In a stock market, trading chart patterns are important tools for successful trading. Using them can help you identify trends in the market and determine when they are likely to reverse. A common pattern is the head and shoulders, which is formed when a stock makes three successive highs or lows, each roughly equal in price. Traders often use this pattern to identify a bearish reversal, as it signifies three attempts to break out of a pattern.
There are several different types of trading chart patterns. Rectangles, for example, are formed when prices are bound by parallel resistance and support levels. Rectangles can form during a bullish or bearish trend. When prices break out of a range, traders look for an opportunity to enter a trade in the direction of the dominant trend.
These patterns have a long history and are often used to determine stop-loss levels. Although they can be used on any time frame, they are most effective on day charts, where movement potential is greater. Many chart patterns are popular enough to have their own followers and fans. Authors such as Peter Brandt, who maintains a popular Twitter account, have long recommended specific chart patterns.
While some trading chart patterns can indicate the direction of the trend, there is no sure way to determine whether the trend will continue or reverse. In most cases, a bullish breakout is followed by a bearish breakout. Whether a breakout is a bullish or bearish breakout is a subjective decision, but technical analysts recommend waiting for confirmation before making a position.
Another trading chart pattern you can use to predict trend reversal is a double top and bottom. Double tops and bottoms happen when a stock touches the same level twice. If it breaks through a support level twice, then it is likely to continue trending downward. The price may rebound and hit a reaction high, so traders will be looking to buy.
Besides looking for breakouts, you can also look for continuation patterns. Unlike the breakout patterns, continuation patterns will tell you when to open a position after a pullback. As such, you can make a profit with this pattern. You can use it to determine a strong trend and find opportunities to take advantage of it.
The cup and handle is another trading chart pattern to look for. This pattern resembles a cup, but a handle forms after it forms. This pattern often forms when price is trending downward and provides clear entry levels. Traders look for the high on the right side of the cup. They can also take advantage of a trend breaking through resistance levels.