Again and again, certain Chart patterns seem to develop on our charts. And we realize that the probability of reversal or continuation is greater with certain patterns. Not saying that the reverse cannot take place. Anything is possible and therefore we have our stops … but these patterns usually either reverse or continuing trends. Knowing about chart patterns is one more weapon in our arsenal.
Two types of Chart Patterns
a) Reversal Patterns: These patterns reverse trends -> Eg. Double Top, Double Bottom, Head and Shoulders, Cup n Handle.
b) Continuation patterns: These indicate a possible continuation in trends -> Eg. Triangles, Bull flag, Bear flag, Pennant.
Some Patterns are explained with examples from Indian Stock Market:
I) Cup & Handle Pattern
II) Head & Shoulders Pattern
III) Double Tops
IV) Triple Tops
V) Triangles ( Symmetrical, Ascending, Descending, Expanding)
Head and Shoulders, Upside Breakout, ascending Triangle and Double Bottoms are all patterns which may be found in charts. The occurrence of these patterns can be quite advantageous as they often give strong indications of what is happening or about to happen. The negative aspect is that these patterns don’t really exist. They are subjective impressions placed on graphical history. A bit like mind reading. And we all know how easy that is!One piece of advice I was given a while ago about looking at patterns, trend lines and trend channels was “If the pattern isn’t blindingly obvious, then it doesn’t exist. If you force a pattern on the market you will generally pay for it with your money.