	The trend direction is shown for a longer time span.
The trend direction is indicated for a short time span	The change in trend direction can also be indicated by chart pattern.
This pattern is adapted for short-term entry & exit points.	This pattern is adapted for longer-term buy and sell signals.

A

B

C

E

Economic Indicators

Add a Comment

Comments will be shown after admin approval.

Name *

Email *

Mobile *

City *

Your Comment *

Question: What is capital of Pakistan?

(Answer can be from islamabad | lahore)

Spam comments will not be approved at all.

Amount

Select Source Currency

Select Target Currency