A pattern refers to a recurring and recognizable arrangement or sequence of elements. It is a regularity or consistency observed in various contexts such as economics, finance, nature, mathematics, language, art and even human behavior.
In the context of technical analysis, patterns specifically
refer to recurring formations or structures observed in price charts of
financial instruments. These patterns are believed to reflect the collective
psychology of market participants and can provide insights into future price
movements. Analysts study these patterns to identify potential
buying or selling opportunities and make predictions about market trends.
Patterns in technical analysis (TA) are typically formed by plotting price data such as open, high, low and close prices over a specified length of time. Investors attempt to gain an understanding of market sentiment and make informed trading decisions by analyzing the shapes, relationships and characteristics of these patterns.
Types of pattern in technical analysis:
Trend/ Chart Patterns: These patterns indicate the direction of the market trend and include uptrends, downtrends and sideways trends. Three major patterns are in the below by this concept-
- Ascending Triangle: A bullish continuation pattern characterized by a flat top and rising bottom.
- Descending Triangle: A bearish continuation pattern characterized by a flat bottom and declining top.
- Symmetrical Triangle: A neutral pattern characterized by converging trendlines, indicating indecision in the market.
Reversal Patterns: These patterns suggest a potential reversal in the current trend and include patterns such as-
- Head and Shoulders: A bearish reversal pattern consisting of three peaks, with the middle peak (the head) higher than the other two (the shoulders).
- Inverse Head and Shoulders: A bullish reversal pattern that is the opposite of the head and shoulders pattern.
- Double Top/Bottom: A bearish/bullish reversal pattern characterized by two consecutive peaks (top) or troughs (bottom) at approximately the same level.
Continuation Patterns: These
patterns suggest a temporary pause in the prevailing trend before it continues.
Major continuous patterns are-
- Bull Flag: A bullish continuation pattern formed by a sharp upward price movement (flagpole) followed by a consolidation phase (flag).
- Bear Flag: A bearish continuation pattern formed by a sharp downward price movement (flagpole) followed by a consolidation phase (flag).
- Pennant: A short-term continuation pattern that resembles a symmetrical triangle but has a narrower range and is formed during strong price movements.
Candlestick Patterns: These
patterns are derived from Japanese candlestick charts and provide insights into
market sentiment.
- Doji: A candlestick pattern where the open and close prices are nearly the same, indicating market indecision.
- Hammer: A bullish reversal pattern characterized by a small body and a long lower shadow, suggesting potential bullish momentum.
- Shooting Star: A bearish reversal pattern with a small body and a long upper shadow, indicating possible bearish pressure.
Harmonic Patterns: These
patterns use Fibonacci ratios and specific geometric shapes to identify
potential turning points in the market. Examples include the Gartley pattern,
Butterfly pattern, Bat Pattern, etc.
- Butterfly Pattern: A bullish or bearish reversal pattern that consists of specific Fibonacci-based ratios.
- Gartley Pattern: A pattern that incorporates both Fibonacci retracement and extension levels to identify potential reversal points.
- Bat Pattern: Another harmonic pattern that seeks to identify potential market reversals.
Fibonacci Patterns: These patterns are based on the Fibonacci sequence and ratios and are used to identify potential support and resistance levels. Examples include Fibonacci retracements and extensions.
These are just a few examples of pattern types used in technical analysis. Analysts often combine multiple patterns and indicators to make informed decisions about buying, selling or holding financial instruments.
