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Chart patterns can provide one with a clearer perspective into the underlying strength and direction of the market by presenting a complete pictorial record of all trading. More importantly, chart patterns and technical analysis can help determine who is winning the battle between the bulls and the bears, allowing traders and investors to position themselves to enter or exit the market accordingly.
Moreover, chart pattern analysis can be used to make short-term or long-term forecasts. The data can be intra-day, daily, weekly or monthly and the patterns can be as short as one day (with intra-day charts) or as long as years (with monthly charts).
But identifying certain patterns and what they generally forecast is not as easy as pure memorization. Pattern recognition is open to interpretation and can become biased even at the best of times. Other aspects, or tools, of technical analysis should always be applied to confirm or refute one's pattern analysis. While many patterns may seem very similar, no two patterns are exactly alike. That is where constant studying and years of experience can help in reducing the amount of false signals.
In general, chart patterns tend to fall into two categories: reversal and continuation. Reversal patterns indicate a change of the current trend while continuation patterns indicate a pause in the trend, or consolidation, and indicate that the previous direction will resume after a period of time.
Some of the more popular reversal patterns include:
Double Top
Double Bottom
Triple Top
Triple Bottom
Head and Shoulders Top
Head and Shoulders Bottom
Rising Wedge
Falling Wedge
Rounding Bottom
And continuation patterns include:
Cup with Handle
Flags and Pennants
Symmetrical Triangle
Ascending Triangle
Descending Triangle
Price channels
Rectangle
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