The matter of interest begins in the technical analysis with price patterns. It brings a lot of ease and technical readability of charts. Price patterns basically tell us about the upcoming shifts and the contemporary market trends all along. This category holds obliging predictive value which ultimately adds up in the chart reading and technical analysis. There are total six patterns disseminating price visually. The all six patterns are categorized into two broader categories i.e., reversal and continuation patterns. In the later section of the underlying article, we will interact with first category of the price patterns, known as reversal pattern.
- Reversal patterns
There are three kinds of reversal patterns with proved value in technical analysis. It is elucidated that the reversal patterns have vital importance because of visible and frequently observed predictive value. These patterns can be observed in a frequent manner if you keep a sharp eye on the trade screen of the respective stock exchange. Reversal patterns suggest that market will change its trend. Following are the types of reversal patterns:
– Head and Shoulders
It perhaps is the most popular and reliable pattern ever observed. The rate of reliability of this pattern is more than all others available. A top of the head and shoulders is typified by the three of the most prominent market peaks.
The pattern is known as head and shoulders because of the unique trend as one can find three consecutive peaks all around. The middle peak is higher than the other two alongside; this is why the middle one is called a head. The right and left surrounding peaks are the lower than the head which is why they are known as shoulders. Visually it has been presented in the above figure. After once a head and shoulder pattern occurs, the market reverses its price trend as represented in the snapshot.
– Double and Triple Top and Bottom
This however is a rare pattern but has a pet value that market will surely be reversed. Whenever this pattern has been observed, 8 out of every ten times market has shown the expected pattern.
– Saucers and Spikes
Saucer pattern represents a flatter trend in the price pattern and explain the need of market correction for undervalued shares. After a little bit flatter trend, market shows a strong comeback. However if a saucer is shown below side of the chart, the pattern will encourage a positive market line whereas if a saucer is formed upside of the chart, it will show a negative symptom for the market. It is because the market will go down afterwards.
Spikes are also not as common in technical analysis as other patterns do. It explains one of the two options: first, market has a speculation activity; second, market has suddenly observed short term encouraging news. Whatever is the reason, it will reverse the sentiment of the entire market. In the speculative environment, it is even observed frequently. In a market which is near to efficient, these both patterns are seldom observed.