Seeing Chart Patterns Through a Technical Lens
In This Chapter
Figuring out continuation patterns
Going over reversal patterns
Measuring the measured move
A pattern is a type of indicator traditionally drawn on the chart by hand. Technical traders have been developing patterns from the earliest days of technical analysis. Until personal computers came along, Technical Analysis of Stock Market Trends by Edwards and McGee was a Bible for chart readers. Chart patterns are powerful indicators, and some rudimentary knowledge of patterns is a good idea for the most sophisticated indicator trader and the beginner alike.
I cover some classic patterns in other chapters, such as the inside day (Chapter 7) and support and resistance lines (Chapter 10). Other bar patterns are also covered in Chapter 7 (island reversal), and all the candlestick formations are considered patterns, too (Chapter 8). In this chapter, I describe a few more of the most common patterns.
Chart patterns are indicators consisting of geometric shapes drawn on the chart, such as a triangle. As with most indicators, a price forecast is embedded in the pattern identification. Here’s a quick pattern primer:
Most patterns employ straight lines (such as triangles), although a few use semicircles or semiellipses (such as head-and-shoulders).
Pattern lines generally follow either the highs or the lows.
You usually want to organize pattern types according to whether they forecast ...