New Investor? Learn What Are Trading Chart Patterns

In this article, we will discuss

• Types of Charts
• Trading Chart Patterns For Beginners
• Conclusion
• FAQs

If you are a new investor, those glaring red and green lines on a trading chart can be quite intimidating for you. However, once you learn to identify chart patterns on it, it won’t feel so daunting anymore. In fact, as you master this art of reading trading chart patterns, you will realise that they are one of the most powerful tools any investor could have. They are not just patterns but your key to spotting entry and exit points in trade, discovering new opportunities and formulating profitable strategies. Read this blog to discover some very basic yet essential chart patterns for every trader and start trading like a pro!

Types of Charts

Before we get to different types of chart patterns, let’s take a quick look at 3 different types of charts you can find on a stock trading app.

• Line charts

These are one of the simplest chart patterns to understand the price trend of a stock. The line on the graph connects the closing price of every day to form a graph. However, because of the nature of their simplicity and lack of information, these charts do not reveal any other information except the closing price trend of a security. Hence, to get a better understanding of a stock price trend, traders will need further information.

• Bar charts

Some traders also refer to them as OCHL charts, i.e. Opening, Closing, High and Low. Compared to line graphs, they are much more detailed because, in a single graph, you can find out 4 different pieces of information about an asset over a period of time.

• Candlestick chart

These are the most popular chart types, which are represented with red and green bars that look like candles. The body of these sticks represents the highs and lows of the day, whereas the extended shadow or wick represents the opening and closing price.

Trading Chart Patterns For Beginners

If you are a beginner to trading, here are some chart patterns that you should look out for:

• Head and Shoulder

This trading chart pattern has three peaks, the middle one being the tallest and two smaller peaks on each side. Traders look at it to identify a bullish-to-bearish reversal pattern. It starts with a bullish trend where the price rises to a peak and then falls down to the same level from where it gained momentum. It rises again for the second peak, which is taller than the first and falls down to that same level again. Finally, the price gains momentum for the third time, reaches a peak smaller than the middle peak, and falls back to the same level before it takes a downward trend. The base level at which the price falls is called the neckline, the middle peak is the head, and the two side peaks are the shoulders. This pattern can also indicate an upside reversal with an inverted chart pattern.

• Double Top

This is another trading chart pattern which signals a trend reversal. It forms two peaks that look very similar to the alphabet M . This chart represents two unsuccessful attempts of the market to break through a trend. The first peak forms from a neckline, reaches a certain level and starts going downward. It then rises again, meets a peak and then falls back. However, this time it doesn’t rise again; instead, it keeps following the downward trend and goes even further below the neckline.

• Double Bottom

It is an inverse pattern of the double top. Just like the double top, it is a trend reversal pattern and looks like the letter W. It represents a seller-centric market, where the price falls down the neckline and forms an inverse peak before it bounces back to the neckline. After meeting the neckline, it starts going downward yet again and comes back to the neckline, forming the second inverse peak. When it meets the neckline again, it continues going upward, thus creating a bullish trend.

• Trend Line

A trend line is formed by connecting two or more price points where the line indicates either an upward or downward trend direction. The line forms an uptrend when it connects with two ascending lows. The ascending low means the second low is at a point higher than the first low, thus forming an upward trend. On the contrary, when the line is formed by connecting two descending highs, it signals a downward trend. The descending highs mean the first high is at a point higher than the lower high.

• Cup and Handle

It is another trend reversal pattern where the market shows a bearish market trend for a period before breaking into an uptrend bullish market. The cup forms a U-shaped pattern resembling the roundness of a bowl. The cup shape is formed with two equal highs, which is then followed by a slight downward drift on the right of the cup, forming the handle. The handle can be considered a temporary retracement, but the asset eventually breaks out of it and follows a higher bullish trend.

• Rounding/Saucer bottom

This pattern can signify either a reversal or continuation of a trend. It is a long-term pattern and can take weeks or months to finally reveal a trading chart pattern. When the initial downward slope forms, it is usually because of an excessive supply, thus leading to a price fall. However, it gradually converts into an uptrend once buyers start entering the market at a low price. The price gradually starts rising, forming a completely rounded bottom before it breaks out to form an uptrend.

• Pennants

One of the key identification of pennants is that there are two trend lines moving in two directions, and they eventually meet at one point. One of the lines will be moving towards a downward trend, whereas the other line will be moving towards an upward trend. In the case of a bullish pennant, the indication is set towards an upward price trend, and the flagpole is on the left side of the pennant. Whereas for a bullish pennant, the flagpole is at the right, and it indicates a downward price trend. Also, remember that it will be considered a pennant only when it forms in a horizontal direction.

• Flags

Flags are a trading chart pattern similar to a pennant, but the trendlines here don’t converge. The trendlines here are parallel, and they can either slope upwards, downwards or even sideways. It generally starts with a significant price increase, and thereafter, the price consolidates for a period of time. Price consolidation refers to a movement when the price keeps moving up and down within a price range for a period of time.

• Wedge

A wedge pattern is also similar to a pennant. However, one primary difference is that both the trend lines of a wedge move in the same direction, unlike a pennant, where they are moving in opposite trends. A wedge trading chart pattern can either be a rising wedge or a falling wedge. In case of a rising wedge, the price line slants upwards. It is an ascending pattern that indicates a bearish movement. The trend lines in a rising wedge meet at a point of the most recent higher highs and higher lows. The lower trend line here is steeper because the lows are catching up to high price points at a higher speed than high price points. Once this pattern appears, investors expect the price to fall. On the contrary, when it comes to a falling wedge, the price line remains between two downward-sloping trend lines. It is a bullish pattern and is generally considered a reversal pattern. When it appears, investors expect the price of the asset to break through and continue rising.

Conclusion

Reading about these trading chart patterns may sound easy, but the tricky part is when you try to apply them in practical use. It may feel overwhelming at first, and you might fail to spot these patterns. However, with regular monitoring and practice, you will learn to use chart analysis. It would not only sharpen your trading strategies, but it would also make you more thorough in identifying patterns and reducing your chances of loss. Trading overall is a complicated process, but it is going to change with the New-Gen Samco Trading app . With its incredible index-tracking features, personalised feeds, technical chart insights and suggestions, you are bound to excel in your trading game. To receive all these benefits, download the app and open a demat account with Samco today!

FAQs:

Q1. What is resistance and support level? Ans. The support level is the base at which the price of an asset stops falling and tries to rise back up. The resistance level, on the other hand, is the upper ceiling from which the price stops rising and takes a downturn. Q2. What are the three different types of graph patterns? Ans. There are mainly three types of graph patterns, viz. Continual, reversal and bilateral patterns. Q3. How many types of trading chart patterns are there? Ans. Different traders leverage different trend patterns to study the markets. However, broadly speaking, there are more than 35 patterns. Q4. Can a trader customise the colours of their candlestick chart patterns? Ans. Yes, most trading apps allow you to change colours of your candlestick charts. You can use any set of contrasting colours, such as black and white, black and red, green and red, etc. Q5. What is the most commonly used chart? Ans. Candlestick chart patterns are very commonly used charts because they are a combination of line and bar charts. Additionally, just a single candlestick chart can convey a lot of details about an asset. Hence it eliminates using multiple sources to analyse information.