Being a beginner in the trading industry, there are a lot of things around. While you may feel that the material is sufficient enough to support you with your trading, the truth is that is can be a bit too confusing for many people. So, if you are unable to understand the chart patterns and how they work, it is perfectly alright. For certain individuals, especially the ones that come in touch with a forex chart for the first time, things may seem a bit too complex.
But one should not worry about this much as you will understand once you start figuring out the patterns in the charts. Soon, it will take only a glance before you are able to identify the patterns and make your trading decisions. Here, we will guide you about various patterns and how they all work.
The two primary categories
There are more than one types of patterns that you will find on charts. However, all of them are categorized in two primary sections which are named as the reversal patterns and continuation patterns.
The reversal patterns are the ones which send signal to traders that the trend is coming to an end. For instance, if you are taking a look at the trend which has been bearish for a while, it may be time that this starts going bullish or vice versa. If there is an uptrend and you see the pattern forming which falls in reversal category, it is an indication that the trend will change sooner than later.
On the other side, you have continuation patterns. If you identify a chart which has a formation that you can find in the category of continuation arrangements, it is a signal that the trend is likely to carry on. This means that if the chart has been going down for a while and you see the pattern taking place, it is likely to go down even more. Similarly, if you identify this formation on a chart that is rising, the price may keep on going up for a while.
Traders use trendlines on the high and low points on the chart. These trendlines help in identifying a certain form and you can then match it with the patterns given below to see if you are able to figure out what is coming your way.
Different types of chart patterns
The stock market charts can be read in more than a single way. There are a number of different formations that you have to watch out for, with each providing either a reversal or a continuation signal. Depending on the coming signal, you can make your trades and see if it goes in your way. Here are some common chart patterns that you may find.
Head and shoulders
One of the most reliable pattern in the market and the one that has gained a lot of popularity with the traders is the head and shoulders. It falls in the category of reversal trend and provides you an indication that the trend may swing in the other direction soon. The basic pattern is formed at the high of an uptrend, giving an indication that it will be over soon. If you are to figure it out on a bearing trend, the figure will go inverse. The 4 primary parts include neckline, 2 shoulders, and a head. The shoulders and head would carry a high and a low.
Cup and handle
The cup and handle pattern certainly would show you a cup forming in a chart. It is usually found when the uptrends are going on and soon there is a downfall in them. Creating a cup, the handle serves as a resistance line. Once the down trend starts, you have to consider the movement along the line because as soon as it will break the resistance the uptrend will continue.
Double top and bottoms
A simple reversal signal provider pattern is the double top and bottoms. You can draw the resistance lines with tops and bottoms, and as the double top and bottom are hit, the trend is likely to swing. One line serves as the resistance from where the trend won’t go up while the other line will serve as the support, hitting which the trend will bounce back.
Triangles
There are three types of triangle chart patterns which is why it can sometimes be complex to figure out. So, you have to be constructive in your approach and be creative when you are trying to figure out the ascending, descending, and symmetrical triangle.
The ascending triangles are formed with bullish patterns and they indicate the continuation of an uptrend.
The descending triangles are seen on downward patterns and indicates that the price will continue to fall. However, if found on uptrends, they can be seen as a reversal signal.
And lastly, you have the symmetrical triangles which are a great way to find out about the continuation of the pattern. Regardless of whether the price is going up or down, if you figure it out, the current trend will continue to follow.
Parabolic curve
Another type of chart pattern is the parabolic curve. Popular with modern day traders and regarded as one of the most reliable ways to figure out about the trends, the pattern can be seen on a number of different charts during varying times. Usually, when the end of a large market advance is around the corner, individuals are able to see the parabolic curve which would help you in predicting the move on the chart.
Why is it important to learn about chart patterns?
The chart patterns are critical to be figured out and still most of the individuals do not pay heed to it. If you think that you will be able to do excellent without learning how to read the pattern formation, you are pretty much wrong. You may be able to do some trades successfully with the help of technical indicators but you won’t have complete command over your trading.
Learning about how the shapes are formed over a chart and how you have to work with them helps you in identifying the trends from the chart. For instance, you find a formation on the chart that indicates a reversal trend, you can try matching it with the technical indicator which you have working on your chart. If the information from the technical indicator matches with the reading of the chart, i.e. both are giving you the signal that the trend would reverse or vice versa, you can give yourself a try and hopefully the luck will fall on your side with a decent profit for you. But if the information is contradicting, you might wish to wait for a little while before proceeding with your move.
Final words
So, these are all the details that you have to know about chart and its reading as a beginner. Search more about the chart patterns and find out how you have to read it accurately. Once you start figuring out the shapes on your charts, you will be able to predict the trends and the time when they would swing, helping you in making the right move and earning some bucks.
Posts by SpeakBindas Editorial Team.