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Ascending Channel

Similar to the horizontal channel however this pattern forms an upward moving channel pattern (i.e. the parallel trend lines slope upwards from left to right.) The upper trend line connects a stocks daily highs and the lower trend line connects a stocks daily lows.

As a general rule of thumb, if the stock fails to move within an established channel it usually indicates that the trend is changing and will most likely break out of the current pattern in the opposite direction thus the clearing of the upper trend could indicate an upward trend and the clearing of the lower trend line could indicate a downward trend.

Basing

Basing describes a period in which there has been little or no movement in the stock price. The pattern shown is then a flat line.

After a market has been in a lengthy upward or downward trend you will usually find that it has a basing pattern. It correlates with the market taking time out to assess what possible direction the stock may take next. Therefore there is little price or volume movement during this time.

Breakout

Breakout trades are one of the most popular and profitable trade ideas. A breakout occurs when the share price moves out of a trading range or goes through a trend line. Basically, a breakout occurs when the share price ‘breaks’ through a support or resistance line.

A breakout is the bullish counterpart to a breakdown. If a pattern experiences a breakout but reverses in the opposite direction it is called a “whipsaw” – that is, the breakout is only small or lacks momentum and is unable to continue. For a true breakout to occur, analysts consider a change of 3% to 5% is necessary.

Breakout

Breakout trades are one of the most popular and profitable trade ideas. A breakout occurs when the share price moves out of a trading range or goes through a trend line. Basically, a breakout occurs when the share price ‘breaks’ through a support or resistance line.

A breakout is the bullish counterpart to a breakdown. If a pattern experiences a breakout but reverses in the opposite direction it is called a “whipsaw” – that is, the breakout is only small or lacks momentum and is unable to continue. For a true breakout to occur, analysts consider a change of 3% to 5% is necessary.

Broadening Formation

This pattern is formed when you draw trend lines along the daily highs and daily lows to form a pattern. This particular pattern is used to predict the possibility of a reversal in the current trend. It is most commonly used to identify trend lines along an uptrend which can predict a move in a downward position.

A broadening formation is the reverse pattern to a symmetrical triangle. This pattern is considered quite rare, but the signal it generates is deemed to be very reliable.

Channel

This particular pattern is evident when the bars form a definitive line between the support and resistance levels. It shows that there is balance between the buyers and sellers and no real movement in an upward or downward trend.

The pattern can breakout from the channel. If it breaks out in an upward trend then it is a bullish movement. If it breaks out in a downward trend then it is a bearish movement.

Variations to the traditional channel include:

  • Ascending Channel
  • Descending Channel
  • Fibonacci Channel
  • Keltner Channel
  • Turtle Channel

Cup & Handle

As with most other charts this is also exactly as it sounds – a pattern on a chart resembling a cup with a handle. There are two distinct parts to this pattern – the cup and the handle. The cup is in the shape of a ‘U’ and the handle has a slight downward angle.

The cup forms after a downward trend turns into an upward trend it looks very similar to a round bottom pattern. The shape must be a ‘U’ with near equal sides. If it is a ‘V’ shape then it is not a cup and handle pattern.

As the cup is formed the market then experiences a pullback and changes direction to a downward pattern which forms the handle. This is not a common pattern and takes many weeks, if not many months, to actually form.

Descending Channel

Similar to the horizontal channel however this pattern forms a downward moving channel pattern (i.e. the parallel trend lines slope downwards from left to right). This is the opposite pattern to the ascending channel. The upper trend line connects a stocks daily highs and the lower trend line connects a stocks daily lows.

As a general rule of thumb, if the stock fails to move within an established channel it usually indicates that the trend is changing and will most likely break out of the current pattern in the opposite direction. Thus, the clearing of the upper trend line could indicate an upward trend and the clearing of the lower trend line could indicate a downward trend.

Flag

This is a rectangular shaped chart pattern that looks like a flag with a mast on either side (similar to football goal posts). It occurs after a security has a sudden move up or down – something like a hiccup – but then continues on the original trend. It has a clearly defined ‘flagpole’, followed by the rectangular flag pattern then another flagpole.

If the original trend was upward, then the flag will slope down. If the original trend was downward, then the flag will slope up. This is a very reliable short term continuation pattern and very rarely results in a trend reversal. Flags form over a period of no more than 12 weeks – once the pattern exceeds 12 weeks it is considered to be a rectangle. Most analysts rely on the pattern for around 1 to 4 weeks however some will take it up to 12 weeks.

Horizontal Channel

A horizontal channel is the portion of a chart pattern that is contained within 2 horizontal parallel lines drawn along the top and bottom of the pattern. The parallel lines are drawn along the daily highs and daily lows. Also known as a trading channel. Once the price of a stock breaks out of the upper or lower line of a horizontal channel, a large price movement in the direction of the break usually follows.

Pennant

Similar to a flag pattern, the pennant is also a continuation pattern and very similar to the flag. As the name suggests, it is when a chart pattern forms in the shape of a pennant.

A pennant forms with a flagpole or stick the same as the flag however the shape of the flag is triangular and not a rectangle. The following flagpole is then formed by a breakout and is in the original direction of the first flagpole. Pennants form over a period of one to five weeks – very similar to the hiccup experienced by the flag chart pattern however the breakout from the pennant is in the same direction as the original flagpole that was formed.

A pennant can form in an upward trend or downward trend.

Triangle

A triangle pattern is formed when the trading highs and lows for a particular stock move closer together towards a common point – the ups and downs in price movement become progressively smaller over time. If trend lines are drawn along the daily highs and daily lows it will form a triangle shape. You will notice on the graph that the daily highs become lower whilst at the same time the daily lows become higher.

If the pattern breaks out above the upper trend line then it is considered bullish however it the pattern breaks out below the lower trend line it is considered bearish.

A pennant can form in an upward trend or downward trend.

Wedge

A wedge chart pattern is formed when price variations converge to meet at a point on a straight line. There are two types of wedges – a falling wedge and a rising wedge. A wedge is exactly how it sounds – a wedge shape that forms on a chart pattern when you join together the peaks and troughs (highs and lows).

A falling wedge formation develops as the price continues to converge to a point after falling rapidly. It forms with lower highs and lower lows. A falling wedge is considered to be a bullish pattern. If it occurs in an upward trend it is considered to be a continuation pattern – if it occurs in a downward trend it is considered to be a reversal signal.

A rising wedge formation develops as the price continues to converge to a point after rallying (an upward trend) for a period of time. A rising wedge is considered to be a bearish signal and forms with higher highs and higher lows. A rising wedge is considered a continuation pattern in a downtrend however in an upward trend it is considered to be a reversal signal. In order to draw a definite wedge, the trend pattern must be compact with frequent price fluctuations and tightly bound lines that converge to a point.

The one difference between rising and falling wedges is that falling wedges may drift out of the wedge pattern before rallying sharply. Rising wedges are most common in bear markets, as they provide the fuel for the continuation of the primary trend.