Importance of Chart Patterns
For those looking to master the stock market, understanding chart patterns is essential. And if you have reached a point where you are out of trading ideas or stuck in a traders’ block, this article is just for you.
Chart patterns are formed by the movement of prices over time, and these can be of two types: Continuous patterns which indicate that price movement will continue in the direction of the trend and Reversal patterns which indicate a potential change in the direction of the trend.
There is no universal pattern which can help you in every situation. Hence, it is important to know what each pattern indicates and how you can spot them in a price movement.
In a series of these articles we will talk about all such important patterns that a trader must know about.
In this article, we look at Head and Shoulders
The head and shoulders pattern is a reliable reversal pattern that forms after an uptrend. The pattern is named for its resemblance to a head and two shoulders. The left and right shoulders are typically at or near the same price level, and the head is higher. When the price breaks below the neckline, it signals a bearish reversal.
Look out for the following sequence:
For example: take a look at the chart pattern for TCS to understand how price movement took place from the month of August 2019 to February 2020 forming three peaks, in the sequence we just discussed.
Chart patterns are formed by the movement of prices over time, and these can be of two types: Continuous patterns which indicate that price movement will continue in the direction of the trend and Reversal patterns which indicate a potential change in the direction of the trend.
There is no universal pattern which can help you in every situation. Hence, it is important to know what each pattern indicates and how you can spot them in a price movement.
In a series of these articles we will talk about all such important patterns that a trader must know about.
In this article, we look at Head and Shoulders
The head and shoulders pattern is a reliable reversal pattern that forms after an uptrend. The pattern is named for its resemblance to a head and two shoulders. The left and right shoulders are typically at or near the same price level, and the head is higher. When the price breaks below the neckline, it signals a bearish reversal.
Look out for the following sequence:
- Left shoulder: A price rise followed by a peak, followed by a decline.
- Head: A price rise again forming a higher peak than the previous one.
- Right shoulder: A decline of price again, followed by a rise to form the right peak, which is lower than the head.
For example: take a look at the chart pattern for TCS to understand how price movement took place from the month of August 2019 to February 2020 forming three peaks, in the sequence we just discussed.
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