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Nifty 50 & Stocks - Decoding Chart Patterns

The document discusses how to decode chart patterns by explaining what patterns are, how they work, different types of patterns, and examples of bullish continuation and reversal patterns. It emphasizes that chart patterns are subjective but can indicate market moves, and keeping analysis simple through focus on key patterns and price action leads to better trading decisions than overreliance on indicators.

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296 views

Nifty 50 & Stocks - Decoding Chart Patterns

The document discusses how to decode chart patterns by explaining what patterns are, how they work, different types of patterns, and examples of bullish continuation and reversal patterns. It emphasizes that chart patterns are subjective but can indicate market moves, and keeping analysis simple through focus on key patterns and price action leads to better trading decisions than overreliance on indicators.

Uploaded by

hb0232599
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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DECODING

CHART PATTERNS

© All Rights Reserved 2022


Chart patterns are one of the major components of technical
analysis while predicting the next market move. Most of the
traders rely on chart patterns while trading. But, chart patterns
are formed by the price action and it is completely subjective in
nature. Any pattern appearing to me on the charts might not
exactly appear to you as it is, one my perceive a pattern
bullish one may perceive ut as bearish. Everything boils down
to what pattern is considered for trading by an individual itself
rather than the masses. Bullish or bearish, all patterns can be
traded when observed correctly. How to do that? Well, in this
article i will teach you how to decode chart patterns.
What are patterns?

Patterns are the unique formations created by the movement


of a security’s price on the charts.a pattern is identified by
connecting few components like closing price or highs or lows.
Traders seek to identify patterns as a way to forecast the next
probable move of the price, It help the traders to form a trading
decision. Patterns are indeed the foundation of technical
analysis.
How patterns work?

Patterns, perhap better known as chart patterns can occur at


any point or measure of time. They are created in the real time
when the market is opened. However, chart patterns may be
very easy to detect in hindsight, but it gets touch to identify
them in real time.

Chart patterns work as an indicator for traders to take a move


in either of the directions based on the market sentiments.
Pattern Types

Chart patterns are primarily divided into two types, i.e. bullish
and bearish. Further, chart pattern formation can be in
continuation of the trend or it can indicate reversal. Simply put,
if a pattern is bullish, it can be continuation or reversal.
Similarly, if a pattern is bearish, it can be continuation or
reversal.

In this article we will discuss about how and where they are
formed.

Bullish Patterns

Bullish patterns are majorly of two types, i.e. bullish


continuation and bullish reversal.

Let’s decode bullish continuation pattern first.

Bullish Continuation Pattern

Bullish continuation pattern is formed in the middle of the


uptrend where the price first takes a halt then continues to rise
again. By middle of the trend means the price still has enough
room in the upside to go.

Here, i am taking the example of flag and pole pattern:


Pattern Breakdown:
A rally in price occurred.
After a certain level, people who entered the trade in the
beginning of the rally started to book their profits, which
created a selling pressure. Hence, price fell.
People who couldn't took entry were waiting for the price to
come down a bit so that they can enter.
Now, due to prior exits and fresh buying the price is not
ready to fall, hence moving in a slant range.
Price gave breakout on the upside as selling orders get
finished and new demand can be seen taking the price
higher and higher.
The flag is like a halt for the price, it is formed in the middle
of the uptrend- it still has a big room on the upside.
Bullish Reversal Pattern

Bullish reversal pattern is formed at the extreme of the uptrend


where the buying pressure get exhausted and it is a clear
indication of bears taking over the market. To make it clear for
you, i am taking the example of double top pattern:

Pattern Breakdown:
The market was in uptrend and the up move started to
exhaust but still buyers tried to take it up.
Due to previous long positions, buyers decided to book
profits and for the bears it was totally indigestible to see
such up move.
At extreme, where profit booking occurred- price saw a fall
Buyers who couldn’t take entry went long in hopes of
profiting from the uptrend.
On the upside bears were sure to short the market as it
was overbought.
Market was short again by the bears and fresh buyers got
trapped here.
Due to fear of stop loss, all of them switched their positions
because it was too hard for them to move the market up
alone.
bears , on the other side, was waiting for the new buyers
to switch their positions and then short the market with
heavy quantity resulting in the market to reverse.

Profit Lies in Simplicity

I have seen most of the ameteur traders rely a lot on indicators


for forecasting the next market move and trade accordingly.
But, indicators won’t alone will help you churn profits. It is the
balanced combination of technical indicators and price action
chart patterns which is needed to be successful in trading.

Here , i will show you two illustration of how an amateur trades


and how a professional trades:
Amateur Trader

As you can clearly see in the above illustration that an ameteur


trader has used a lot of indicators and very less chart patterns
formation, which makes it quite difficult for him to look for the
bigger picture. The cluttered chart is working like a hindrance
for him to find a spot where he can take trade. Thus, keeping it
simpler will make anyone money, not the complexity.

Professional Trader
As you can see in the above illustration that how a proffesional
trader took trade. He only took the mere assistance of RSI
indictor and purely traded on the basis of chart patterns,
clearly seen in the two diagrams that the later one is more
clear and simple. A simple chart marked with levels along with
an indicator allows to trader to find a spot from where he can
take a trade and churn huge profits out of the market.

Continuous Chart Patterns Cheat Sheet

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