Reversal and continuation patterns
Chart patterns are shapes that the price draws on the chart: reversal patterns signal the possible end of a trend, continuation patterns a pause before it resumes.
Technical analysis has studied them for more than a century. Reversal patterns include the double top and double bottom, the head and shoulders and some candles such as the hammer and the engulfing; continuation patterns include triangles, rectangles and flags. No pattern guarantees the outcome: it only indicates a more likely scenario, to be confirmed.
How to spot it
You identify the relative highs and lows (the chart's turning points) and look at how they are arranged: two highs at the same level, a high above two lower ones, highs and lows converging... The pattern is confirmed when the price breaks the key level: the neckline, support or resistance.
Worked example
After a long rise, a stock touches €50 twice without breaking above it and falls to €46 between the two highs. It's a possible double top: if the price falls below €46 the pattern is confirmed and the indicative target is 46 − (50 − 46) = €42.
How to read it
A reversal pattern after a rise is a sign of weakness, after a decline of strength. A continuation pattern suggests that the previous trend will resume after the pause. The wider and longer the pattern, the more reliable the signal is considered.
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