In technical analysis transitions between rising and falling trends are often signalled by price patterns.
Basically price patterns follow Dow theory. Price patterns give the characteristics behind the price movements
Double top, Double bottom, Cup, Flag and Triangle patterns are some of the most important and reliable price patterns.
Each price patters have some set of conditions to be qualified. If any of the conditions meet, we cannot qualify that pattern.
The trader needs to understand each price patterns and qualify them before taking the trading decisions.
- : Price patterns give the characteristics behind the price movements. A price pattern is a recognizable configuration of price movement that is identified using a series of trendlines and/or curves. In technical analysis transitions between rising and falling trends are often signalled by price patterns.
- : Dow theory clearly indicated whether the trend is positive or negative. It doesn’t say about the nature and quality of the trend. Though Dow theory gives information on demand and supply it lacks in providing the characteristics of the trend. Whereas the price patterns provide the characteristics of the trend. Dow theory gives late information about the trend reversals. Price patterns give signals about the trend reversals.
- : Double top is a term used in technical analysis to describe the rise of a stock, a drop and another rise roughly of the same level as the previous top and finally followed by another drop. Double top is bearish reversal pattern. Conditions: 1) There should be two identical tops. The prices are equivalent but not necessarily exact. Obviously there is trough between two tops. 2) After reaching second top, the sellers come in and the price starts falling beyond the trough. The volume in second top or second bottom should be high. 3) The duration between two tops should be at least 1 month. 4) If the above conditions are satisfied, this pattern can be qualified as double top. The short positions can be considered when the price goes below the second bottom.
- : Double bottom is opposite to double top. Here there are two identical bottoms are formed. Double bottom is bullish reversal pattern Conditions: 1) There should be two identical bottoms. The prices are equivalent but not necessarily exact. 2) After reaching second bottom, the buyers come in and the price starts increasing beyond the first peak in between to bottoms. The volume in second bottom or second top should be high. 3) The duration between two bottoms should be at least 1 month. 4) If the above conditions are satisfied, this pattern can be qualified as double bottom. The long positions can be considered when the price goes above the second top.
- : Head and shoulder is basically reversal pattern, also called the distribution pattern. This will be followed by down trend. The name head and shoulder is so because graphically the pattern resembles two shoulders and a head in between shoulders. The pattern contains three successive peaks with the middle peak (head) being the highest and the two outside peaks (shoulders) being low and roughly equal. The reaction lows of each peak can be connected to form support, or a neckline The conditions: 1) It takes at least three months for this pattern to form. 2) The left and right shoulders are roughly equal. 3) High volume takes place in the left shoulder (LS) 4) Low volume in right shoulder (RS) because the stronger hands are already sold out. 5) Short position can be initiated when the price breaks below the neck line.
- : Inverted head and shoulder is opposite to Head and shoulder pattern. This is bearish reversal, also called accumulation pattern. This is followed up uptrend. The conditions: 1) It takes at least three months for this pattern to form. 2) The left and right shoulders are roughly equal. 3) High volume takes place in the left shoulder (LS) 4) Low volume in right shoulder (RS) 5) Long position can be initiated when the price breaks above the neck line.
- : The cup pattern (Rounding bottom pattern) is suitable for the long term traders (investors). It indicates the gradual accumulation of the stock for the long period. Graphically, the patters looks like a cup. The conditions: 1) Cup patterns are generally powerful if it takes long time to construct. 2) During the rounding bottom, the volume is expected to be low as possible. 3) The correlation between the market to the stock should be low during the MID of pattern. 4) Long position can be created when we find the cup start getting filled.
- : Graphically this pattern looks like a flag with pole. The flag pattern generally indicates the momentum is getting increased and lot of buying happens in shorter span of time. Generally appears at the early stage of the trend. Better visible in Candlestick chart. The conditions: 1) A Steeper pole (75 ~ 80 degrees steep) 2) Rectangular shaped sideways movement can be considered as flag. 3) Generally takes 4 to 7 days to form. 4) Volume should be low during the flag period. 5) The flag should not drift lower. 6) Positive pole flag should give positive break out. 7) Volume is expected to increase while giving breakout. 8) Long positions can be created on break out.
- : In case of Bullish Flag:- Entry price: At the break out of the flag. Stop loss : Bottom (Support ) of the flag portion. Target (Exit): Should be greater than the difference between Entry & Stop loss prices.
- : The triangle pattern indicates the trend consolidation. It is a wave pattern where the lines connecting tops and bottoms of the wave should form a triangle. Conditions: 1) 5 Wave correction pattern (A-B-C-D-E) should form triangle shaped structure. 2) The triangle area should be minimum 1.5 months 3) Triangle breakout expected around 70% zone 4) Volume required to confirm breakout. 5) The breakout can take any side (Up or Down)