Regardless of experience, it is important to incorporate technical analysis into the strategy used for successful trading. By definition, technical analysis is a method of predicting future market movements based on historical data and taking into account current prices.
The most common technique in technical analysis is chart pattern analysis, which is essential for determining price signals to determine whether a movement is bullish, neutral, or bearish.
Although chart pattern analysis does not guarantee accurate results, it serves as a good basis for price predictions and should be in every trader’s arsenal.
Introduction to Chart Patterns
Chart patterns are unique shapes created by price movements on a chart and form the basis of technical analysis. Before diving into chart patterns, it is important to have a good understanding of trend lines in technical analysis.
trend line
Chart analysis is based on identifying trend lines and curves.
By connecting falling highs (highs) or rising lows (troughs), trend lines can signal price changes. The emergence of premonitions of market changes is a useful tool for traders to predict and react to changing price dynamics by visualizing maps.
Graph setup for observation
To set up a chart for pattern analysis, it is important to define a time period. The time period is defined by selecting an appropriate time period for each data point on the chart.
The most common time zones are:
- Short term: 3 or 5 minutes
- Midterm: 1 and 6 hours
- Long term: 1 day
It is also important to visualize price and volume on charts.
general trends
Price movements are dominated by three basic trends: uptrends, downtrends, and consolidation. Listed below are some of the most common trends that can be observed on trading charts.
bullish trend
An uptrend indicates a period of a bull market in which prices rise for as long as the trend continues. You can identify it by:
higher peak
When an asset is in an upward trend, its price hits new highs that are higher than previous highs. Buyers are willing to purchase at higher prices, indicating an optimistic outlook for asset values.
higher minimum
Prices may decline or adjust slightly, but these adjustments will not return prices to previous lows. Rising lows during bullish momentum may indicate buyers entering the market to support prices at higher levels.
support line
An uptrend line is created by connecting higher lows. An upward trend line is a support level to observe and predict the expected low level of increase in the future period. The uptrend will continue as long as the uptrend line does not cross the next low.
volume analysis
Volume is higher during an uptrend and decreases during an uptrend correction.
bearish trend
A bear market refers to a period of a bear market in which prices fall for as long as the trend continues. You can identify it by:
low peak
In a downtrend, subsequent price peaks are lower than previous peaks. This indicates that selling pressure is dominant and sellers are preventing prices from rising to higher levels. Buyers have a pessimistic view of the value of the property and are unwilling to pay a higher price.
lower minimum
The lows on the price chart correspond to the lowest highs and continue to fall. Each subsequent low is lower than the previous low, indicating that the price continues to fall.
support line
A descending trend line is formed by connecting lower highs. The downtrend will continue as long as the downtrend line is not crossed.
resistance level
As the price falls, it can reach support (possible buying pressure) and resistance (possible selling pressure) levels. These levels can be used by traders to identify entry or exit points.
volume analysis
During a negative price trend, volume will find new lows, while within a downtrend, volume will decrease while price is rising.
enforce
price fluctuations
A consolidation pattern is a neutral or sideways price movement, usually forming after a bullish or bearish price movement. During consolidation, prices tend to fluctuate between similar lows and highs over a period of time. The entry movement is called the “pre-trend” and builds directional assumptions for the next price movement after the consolidation phase.
reduced volatility
Price movements within the consolidation are small compared to the previous trend, indicating a temporary balance between buyers and sellers.
Volume
In consolidation patterns, volume tends to decrease overall. This decrease in trading volume means fewer market participants and may indicate a lack of clear direction in the market.
support line
During the consolidation phase, you can draw a trend line connecting the highs and lows. The consolidation will continue as long as neither of the two trend lines cross.
breakout
A breakout marks the end of a consolidation phase where the price clearly moves above the top (bullish) or bottom (bearish) of the consolidation range. Breakouts are usually triggered by new information received by market participants, which helps form a new buy or sell direction. If the consolidation is short-term, a breakout usually confirms the previous trend.
check
A false breakout can occur if the price briefly crosses the threshold and then reverses. Therefore, traders should confirm a breakout by observing an increase in volume and consistent price movement in the direction of the breakout.
The second part of this series covers more aspects of chart patterns, types and how to identify them.
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