As a continuance of the technical analysis learning, now we will learn about Chart Pattern. Beforehand, it is suggested that you learn the Trend Line and Support & Resistance topic because basically, Chart Pattern is formed by concepts of those prior topics. The nature of Chart Pattern is somewhat pretty similar to what has been discussed on those topics.
As mentioned above, Chart Pattern is a graphic pattern which is made of concepts of the Trend Line and Support & Resistance. This pattern is basically formed by the understanding of traders throughout the world in identifying and responding the happening situation and condition.
In the beginning, Chart Pattern was not something taken seriously in case of technical analysis until 1920s when an accountant named Ralph Nelson Elliot brought up his observation about the relationship between basic concept of Support & Resistance and price tendency to form a pattern. What he put forward had confirmed the existing assumption that humans have similar feelings or emotions for a certain condition or situation. Based on the assumption, Elliot predicted that humans reaction (read: traders) will be identical. It makes a particular pattern recurs until the nature of it is possible to predict or understand.
Actually, Chart Pattern is a more specific form of a trend phase. Chart Pattern summarizes the whole activity perspectively and formatively. It is perspectively because the formed pattern will depend on who is looking at it and formatively because it contains particular formations of price movements.
Basically, Chart Pattern can be seen by different points of view as traders would have dissimilar views on recognizing the occuring event. Yet, in recognizing pattern, the perspective is not the only thing that matters, but the validity as well. Chart Pattern’s validity level on a wide time frame will certainly be higher than the narrower one. For example, it will have more validity to observe pattern on H4 time frame than M15.
In terms of formation, Chart Pattern is divided into two categories, which are Reversal Pattern and Continuation Pattern. As mentioned on the Trend Line topic, reversal is an event in which the price movement takes a “U-turn” or in other words, it is a pattern indicating a reversal of the ongoing trend. On the other hand, Continuation Trend, as what it is called, is a pattern indicating a continuation of the ongoing trend. It is important for a trader to be able to identify and take an advantage of an information as quick as possible if an optimum profit is desired.
Both Chart Patterns have their own forms. Moreover, they have several unique forms in general, which are:
Reversal Chart Patterns:
Head and Shoulders
Inverted Head and Shoulders
Continuation Chart Patterns:
Cup and Handle
Each pattern will be discussed further in Chart Pattern part 2.