Simple Chart Patterns
Simple Chart Patterns - text
Chart Patterns Part 1
Identifying chart patterns help us to predict price reversals or trend continuations. They are repetitive in nature and can be seen in all timeframes. They are an important analytical tool for a technical trader to spot large market moves. We will discuss the features of some of the most common and useful chart patterns we are likely to come across when trading
Let’s start with double tops
A Double top is a REVERSAL pattern formed to the upside. A double top is formed when buyers cannot break through a certain price point on TWO occasions. Each time the price reaches this level it reversed and moved in the opposite direction.
Let’s look at an example
On this chart we can see how two tops were formed around $90.00 after a strong move upward. We can also see that the high of top 2 was unable to break the high of top 1.
This is a solid indication that a reversal will occur as the buyers have lost momentum in the market.
Double tops are therefore a sell signal where we are looking to profit from the market reversing and moving away from this resistance level.
Ok let’s look at double bottoms
A Double bottom opposite of a double top it is a REVERSAL pattern formed to the downside. A double bottom is formed when sellers cannot break through a certain price point on TWO occasions. Each time the price reaches this level it reversed and moved in the opposite direction
These formations show how important support and resistance levels can be and how we often see these formations in range-bound markets.
Head and Shoulders
Another trend reversal pattern is a head and shoulders formation.
When we see a head and shoulders pattern we look to open a SELL trade to profit from downward movement.
A head and shoulders pattern is so called because that is the shape it forms on the chart.
It is characterized by a peak (the left shoulder), a higher peak in the middle (the head) and then a lower peak (the right shoulder). We can then draw a neckline by connecting the troughs.
Let’s look at an example of this.
Here we can see peaks at the left shoulder, head and right shoulder. After the head and shoulders formation there was a strong movement to the downside as the buyers had lost momentum in the market. The price plummeted below its neckline and a short position would have picked up nearly 100 pips.
Notice how the downtrend below the neckline is a similar distance as the head was above the neckline. This is a useful observation as it is often the case. Therefore having a profit take set at this level will help us lock in the profit from the move.
The head and shoulders pattern can also be used for a buy signal. It is called the inverted head and shoulders pattern and is essentially just the mirror image of the regular head and shoulders.
Watch part two of this video to learn further chart patterns which can help you identify potential movements in the market