Introduction to Chart Patterns – III
We have covered basic chart patterns in my earlier blog. Kindly visit Chart Patterns – An Introduction and Introduction to Chart Patterns II to have a peep into Head and Shoulders, Double Top and Double Bottom, Triple Tops and Bottoms, Symmetrical Triangle, Ascending Triangle, Descending Triangle and Cup with Handle. Here we will have a look into:
- Falling Wedges
- Rising Wedges
Wedges mean a thick area on one end and tapering towards a thin edge. This is similar to Symmetrical Triangle pattern. Only difference here is the triangle is tapering downwards. This is considered as a bullish pattern. If you look closely it creates lower tops and lower bottoms.
Stock creates lowers tops (A-B- C) creating a resistance level and lower lows (D-E-F) creating a support level. If the stock breaks the resistance level (G) which it will generally do, the stock is expected to rise. An Investor can invest in this stock by having a strict stop loss at support level. This also happens even if this pattern occurs in a downtrend.
Rising wedges is a Bearish trend. Here the formation of the triangle is upwards. Pattern creates higher tops and higher bottoms. Level of resistance A-B-C is created and is difficult to break, whereas a support Level D-E-F is a rising support level. When stock breaches the support (D-E-F) it is expected to go further down, at least to a level of ‘D’ ad further down later. A trader can short sell the stock at point ‘F’ with a strict stop loss of level ‘C’. Trader can book the profits at level ‘D’ and might hold for more profits. Same results occur even if this pattern occurs in uptrend or downtrend.
Rectangles is a continuation pattern. There is a area of indecision where stock moves within a specific range and once stock breaches the resistance level (in uptrend) will continue to rise where as if it breaches the support level (in downtrend) will fall. The pattern is created when it creates higher levels (A-B-C) and comes down creating a support (D-E-F) thus creating a rectangle shape. The pattern is complete when it breaches the point ‘G’. Area of indecision is A-G in a rectangular form where it is difficult to make where is stock is heading.
In Downtrend the stock falls to a level of D-E-F and tries to rise but cannot go ahead of A-B-C level of resistance. Once the stock breaches the level of ‘G’ the stock falls and downtrend continues.
Happy and safe trading.