Price patterns are price or market activity formations on a graph that can be categorized into various categories and have predictive value. Also, we know that markets form trends that give analysts insight into possible future results. Two basic types of price formations may occur as large or smaller, interim groupings over any time, i.e. reversal patterns and continuation patterns.
Reversal patterns
The presence of these patterns means that a significant reversal of pattern is about to take place. There are different kinds of patterns of reversal that share similar and underlying characteristics that follow.
- The presence of a prior trend is a prerequisite for any reverse pattern.
- A breaking of a trend line is the first signal of an imminent trend reversal.
- The bigger the trend, the greater the future step that follows.
- Topping trends are typically shorter and more volatile in length, and more explosive.
- The bottoms are longer and have smaller ranges that are less unpredictable.
- In these patterns, the volume is an essential indicator of confirmation, particularly around bottom formations.
- Reversal patterns often allow specific measuring techniques to help decide price targets.
Continuation patterns
In the more extensive and dominant trend, continuation patterns are mostly sideways and overlapping patterns. Most likely, the next trend shift would be in the same direction as the trend preceding the formation. Although these groups have a strong tendency to continue the pattern, there are some conditions under which a reversal can occur.
Without intermediate delays and adjustments, a trending market quite seldom continues. Dynamic supply and demand stabilize during these consolidation processes as participants re-assess business dynamics and profit-taking occurs. As soon as prolonged circumstances have been resolved, the broader pattern reappears.
Candlestick and bar chart patterns
Without discussing candlestick and bar patterns, an analysis of demand and price patterns will be incomplete. Psychological representations of market participant mentality are different variations of candlesticks and bar charts. A candlestick or bar pattern, usually not more than five, may consist of a single unit or a combination of sticks/bars.
To determine reversal patterns, most of these formations are used, but continuation patterns still exist. They have specific names that clarify the perceptions of their predictive value and post trends. The relatively short-term existence of these measures makes them a trading tool and for investment and asset management purposes, less relevant.
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