What is Chart Patterns?
Chart patterns are recognizable formations in price charts that traders use to identify potential trend continuations or reversals based on historical probability.
Chart Patterns Explained
Chart patterns work because they represent the psychology of market participants. Common reversal patterns include head and shoulders, double tops, and double bottoms. Common continuation patterns include flags, pennants, and triangles. The reliability of any pattern improves with confirmation from volume and other indicators.
Real-World Example
A stock forms a 'cup and handle' pattern over six weeks — a rounded bottom (the cup) followed by a small downward drift (the handle). When the price breaks above the handle's resistance, traders buy expecting a continuation of the uptrend.
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