Reversal and Continuation Price Patterns
PRICE PATTERNS
First of all, what are price patterns? Price patterns
are pictures or formations, which appear on price charts
of stocks or commodities, that can be classified into
different categories, and that have predictive value.
TWO TYPES OF PATTERNS:
REVERSAL AND CONTINUATION
There
are two major categories of price patterns-reversal and
continuation. As these names imply, reversal patterns
indicate that an important reversal in trend is taking
place. The continuation patterns, on the other hand,
suggest that the market is only pausing for awhile,
possibly to correct a near term overbought or oversold
condition, after which the existing trend will be
resumed. The trick is to distinguish between the two
types of patterns as early as possible during the
formation of the pattern.
We'll be examining the five most commonly used major
reversal patterns: the head and shoulders, triple tops
and bottoms, double tops and bottoms, spike (or V) tops
and bottoms, and the rounding (or saucer) pattern. We
will examine the price formation itself, how it is
formed on the chart, and how it can be identified. We
will then look at the other important considerations-the
accompanying volume pattern and measuring implications.
Volume
plays an important confirming role in all of these price
patterns. In times of doubt (and there are lots of
those), a study of the volume pattern accompanying the
price data can be the deciding factor as to whether or
not the pattern can be trusted.
Most
price patterns also have certain measuring
techniques that help the analyst to determine
minimum price objectives. While these objectives are
only an approximation of the size of the subsequent
move, they are helpful in assisting the trader to
determine his or her reward to risk ratio.
We'll
look at a second category of patterns -the
continuation variety. There we will examine
triangles, flags, pennants, wedges, and rectangles.
These patterns usually reflect pauses in the
existing trend rather than trend reversals, and are
usually classified as intermediate and minor as
opposed to major.
Reversal and Continuation Price
Patterns