How to Spot Trends in a Chart?
The ‘trend is your friend’ is the phrase which is used by traders; in simple terms, markets follow trends in one direction (usually) until something else reverses the trend
Trading contrarian may be profitable if predictions are made accurately and in a calculated, well-observed manner, but this does not change the risk levels of such trading, and it requires a lot of technical understanding of analysis, and preferably experience in the trade markets.
Traders indulge in the use of chart patterns which form distinct formations (or shapes) which may be used in order to identify a continuous trend, a possible upcoming reversal of the trend. This helps them to formulate their buy, as well as sell strategies, and some are identified as bearish (downwards trending) or bullish (upwards trending). Keep in mind that while such chart patterns may give traders and indication of the future price movements, there are no guarantees or indications that such predictions are true.
Such patterns on charts display existing trends, and how they predict them to continue; below are some of the most common patters which may be displayed on a chart, explained:
Bullish triangles show that the price trend in question may change, once the pattern is complete. Two trend lines constitute the beginning of the pattern – an upwards resistance line (flat line, explained further down), and a rising line showing support of the price.
The Bearish triangle, similarly, follows the suit until the pattern is whole. However, in this case the flat trend line is the support, while the downwards angled line is the resistance; this is also called a descending triangle formation.
These patterns display the trend lines joining; when the formation is bullish, the wedges lines come together in an ascending direction; while with the bearish wedge, the lines join in a downwards pointing direction
When prices move quickly and a broad sideways move is present, a ‘flag and pennant’ formation occurs. The flag is formed by two parallel lines of support and resistance; the pennant is formed when the two trend lines join.
This formation (with some imagination) can be used to see the shape of a tea cup, and handle (this displays a bullish pattern); if a price moves in an upwards direction, pauses, or drops, then moves upwards directly after, then the cup and handle formation occurs.
Reversal patterns display a trend which is nearing the end, and directing to a reversal once the pattern is whole. Below are some examples which traders should know.
Traders identify this pattern when three price peaks, which form a higher middle peak (the head) with two slightly lower ones one either side (the left and right shoulders); with reversal patterns, traders can anticipate that the prices would move in the opposing direction from the previous trends. This pattern specifically, indicates a possible drop in price below the two bottoms (troughs) are formed by the shoulders.
The opposite is named the ‘inverse head and shoulders’, and this indicates a rise in price once the completion of the pattern occurs.
In a double to chart pattern, the peak of a rising trend is present, and once the pattern is done, the trader can expect to see a sudden drop in price.
In a double bottom chart formation, the bottom (or trough) of a falling trend is present. It displays support to the falling trend, and it can be expected to see price move up after the completion of the formation.
When a price moves up three times, to touch the resistance line without breaking through it, then we get what is called a triple top: a bearish reversal pattern. At every touch point at the top the price will drop to a similar support level. After doing so three times, the price break can be seen dropping below the support line and continuing on to the new trend.
Bullish triple bottom is the above example, in reverse. When prices move downwards and test three similar supports levels without breaking them; the price is seen to rise back up to similar resistance levels. Once the pattern has been completed three times, the price may be seen pushing through the third resistance levels with an expectation that it may be rising continuously.
There are various patterns which could be discussed, but the above-mentioned are some of the most commonly occurring ones; once the charts are followed, and traders begin to observe the patterns, and may be able to make use of the direction which is indicated with regards to market moves.