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Chart Patterns

Introduction

"Chart pattern is formed on chart when prices are plotted. Chart pattern play important role in stock and commodity markets trading. Price pattern plays huge role in technical analysis. When data is plotted, there is usually a pattern which can be seen repeatedly over period. Chart patterns can be used as reversal or continuation signal."

Head and shoulder

Head and shoulder formation occurs when price trend is in process of reversal from bullish or bearish trend and is recognized as reversal formation.

Head and shoulder Top

Head and shoulders formation consists of a left shoulder, a head, and a right shoulder and a line drawn as the neckline. The left shoulder is formed by extensive high volume. After the peak of the left shoulder is formed, there is a subsequent reaction and prices slide down because of low volume. The prices rally up to form the head with normal or heavy volume and subsequent reaction downward is accompanied with lesser volume. The right shoulder is formed when prices move up again but remain below the head peak called the Head and fall down nearly between the left shoulder and the head or at least below the peak of the left shoulder. Volume in right shoulder formation is lower than the left shoulder peak and head formation. A neckline is drawn across the bottoms of the left shoulder, the head and the right shoulder. When prices break through this neckline and keep on falling after forming the right shoulder, it is the ultimate confirmation of the completion of the Head and Shoulders Top formation. It is quite possible that prices pull back to touch the neckline before continuing their declining trend.

Head and shoulder Bottom

This formation is simply the inverse of a Head and Shoulders Top and often indicates a change in the trend. Head and shoulder formation is upside down in which volume pattern is different from head and shoulder top. Prices move up from first low with increase volume up to a level to complete the left shoulder formation and then falls down to a new low. It follows by a recovery move that is marked by somewhat more volume than seen before to complete the head formation. Again corrective reaction on low volume occurs to start formation of the right shoulder and then a sharp move up that must be on quite heavy volume breaks though the neckline.

Major difference between top and bottom pattern is, top formation takes few weeks to get completed, while bottom formation takes longer time to get completed. And that’s why bottom formation can be observed for longer period like month or more than a year.

Double top and Double bottom

Double top and double bottom are reversal chart patterns that can be observed in the technical analysis of financial trading markets of stocks, commodities, currencies, and other assets

Double top and Double bottom

Double top and double bottom are reversal chart patterns that can be observed in the technical analysis of financial trading markets of stocks, commodities, currencies, and other assets

Double Top

The double top is price formation at the end of a bullish market. It occurs as two consecutive peaks of approximately the same chart of a market. The two peaks are separated by a minimum in price, a neck line. The formation is completed when price falls below the neck line. The formation is completed and confirmed when the price falls below the neck line.

The double top pattern shows that demand is increasing than supply up to the first top and increases the price. The supply-demand balance then reverses; supply increases than demand, causing prices to fall. After a price valley, buyers again predominate and raise the price. If traders see that prices are not pushing past their level at the first top, sellers may again prevail, and causes double top formation by decreasing prices. It is generally regarded as a bearish double top formation if prices drop below the neck line.

The time between two peaks is also a major factor. If tops appear at same level but time difference is very small than it may be possible that trend will resume.

Double Bottom

A double bottom is the end formation in a market. It is same as the double top, except for the inverse relationship in price. The pattern is formed by two price minima separated by local peak defining the neck line. The formation is complete when prices rise above neck line.

Most of the rules that are associated with double top formation also apply to the double bottom pattern.

FLAG

A double bottom is the end formation in a market. It is same as the double top, except for the inverse relationship in price. The pattern is formed by two price minima separated by local peak defining the neck line. The formation is complete when prices rise above neck line.

Most of the rules that are associated with double top formation also apply to the double bottom pattern.

The flag pattern is generated by two parallel lines. These lines can be flat or pointed in the opposite direction of the primary market trend. Here the pole line indicates the primary trend in market. The pattern is seen as the market potentially just taking a “breather” after a big move before continuing its primary trend.

Flag pennants are two patterns formed when there is a sharp price movement followed by sideways price movement, which is the flag or pennant. The pattern is gets shape when there is a price breakout in the same direction of the initial sharp price movement. The following move will see a similarly sharp move in the same direction as the prior sharp move. The complete move of the chart pattern - from the first sharp move to the last sharp move is known as the flag pole.

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