Basics

The two basic elements of technical analysis, and the study of chart patterns in particular, are the concepts of support and resistance and trend lines. The Dow Theory of trends, for example, is based on support and resistance and states that a market is in an uptrend when it makes higher highs and higher lows, and is in a downtrend when it makes lower lows and lower highs. The highs are formed at resistance levels where selling is strong enough to reverse the rally in prices while the lows are formed at support levels where buying is strong enough to reverse the decline in prices. However, support and resistance lines, which are horizontal lines, are often confused with trend lines, which are lines that slope in the direction of the trend.


Support and Resistance

Support and Resistance
Support and Resistance

Support and Resistance lines are often confused with trend lines but they are horizontal lines under the lows and above the highs respectively. They indicate where a previous rally met resistance and where a previous decline met support. These are two important levels in terms of trend identification since an uptrend will tend to break previous resistance levels above the market while a down trend will break the previous support levels below the market.

When the support line below the recent minor low in broken in an uptrend, it indicates that ...

Trend Lines

Trend Lines
Trend lines

Trend lines play an important role in identifying chart patterns as they draw the chartist's attention significant price levels. Trend lines are relatively easy to draw. In an uptrend, which is characterized by higher highs and lower lows, a support trend line is drawn below two or more correction lows. If the trend line connects only two correction lows, it is a tentative trend line and is only confirmed when the price touches the line for a third time without breaking that line.

When a trend line has been identified, it can used to identify areas of potential support or ...



Channel Lines

Trend Lines
Channel Lines

Trend lines form the basis for channel lines when the price can be seen to bounce off a line parallel to the trend line. The latter is called the channel line and is drawn along the peaks in an uptrend and along the dips or valleys in a downtrend. However, the price must bounce off the channel line at least twice to confirm the channel. The more tests the trend line and channel line survives without being broken, the more significant the channel is considered to be.

However, the trend line, which offers trade entries in the direction of the trend, should always ...

Pivot Points

Pivot Points
Pivot Points

Pivot Points were developed by floor traders as a quick and easy method of identifying key support and resistance levels, which are called pivot levels, at which the market might turn, and to identify the direction the market may take in the short-term.

At its basic level, these pivot levels are calculated using the range and close of the previous period. However, there are different formulae that can be used to calculate the various support and resistance levels, which includes the Classic Floor Trader's Method, the Woodie ...


Triple Tops

Triple Tops Pattern
Triple Tops

The Triple Tops pattern consists of three distinct peaks that reach the same approximate high separated by two dips. It is a short-term, bearish trend reversal pattern that indicates the potential end of an uptrend. This pattern gives an entry signal to sell short when the price moves below the lowest low for the dips that form between the three peaks.

The Triple Top pattern is only valid when the support level at the bottom of the dips is broken. This signals a short-term change in trend from bullish to bearish. However, a triple top may also be part of a larger pattern or an ...


Double Tops

Double Tops Pattern
Double Tops

The Double Tops patterns appear at the end of an uptrend when the price reaches the previous resistance level but fails to break through the resistance. The result is two price peaks with the same high. The entry point in this pattern is when the price moves below the minor low between the two peaks. This will result in a lower low and the start of a downtrend.

The Double Top pattern is confirmed when the support at the bottom of the recent low is broken and indicates an intermediate to long-term change of the ...


Ascending Triangles

Ascending Triangles
Ascending Triangle

The ascending triangle pattern is similar to the symmetrical triangle except that the upper trend line of the ascending triangle is flat resistance line. Ascending triangles are generally bullish in nature as the rising lower line indicates a weakening of bearish sentiment. In these patterns, buyers appear outnumber sellers but only to a small extent.

Buyers cause the market to become overbought, which gets corrected as sellers start pushing the price back down. However, buyers then re-enter the market and prices rally back up to the recent high level where some ...