Section 5: Applying Price Patterns

Having learned the basic price patterns assumed to be known to all Technical Analysts, we now move on to their application. Price patterns have value not only as indications of the reversal or continuation of trends, but also as tools to project likely future price targets following the completion of the pattern. Price patterns can also have predictive power when they “fail” to perform according to plan. Finally, volume should be analyzed to gauge the validity of price patterns, ultimately resulting in a qualification statement about the pattern’s effectiveness.

General Application

Price patterns occur quite often, but can occur over varying time frames. Basic concepts can be applied to all price patterns, regardless of their duration.

Basic Concepts:

Introduction to Chart Patterns

Measuring Implications:

	Measured Move - Bullish (Continuation)
	Measured Move - Bearish (Continuation)

Reversal versus Continuation:

Two Dominant Groups

Breakouts

Price patterns require a “breakout”, or a final price movement outside of the range of support and resistance boundaries forming the pattern, in order to confirm its validity. There are rules for establishing valid breakouts. An example is used below of the Symmetrical Triangle.

Breakout confirmations:

Symmetrical Triangle (Continuation)

Volume:

Head and Shoulders Top (Reversal)

Other Pattern Characteristics

In addition to measuring implications and volume requirements, price patterns have these noteworthy aspects to consider.

Long- versus Short-term Patterns:

	Flag, Pennant (Continuation)
	What is the difference between a triangle and a pennant?

Next: Using Candlesticks

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