Discover
the logical approach to understand different types of chart patterns with MoneyWishMind’s
comprehensive guide. Read now and enhance your technical knowledge to interprete
candlestick charts.
Table of contents
- Introduction
- Double Top Pattern
- Double Bottom Pattern
- Three Inside up Pattern
- Three Inside Down Patter
- Ascending Triangle Pattern
- Descending Triangle Pattern
- Three Outside up Pattern
- Three Outside down Pattern
- Tweezer Top Pattern
- Tweezer Bottom Pattern
- Head and Shoulders Pattern
- Inverse Head and Shoulders Pattern
- Rectangle Pattern
- Pennant Chart Pattern
- Rising Channel Chart Pattern
- Falling Channel Chart Pattern
- Conclusion
1. Introduction
Why we should learn chart patterns? Because, chart patterns help
us to guess the price movements of securities, playing a crucial role in
technical analysis. To identify the right price movements we need some confirmations.
So, we use chart patterns to initiate trade. There are various types of
candlestick chart patterns. They help traders and investors predict market
movements by identifying potential buying and selling opportunities.
Actually, Chart patterns are visual representations of price
movements of securities or stocks that form in distinct shapes or formations.
Recognizing these patterns allows market participants to make informed
decisions. We have already discussed about another form of candlestick patterns
in our popular guide of candlestick patterns . "A Logical Guide to Candlestick Chart Patterns...Series 1,2,3".In this article, we'll discuss another
forms of chart patterns which are very important for stock market traders and
investors to take informed decisions in their trading and investing. Let's get
started.
2. What is a Double Top Pattern?
A Double Top pattern is a bearish reversal pattern that forms after a recognizable uptrend. It consists of two peaks at roughly the same price level, with a trough between them looks like "M". After the second peak, if the price breaks below the trough, it signals a potential trend reversal from bullish to bearish.
The pattern formation confirmed when the price breaks through the support line which is the neckline between the two tops. And the price will continue its downtrend. During the breakdown of the neckline the volume should increase which is the proof of confirmation of the pattern.
3. What is a Double Bottom
Pattern?
It is a bullish reversal pattern that typically occurs after the end of a
downtrend. It is completely opposite of Double Top pattern. It looks like the
letter "W" when the pattern is formed. So we call this pattern as W
pattern. This pattern can happen in any time frame 15 minutes, 30 minutes,
hourly, daily, weekly or in fact, in monthly also.
This Pattern consists of two consecutive troughs or lows in the
chart, with a high point in between. The lows should be nearly at the same
levels or slightly different levels looks like "W". The pattern
formation is confirmed after identifying the Double Bottom pattern,
when the price breaks through the resistance or neckline above the peak
that separates the two lows. The break out should be accompanied by
increased volume which indicates strong buying pressure at the level. Below is
an example of double bottom pattern.
4. What is a Three inside up
Chart Pattern?
The Three Inside Up is a bullish reversal pattern that typically appears at the end of a downtrend. It signals a shift of sentiments of the market participants or a potential change in market direction from bearish to bullish. This pattern consists of three candles:
First Candle: A large bearish (red) candle indicating the market is in a strong downtrend.
Second Candle: A smaller bullish (green) or a neutral candle that confined within the body of the first candle.
Third Candle: This is a bullish (green) candle that closes above the high of the first candle.
5. What is a Three Inside Down
Chart Pattern?
The Three Inside Down is a bearish reversal pattern that typically appears at the end of an uptrend. It signals a shift of sentiments of the market participants or a potential change in market direction from bullish to bearish. This Pattern is completely opposite pattern of the three inside up Candlestick pattern. This pattern consists of three candles:
First Candle: A large bullish (green) candle indicating the market is in an strong uptrend.
Second Candle: A smaller bearish (red) or a neutral candle that confined within the body of the first candle, indicating a hault in the uptrend.
Third Candle: Finally, the third candle is a bearish candle (red) that closes below the low of the first candle confirming the sellers strength.
6. What is an Ascending Triangle Chart Pattern?
An ascending triangle pattern is a bullish continuation chart pattern which forms making identical multiple highs at the same level and creating higher lows consecutively. The series of multiple resistances make a horizontal line and the consecutive higher lows form an ascending trend line looking like a triangle when the two lines are connected at the end.
The pattern indicates a strong bullish sentiments among the buyers. The buyers are willing to buy the security inspite of touching the resistance many times. They fight for pushing the price higher knowing that the price may go upward. This is a powerful chart pattern when it breaks the resistance hitting cluster of stop-losses at that point.
7. What is a Descending Triangle Pattern?
A descending triangle pattern is a bearish reversal pattern indicating a downtrend in price. It is formed with making multiple lows at the same level and lower highs in a descending way.
When two lines meet each other at the lowest point it looks like a triangle. The pattern indicates a strong bearish sentiments in the market and bears are controlling the market in selling side. It's just the opposite of Ascending triangle pattern.
8. What is the Three Outside Up
Chart Pattern?
The Three Outside Up pattern is a three-candle formation that forms on the chart indicating three trading sessions. It has three candlesticks and is typically formed in a down trend or we can say the pattern forms at the end of a down trend signaling a potential bullish reversal to upside. It is considered a reliable pattern, offering traders an opportunity to identify a shift from bearish to bullish market sentiment.
This pattern is formed over three trading sessions after a recognizable downtrend, the first two session’s looks like a bullish engulfing pattern.
The third candle confirms the pattern
which is a reliable bullish reversal pattern.
9. What is the Three Outside
Down Chart Pattern?
The Three Outside Down candlestick pattern consists of three candlesticks that forms on the chart indicating three trading sessions. It has three candlesticks and is typically formed in an uptrend trend or we can say the pattern forms at the end of an uptrend, signaling a potential bearish reversal to downside. It is considered as a reliable pattern, offering traders an opportunity to identify a shift from bullish to bearish market sentiment.
This pattern is formed over three trading sessions after a recognizable uptrend, the first two sessions look like a bearish engulfing pattern.
The
third candle confirms the pattern which is a reliable bearish reversal pattern.
10. What is a Tweezer Top
Pattern?
The Tweezer Top candlestick pattern is a bearish reversal pattern consisting of two candles forms at the end of an uptrend. The first candle is a bullish one signaling a bullish trend continuation and the second one is bearish which signals a potential reversal as it unable to surpass the high of the 1st candle and closes lower. The two candles have the same high which marks the resistance. When two or more consecutive candles have the same high which typically occurs after an uptrend.
11. What is a Tweezer Bottom
Pattern?
The tweezer bottom candlestick pattern is a bullish reversal pattern consists of two candles. The two candles are formed at the same height of support levels. This pattern forms at the end of a down trend and indicates a potential shift of the market trend from bearish to bullish.
This pattern signifies that the market has exhausted at the support levels and signals a more buying pressure may arise to absorb the selling pressure and consequently the market tries to shift higher.
12. What is a Head and Shoulders
Pattern?
The Head and Shoulders pattern is a bearish reversal pattern, forms at the end of an uptrend indicating a change from an uptrend to a downtrend. It consists of three peaks: the middle peak (head) is the highest, and the two side peaks (shoulders) are lower. A break below the "neckline" after the right shoulder forms typically signals a reversal.
The logic of the pattern is that in the first peak, buyers are pushing the price higher rapidly. In the 2nd peak, it is showing that there are slow buying and profit taking happening. In the third peak the buyers are completely exhausted and sellers taking control of the market to pull down the price lower which finally indicates a trend reversal is on the card.
13. What is an Inverse Head and
Shoulders Pattern?
An Inverse Head and shoulders is a bullish reversal pattern that forms after a downtrend. It consists of three troughs: a deeper middle trough (the head) and two shallower troughs (the shoulders) on either side. A breakout above the neckline signals a potential upward reversal.
Once the neckline breaks, the sellers
lose their control over the market and buyers aggressively push the price
higher taking full control of the market.
14. What is a Rectangle
Pattern?
A Rectangle is a continuation pattern that forms when the price moves between horizontal support and resistance levels for an extended period. A breakout from the rectangle's boundaries signals the continuation of the preceding trend, either up or down.
The psychology behind the rectangle pattern is that after a prolonged move either upward or downward, the price consolidates as the buyers and the sellers are in equilibrium, there is indecision in the market. So the price jumps from a horizontal support and resistance making a rectangle.
There are two types of rectangle pattern. Bullish rectangle
pattern and bearish rectangle pattern.
15. What is a Pennant Pattern?
A Pennant pattern is a small consolidation pattern that forms
after a strong price move, either up or down. It consists of two converging
trend lines forming a small symmetrical triangle. A breakout from the
pennant—above the resistance line (bullish) or below the support line
(bearish)—indicates a continuation of the prior trend.
16. What is a Rising channel Pattern?
A Rising Channel is a bullish pattern
that forms when the price moves within two parallel, upward-sloping trend
lines. The price tends to bounce off the support line and face resistance at
the upper line, continuing higher within the channel. A breakout above the
resistance line signals a potential further uptrend. It is also known as
ascending channel.
17. What is a Falling Channel Pattern?
A Falling Channel is a bearish
pattern that forms when the price moves between two parallel, downward-sloping
trendlines. The price is generally resisted by the upper trendline and
supported by the lower trendline. A breakdown below the lower support line
suggests a continuation of the downtrend. It is also known as descending
channel pattern.
18. Conclusion
Earning money from stock market is a dream for everyone. As a beginner you should learn the basics of price action and technical analysis. First of all, you should focus on learning which includes basics of technical analysis, different types of chart patterns, their logics. You have to set your eyes practicing more and more charts daily to understand in a logical way how these chart patterns are formed. It is essential for traders and investors who rely on technical analysis. Different types of chart patterns provide insights into market sentiment and potential price movements, enabling better decision-making. Chart patterns offer a visual roadmap for navigating the complexities of the stock market.
By mastering these patterns and applying them with proper risk management strategies, traders can improve their chances of success in the stock market. Always remember that no pattern is foolproof, so combining them with other indicators and analysis techniques is crucial for making informed trades.
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
