How to trade through Chart Patterns in Trading
Double Bottom Chart: In this pattern, the first trend will be a rising trend, then the price goes down again; it will start to change the trend where the price goes up. The second fall made by this trend will be at the first low. The important point to be noted while observing this trend is that there should be at least one month gap between the two lows made by this trend. After the second low reaches the support, it will again start to move up. We can see from the picture below that after the second fall reaching support (shown with a pointer), a trader does not know whether the trend will move up or not.
At the low shown at the pointer, we should be alert and wait for the further moves to happen. However, when we observe after the second low the trend again starting to rise, we should be ready to buy the stock. When we confirm that the trend here is a double bottom, we will be able to know the target which is shown below with the vertical line at the pointer.
It is the difference between the top high and the Bottom, where the two lows meet. After the double Bottom, when the trend line moves up and crosses the resistance, we can confirm that the stock will move above at least to the target level we set using a vertical line. We can buy a stock just when the trend crosses the resistance considering it to be the support.
From the chart above, we can notice one thing. That is, when the trend reaches the support point, it is 9 to 10 per cent profit can be made from the point we bought when it just crossed the resistance after making a double bottom. Traders can benefit from these patterns when they rightly ascertain that it is a double bottom, including some risk management techniques and making moves with the right volumes while trading.
Falling Wedge Reversal Pattern: In this pattern, we see a prior pattern which is rising suddenly starts to fall, taking a bent at a certain point. It breaks the previous low and goes down, rises again but falls breaking the previous low. When we carefully observe this pattern, this indeed will reverse at a point, and we term it as a falling wedge pattern. To understand this better using a chart below
We can see that the highs (resistance) always obeys the trend while it is moving down. Similarly, the support is also obeying the trend line while falling and rising by breaking the previous lows. While confirming with RSI’s and by extending the trend lines, we can see that both the lines seem to be contracting as shown in the picture below.
By this, we can understand that there is something that is going to happen with the price. We can also see from the picture when after the third low, the price suddenly snaps up and breaks the resistance shown with a pointer in the image above. When we see both the trend lines contracting, we can judge it is going to be a perfect wedge (reversal). Once the trend crosses the support line, it will always (or at least many times ) moves upwards through making many corrections in its upward moments.
Head and Shoulders Pattern on Lows: This pattern is precisely opposite to the head and shoulders pattern on highs. This pattern helps us to know when it is the time to reverse before making a new high. In this, the prior pattern will be in a falling trend then makes a high and comes back, but we cannot estimate which pattern it would take. Then it will move upward and creates a low without breaking a previous low. Here, we can think of that it is going to be ahead and shoulder pattern just like a human. At this point, we can know that the price is going to take a reversal. With the help of support lines and using a target line, we can estimate how much the upward trend is going to happen. A support line need not always be a straight horizontal line; it may be a bit slanting to the left or right side. From the figure below we can make a target using a line drawn between two lows of the head and the support line of the top of the head.
Moving the target line above the support line over the head, we can estimate the trend level upwards once it crosses the resistance. This pattern is going to happen at different intervals in a year or repeats each in a year.
Rounding Top Pattern: This pattern is essential to estimate the reversal patterns once the trend reaches the high a distribution happens. E.g., if a big trader owns 3% of the company stock sells it at intervals once the price reaches high, also making sure the price is not falling. To sell these stocks, it may take more than a month, which makes a sideways pattern for more than a month. Once the buyer thinks that he has bought a bad stock tries to sell it again. Brokers may feel that this is a good stock and buy them. This goes on like a cycle until the big trader completely sells the stock he wanted to. This whole process continues for more than a month, i.e., from 2 to 4 months, making a sideways pattern. We cannot know in the midways that this is going to take a rounding pattern as it will directly go straight, which does not exceed the previous high or does not even fall. From the picture below, we can notice a rounding top pattern formation after for a duration of two months.
Once this pattern starts to fall, it will generally do fall 50% of the price.
Flag Pennant Pattern: In this, there will be a prior trend where the pattern is going up, then it starts to fall. This fall will generally be in the form of a pennant flag where it has a flagpole and a flag. From the picture below we can see we have made a flagpole on the prior trend where it is going up, and by joining two lows and two highs, we get a flag which is downwards.
We can also notice here that the volumes fell in huge while making lows. It does until it breaks the resistance after the second low, and again the volumes came back to the normal. As the volumes fall, it suggests that it is a pennant pattern. Also, when it breaks the resistance, the price again goes up, but how to know where the price will stop. An important point here to remember always is that this pattern should be formed between 1 to 8 weeks. It should not work more or less.
Rising Wedge Pattern: In this pattern, we observe that in history, the price trend is going up, falls, and again rises. To check whether this trend is a rising wedge pattern, we can do it using trend lines. One for highs and the other for lows. We here need to have had at least two highs touching the trend line to check whether it is a strong trend line or not. For lows also we need to have two lows touching the trend line, but it would be better if three lows are touching the trend line. We can see this in the chart below:
From the chart, we can see that as both the trend lines are going towards a contraction, we need to be alert that the price may fall down. We can see from the figure that after the price has dropped, it has gone to a straight sideline pattern. Once we notice the trend lines going to contract, we can term the whole scenario as a rising wedge pattern as it happened after the prior market rise. The vital point to note is that the volume is also gone down when the support broke. Looking at another picture below:
We can see that the lows keep on increasing, but highs are not increasing. Also, it did break the high certainly means it goes high further. If it would have been broken the low, then it definitely would fall or remain sideways as in the first case.
Rounding Bottom Chart Pattern: These patterns generally have a prior trend which is falling and continues to advance, which we could not expect it is going to be a rounding Bottom pattern or not. This pattern usually takes months to form taking a sideways moment. Then it starts to move up, which continues to advance slowly breaking the previous resistance. Further, these resistances will become support; though they are weak, it marks the end of the long-term decline. This pattern usually takes from months to years.
From the above chart at the pointer, we can see that there is a prior trend falling and made a low before starting to make a correction. Then it moves sideways and slowly breaking the resistance, which is not so powerful, and they take months to form this pattern in the up direction.
From the chart near the pointer, we can see that a big player in the market starts selling the stock and the price continues to fall which may take months but as the selling stops the price takes a low the buying process starts. This process takes to form a rounded Bottom pattern as depicted in the picture below. One more thing to note here is the volume is decreasing as the trend is making a low which signals that this pattern is going to happen.
As it was a long-term fall, it signals there will be a long-term bullish momentum that may take place ahead. Also, this is the hardest to estimate pattern when considered along with the other reversal patterns.
Flag and Pennant Chart on the Bottom: In this pattern, the prior pattern will be downwards, and similar to the Flag chart on the High it should be made during the duration of 1 to 8 weeks. To understand it better using a chart below:
From the figure, we see that after the prior low trend, the price moved up, making few lows. When we join the lows and highs on-trend, we can see that after making the second high, it breaks the support on the bottom trend line. With the help of the volumes which is dipping while this moving taking place, we can easily be speculated that it will move down further and it does so from the chart above. We can observe that both the trend lines we made use of looks like a flag moving up. To estimate the amount of price fall, we can check it with the help of a trend line drawn, as shown in the picture below.
After moving the drawn trend line below the horizontal line which we made in the fall it started to take place, we can estimate the target price fall to the current price. This is depicted in the picture below :
As estimated, the price fall reached the targets we set using the trend line.
Cup and Handle Chart Pattern: Similar to the other patterns, this pattern will also have a historical trend. In general, a cup is always placed on a base. Similarly, this pattern forms when the price trend reaches a low after a fall. We need to make sure that this pattern took months to form but not weeks or shorter duration. From the figure below, we can notice that the cup and handle pattern is formed where two ends of the cup are precisely equal, having a handle structure formed right side to the pointer in the picture.
To estimate the targets given by this pattern, we will make use of a trend line drawn, as shown in the picture below.
This line can be set as a target for the future, as shown in the picture below:
We can notice from the above figure that after completing a handle and breaking the support line, it took support on the line many times before moving further that also crossed the target set. When we notice this pattern is going to take, we can assume that it will be the end of the downward trend direction.
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