Continuation patterns are formed when the price enters a consolidation or correction phase during a trend and indicate that the continuation of the preceding trend is highly probable. The existence of an existing trend is a prerequisite for a continuation pattern as there must be some trend that will continue after the pattern is completed. If there is no preceding trend, then the pattern is not a valid continuation pattern. Valid continuation patterns include the cup and handle pattern, flags and pennants, symmetrical triangles, ascending triangles and descending triangles, and the rectangle pattern.
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 ...
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 ...
Symmetrical triangles are characterized by a symmetrical convergence of trend lines with symmetry. These triangles indicate a period of indecision when the forces of supply and demand are nearly equal. During these conditions attempts to push the price up are met with selling and attempts to push the price down are met with buying.
There is also a tendency for volume to drop off during this period. When the price breaks out of the triangle, an increase in volume confirms a valid breakout while a decrease in volume indicates that the breakout might be a ...
Double Top Pattern
Reversal patterns mark the turning point of an existing trend and are good indicators for taking profit or reversing your position. Generally, trend reversal patterns indicate that a support level in a downtrend or a resistance level in an uptrend will hold and that the pre-existing trend will start to reverse. These patterns allow you to enter early in the establishment of the new trend and are usually result in very profitable trades.
The common reversal patterns include the double tops and double bottoms, triple tops and triple bottoms, broadening tops and broadening bottoms, ...
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 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 ...