When analyzing price charts, recognizing patterns can aid you in predicting
whether the price action will continue as is or whether it will reverse. This is
done through continuation and reversal patterns.
Continuation patterns
Triangle
The triangle has three variants: symmetrical, ascending, descending.
The ascending (flat top) triangle is a bullish continuation pattern. The highs
of the recent candlesticks remain the same and form a resistance level while
the lows creep upwards. Confirmation occurs when the price breaks out
above the resistance.
The descending triangle (flat bottom) is a bearish continuation pattern. The
lows of the recent candlesticks remain the same and form a support level
while the highs creep downwards. Confirmation occurs when the price
breaks out below the support.
The symmetrical triangle can be either bullish or bearish depending on the
trend. Here, both the lows and highs move towards each other until the price
breaks out of the range.
Flag
A flag pattern temporarily goes against the overall trend of the asset. For
bullish flags, the pattern is recognized by two downward moving parallel
lines between which the price moves before breaking out. For Bearish flags,
the two parallel lines move upwards before the price breaks out downwards.
Pennant
Pennants are quite similar to symmetrical triangles. The major difference is
that for a pennant to form, a major movement has to occur first which is
known as the flagpole. The consolidation of the price in a triangle shape that
occurs after the flagpole is known as the pennant.
Wedge
Wedges can be either ascending or descending. Descending wedges are
considered bullish and happen in uptrends. With descending wedges, the
lows and highs of the candlesticks move downwards but still converge.
Reversal patterns
Double top (M)
The double top is a bearish pattern that signals a reversal of an uptrend. It
occurs when the price gets rejected from the same high point twice with a
drawback in between. Because of this structure, it is also referred to as an M
pattern.
Double bottom (W)
The double bottom is the opposite of the double top and signals a reversal of
a downtrend. It occurs when the price gets rejected from the same low point
twice with an up move in between. It is also referred to as a W pattern.
Cup and handle
The cup and handle pattern is a bullish signal. First, the cup is formed by the
price moving in a “U” shape or a “bowl”. Then, after the bullish momentum,
the price pulls back a bit, creating the handle. The pattern is confirmed once
the price moves above the level of initial rejection preceding the handle
again.
Head and shoulders (H&S)
The head and shoulders pattern is a bearish signal that indicates the reversal
of an uptrend. It consists of three tops: the left shoulder, the head, and the
right shoulder. The head is the highest top with the left and right shoulder
being of more or less equal height. Between the left shoulder and the head,
the price dips. The low point of this is considered the neckline which is
considered a support that is again touched during the pullback between the
head and the right shoulder.
Reverse head and shoulders
The reverse head and shoulders pattern is a bullish signal that indicates the
reversal of a downtrend. It consists of three bottoms: the left shoulder, the
head, and the right shoulder. The head is the lowest bottom with the left and
right shoulder being of more or less equal height. Between the left shoulder
and the head, the price rises. The highest point of this is considered the
neckline which acts as a resistance that is again touched during the pullback
between the head and the right shoulder.