Classic Chart Patterns are patterns which represents historical overview of prices over time. It includes different ways to analyze the financial market using technical analysis. Some traders use indicators and oscillators while some base their analyses on price action. When the Classic Chart Patterns are formed as a bullish reversal pattern they are said to be part of accumulation. On the other hand, if they are formed at the top of a price move just before a bearish reversal, then they are part of the distribution.
What are Classic Chart Patterns ?
- Classical or traditional chart patterns refer to a group of widely common price formations formed on price charts. These charts are an integral part of technical analysis methodology and are widely used by analysts and technical traders to predict future price movements and establish a trading strategy.
- Technical chart analysis is based on the idea that prices tend to move in waves or trends and that past price performance can strongly indicate the future price movement of an asset.
- Often these classical patterns are based on support and resistance levels and trend lines. When the pattern appears traders are looking for a level where the price breaks above or below a certain price levels and by using this data, they estimate the future direction of the market.
Understanding Classical Chart Patterns
- The chart patterns are tools that traders use to enter and exit a trading position. Its important to understand how these chart pattern works. Most charting methods including classical charting make use of implied psychological or behavioral motivations. Classical chart patterns such as head and shoulders triangles and others are thought to be indicative of pool operators or inside interests who intentionally manipulate the market in distinct phases referred to as accumulation, markup distribution and markdown.
- Regardless of the underlying causes attributed to their formation, classical chart patterns rely chiefly on the interpretation of trend lines, geometric formations and price and volume relationships.
- Classical Chart Patterns are believed to be great indicators of market sentiments. They often form around support or resistance levels. These trend lines indicate areas where traders were interested in exchanging their assets holding and time plus trades will draw these patterns.
Let us understand different types of Classical Chart Patterns
Head and Shoulder Chart Pattern
- Head and Shoulder Pattern is a bearish reversal pattern. It appears after an uptrend. This pattern is formed with three consecutive tops with the middle one being higher than the other two. The middle top is called the head and the two side peaks are called shoulders.
- On joining the intermediate troughs, neckline is formed. The target is usually a short trade is taken with a stop loss above the top of the nearest shoulder. The target is usually considered as the distance between the neckline and head, projected from the point of break.
- If the volume in the down leg of the right shoulder is on the higher side and breakout happens with high volume, the conviction is on the higher side of the reversal. An inverse Head and Shoulder is just a mirror image of the Head and Shoulder. This often acts as a very effective bullish reversal pattern.
- Triangles are one of the most well known chart patterns. It is used in technical analysis. The three most common types of triangles which vary in construction and implications are Symmetrical Triangle, Ascending Triangle and Descending Triangle.
- These charts lasts for a week or several months. Unlike other chart patterns which signals a clear directionality to the forthcoming price movement, triangle pattern can anticipate either a continuation of the previous trend or a reversal.
Double Bottom and Double Top Patterns
- A double top is a bearish pattern that is very commonly used. The stock price will form a peak and then retrace back to a level of support. It will then form a peak once more before reversing back from the prevailing trend. It looks like M pattern. A double bottom is a bullish reversal pattern that is totally opposite of a double top.
- The stock price will form a peak and then retrace back to a level of resistance. It will then form a peak once more before reversing back from the prevailing trend.
Triple Bottom and Triple Top Chart Patterns
- A triple top chart pattern is a bearish reversal chart pattern that is formed after an uptrend. This pattern is formed with three peaks above a support level/neckline. The first peak is formed after a strong uptrend and then retrace back to the neckline. This first peak is formed after a strong uptrend and then retrace back to the neckline. The formation of this pattern is completed when the prices move back to the neckline after forming the third peak.
- When the prices break through the neckline or the support level after forming three peaks then the bearish trend reversal is confirmed.
- A triple bottom chart pattern is a bullish reversal chart pattern that is formed after the downtrend. This pattern is formed with three peaks below a resistance level/neckline. The first peak is formed after a strong downtrend and then retrace back to the neckline. The formation of this pattern is completed when the prices move back to the neckline after forming the third peak.
- When the prices break through the neckline or the resistance level after forming three peaks then the bullish trend reversal is confirmed.
Cup and Handle Chart Pattern
- Cup and Handle Pattern is known as a bullish signal, with the right hand side of the pattern experiencing lower trading volume. The pattern’s formation may be short as seven weeks or as long as 65 weeks. A cup and handle is a technical chart pattern that resembles a cup and handle where the cup is in the shape of “u” and the handle has a slight downward drift. To qualify as a continuation pattern, a prior trend should exist.
- The softer “U” shape ensures that the cup is a consolidation pattern with valid support at the bottom of the “U”. The perfect pattern would have equal highs on both sides of the cup, but this is not always the case.
- After the high forms on the right side of the cup, there is a pullback that forms the handle. Sometimes this handle resembles a flag or pennant that slopes downward, other times it is just a short pullback.
- The smaller the retracement the more bullish the formation and significant breakout. The cup can extend from one to six months, sometimes longer on weekly charts. The handle can be from one week to may weeks and ideally completes within one to four weeks.
Pennants or Flag Chart Patterns
- Pennant is a continuation pattern formed when there is large movements in the security followed by a consolidation period with converging trend lines-the pennant-followed by a breakout movement in the same direction as the initial large movement, which represents the second half of the flagpole.
- The flag and pennant chart patterns are commonly found in the price charts of financially traded assets. The patterns are characterized by a clear direction of the price trend.
Rounding Bottom and Rounding Top Chart Patterns
- The rounding top and bottom are reversal patterns designed to catch the end of a trend signal a potential reversal point. The Rounded Top appears as an inverted ‘U’ shape and is often referred to as inverse saucer. It signals the end of an uptrend and the possible start of a downtrend.
- The rounded bottom pattern appears as clear as ‘U’ formation on the price chart and is also referred to as a saucer. It signals the end of a downtrend and the possible start of an uptrend.
Wedges Chart Pattern
- Wedge Patterns are chart patterns similar to symmetrical triangle patterns in that they feature trading that initially takes place over a wide price range and then narrows in range as trading continues.
- However unlike symmetrical triangles, wedge patterns are reversal signals and have a strong bias towards being either bullish for falling wedges or bearish for rising wedges. Wedge patterns can be difficult to recognize and trade effectively since they often look much like background trading activity on charts.
- Classical Chart Patterns are among the well-known Technical Analysis pattern. However as with any market analysis method, they shouldn’t be viewed in isolation. It is good to have a confirmation before taking any decision.