Technical analysis charts and patterns have become increasingly popular for stock market trading and investing as the field grew more sophisticated in the 20th century. From the works of Charles Dow to the classic writings of Edwards and Magee, chart patterns have been used by some of the most successful traders and investors of the past century. Here is a cheat sheet of chart patterns and what they mean in trading.
Common chart patterns in technical analysis
There are 10 common technical analysis charts summarized here along with what they signal for trading and investing strategies: 1. Ascending channel – A channel on a price chart usually refers to consolidation that goes back and forth, meaning the price is stuck between two levels as buyers and sellers are unwilling to pay more or less. An ascending channel is a consolidation that keeps moving up, usually seen in downtrends and sometimes at the end of uptrends, often leading to a price drop. 2. Descending channel – The opposite of an ascending channel. It consists of mild downward consolidation, usually viewed as a brief pause in an existing uptrend, or occasionally at the bottom of a downtrend.
Continuation patterns in trading
Other consolidation moves on charts include triangular patterns and rectangular patterns called flags or pennants. These are similar to channels in being consolidations (sideways moves) of price, but differ in that they usually are just sideways moves rather than up or down. When the price breaks out, the most common move is a continuation of the prior trend.
Head and shoulders trading pattern
The head and shoulders pattern consists of a smaller peak followed by a higher peak, followed by a lower peak. This results in a pattern that looks like two shoulders and a head. Usually there is a support level under all these peaks, referred to as the “neckline”, and the most common way traders use this pattern is to watch for prices breaking below that neckline, signaling lower prices.
Inverse head and shoulders pattern
As the name implies, this is similar to the head and shoulders pattern but opposite. That is, there is a small trough, a big trough, then a higher trough. The thinking is the same with there being a “neckline” or resistance over these troughs that signals upside if the price trades above it.
These are 10 of the most common technical analysis charts, patterns and concepts used in stock market trading. By understanding what they signal, traders can incorporate chart analysis into an overall trading strategy.