Trading patterns: Everything You Need to Know

The patterns are the distinctive formations created by the price movements of the securities on a chart and are the foundation of technical analysis.

A pattern is identified by a line connecting common price points, such as closing prices or highs or lows, during a specific period. Technical analysts try to identify patterns to anticipate the future direction of a stock’s price. These patterns can be as simple as trend lines and as complex as double head and shoulders formations.

In this article, the experts of XTB have summarized the major technical patterns that traders can spot on trading charts. XTB is a world-class regulated investment broker, with a global presence in over 13 countries. The XTB platform offers access to more than 5,800 financial instruments - both real shares and ETFs, as well as CFD-type derivative instruments, as well as access to free and comprehensive training.

What are trading patterns for?

A form of chart pattern called a technical pattern is what traders use to spot potential trading opportunities. They are based on volume of a stock and price changes over a period of time. Support and resistance levels, trends and future price movements can be predicted using technical models.

A series of price changes forming a pattern on a chart is what constitutes a technical pattern. Model names are usually derived from the form and interpretation they take. Heads and shoulders, double tops and bottoms, flags, pennants, wedges, and triangles are examples of common technical patterns.

1) Head and Shoulders

When a stock’s price creates three peaks, two shoulders and a head, with the average peak (the head) being the highest, this pattern is known as a head and shoulders pattern. Typically, this pattern is seen as a warning indicator of a likely underlying trend reversal.

2) Double tops and bottoms

Similar to head and shoulders patterns, double tops and bottoms have two peaks (the two tops or two bottoms) instead of three. The current trend is likely to continue in the same direction, according to this pattern.

3) Flag

Technical designs that look like flags and pennants are called flags and pennants, respectively. They often develop following a significant price movement and are taken as an indication that the price may go further in the same direction.

4) Wedge

Two trend lines converge, creating a triangular shape known as a wedge. Wedges, which can be up or down, are seen as an indication that the underlying trend may be about to reverse.

5) Triangle

Another category of technical pattern is the triangle, which can be an ascending, descending or symmetrical triangle. Ascending triangles suggest that a stock’s price will continue to rise, while descending triangles suggest that a stock’s price will continue to fall. Symmetrical triangles are said to indicate a possible trend reversal.

Are chart patterns a foolproof method?

The use of technical patterns should not be seen as a guarantee against false signals. To validate trade signals produced by technical patterns, it is crucial to apply additional technical indicators and fundamental analysis. It is vital to keep in mind that past success does not guarantee future success.

In any case, it is important to do your research and choose a reputable financial intermediary before making any investment decisions. In case you are interested in the world of trading and investments, you can view the offer of XTB, a one stop shop regulated broker (thousands of markets in a single app), recognized globally and fourth in the world by number of active customers .

Please also note that information or research based on historical data does not guarantee future performance or results. Any opinions, research, analyses, prices or other information provided under the heading of general market commentary do not constitute investment advice.

Original article published on Money.it Italy 2023-03-08 10:09:37. Original title: Trading pattern: tutto quello che devi sapere