General Characteristics Of Chart Patterns

What we do know to be a fact about all price chart patterns is that the more substantial the pattern the greater the likelihood for a increase in price movement. The elevation of the pattern on the vertical axis of the chart indicates the volatility; the width of the pattern on the horizontal axis of the chart indicates the amount of time necessary to build and complete the pattern. The greater the height of the pattern (the volatility) and the more time it takes to develop – the more significant the pattern results in being and the greater the opportunity for the following price move.

Chartists also know that topping patterns are normally diminished in duration and more volatile than bottoms. Price swings at major tops are wider and more violent. Tops usually take less time to form than bottoms. For this reason it is commonly less risky to distinguish and trade lows than highs all the same the time spent in creating a top is more often than not shorter than the time spent establishing a market bottom. As a consequence, a trader can generally do better by trading the down-side of the market instead of the upside of the market. This has important implications for firm managers, because of the fact that the natural tendency is to sell the former as opposed to the latter.

Volume, Reversals and Continuation

Volume is normally more important on the upside, and volume should generally improvement in the direction of the market trend and is an essential confirming factor in the conclusion of all price patterns. The conclusion of each pattern should come with a visible increase in volume, particularly at market bottoms. Market tops are inclined to fall on their own weight once a trend reversal is going ahead. At a market bottom, if the volume pattern does not show an important increase pursuing the upside breakout, the entire price pattern should be questioned. The second type of chart pattern is the continuation pattern. Continuation patterns recommend that market is only pausing for some time prior to the prevailing trend will resume.

Another difference between reversal and continuation patterns is their time duration. Reversal patterns usually take much longer to form on the chart and represent major reversal in trend. Continuation patterns, on the hand, are ordinarily shorter-term in duration and are frequently classified as intermediate term chart patterns. Some of the most commonplace continuation patterns include flags, ascending and descending triangles, symmetrical triangles, pennants, gaps and rectangles.

Price Volume Relationship

1. If Price is rising and volume is rising that confirms an uptrend.

2. If Price is decreasing and volume is rising that confirms a downtrend.

3. If price is rising and volume is declining that indicates a weak uptrend or an uptrend in its       final stages 9oversold conditions)

4. If the price is decreasing and the volume is declining that indicates a weak downtrend or a     downtrend is about to reverse (overbought conditions)

Conclusion

The meaning of a pattern should be open-minded and not specific, as the markets do not admit such perfect artwork of what you see in illustrations in textbooks and magazines. When searching for patterns, it is essential to remember that technical analysis is more art and less science. It can be very challenging for you to find a chart pattern that are precise. Keep this is mind as you examine the chart of your favorite matter.

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