Learn the basics of technical analysis & chart patterns.
You'd be surprised, but price charts often draw certain shapes, which are called graphic models (or patterns).
At first glance, finding such models on a live chart may seem rather difficult. However, with days of practice, you will learn to determine which figure is being formed right now and make trading decisions based on this information.
There are two main types of graphic models: continuation and reversal patterns.
As you may have guessed, continuation patterns show that the price of an asset will move in the same direction soon.
Reversal patterns - on the contrary, show that the price is going to change direction.
We offer to get acquainted with the most popular graphic models.
Double topIt is a reversal pattern. Look, how the asset chart is trying to continue moving up, twice reaching the imaginary line of resistance - and twice pushing away from it. After such a maneuver, most often we can talk about the formation of a downward trend.
Double top resembles the letter 'M'. When traders see it being formed on a chart, are trying to open Sell trades after 1-2 candles appear next to the second downward rebound.
The double bottom resembles the letter “W” and is formed after a long downtrend. In contrast to the double top, the double bottom model shows that after the second collision with resistance, a reversal will follow.
After the second unsuccessful attempt, traders usually open Buy trades, waiting for 1-2 confirming candles to form.
Head and shouldersThis is the most popular graphics model that usually formed during an uptrend.
The figure consists of the first price peak (this is the left shoulder), followed by a higher peak (this is the head), and the lower peak (right shoulder) completes the composition.
Such a pattern signals that after the formation of the right shoulder, the price is likely to rebound and go into a downtrend.
Pay attention to the neckline: this is the level of support from which the price pushes. When the chart passes the neckline from top to bottom, traders decide at what point they should open Sell trades.
Inverted 'Head and Shoulders'
This is a mirror image of the previous model. In this case, the neckline serves as a guideline for opening Buy trades. It is necessary to monitor the chart figures and wait patiently until the candle complete over this line.
Previously, it is not recommended to do this: the chart may suddenly turn around, showing that you were mistaken.
Rising WedgeThis model indicates a pause in the current trend and demonstrates that there is a period of indecision on the market. After Wedge, the trend could as continue, as a reverse in the opposite direction.
If a rising wedge occurs during a downtrend, it acts as a continuation model. As shown in the chart on the right, this is because the price breaks the resistance line down and continues to fall.
However, if an upward wedge appears during an uptrend, it acts as a reversal pattern due to price reaches the resistance line and begins to decline.
Falling WedgeThis model can also signalize a trend reversal or continuation.
Unlike the Rising Wedge, the descending one is most often preceded by a further price increase.
A falling wedge that appears after a downtrend indicates a reversal upwards.
So vice versa: during the uptrend, it confirms the direction of the price movement.