Trading patterns are trends in securities prices over a discrete period of time, identified in real time and often indicators of a general market change. There are at least five types of trading patterns: ascending and descending channels, cup and handle, head and shoulders, and triangle. They are best viewed in a broader context, considering market and world conditions each time a particular pattern emerged.
A trading pattern is a specific trend that occurs in the prices of securities that trade during a discrete period of time. Trading patterns are generally considered an aspect of technical analysis, a method used to determine the value of stocks, bonds, and other securities. Technical analysis uses a macro approach to look at trends in the market and trading patterns rather than what is happening within a particular company. Fundamental analysis is another type of stock valuation and is based on the way a company does business and its ‘history.
Trading patterns are identified in real time and can often be indicators of a general change in the market. The adage, “It’s a psychological market,” is a specific reference to trading patterns or fluctuations that are often caused by public mood. There is often a high degree of correlation between national or world events and the valuation of securities. Trading patterns occur during each type of business cycle.
There are at least five different types of trading patterns: ascending channels, descending channels, cup and handle, head and shoulders, and triangle. Rising channels are a stock trading pattern in which the price of a stock rises steadily over a set period of time. Descending channels, on the other hand, is a pattern whereby securities trade at a lower price on each subsequent day within a set amount of time.
A third type of trading pattern is known as a cup and handle. This trading pattern gets its name from the “U” shape it creates when plotted on a chart. Typically, the cup and handle pattern has a peak followed by a gradual slowdown and then a gradual recovery. The “ride” occurs after values have reached their second peak, after which prices fall.
A security is said to have a head and shoulders pattern if it resembles the outline of a head and shoulders when plotted on a chart. First, the value of the values increases, then it flattens out, and they peak once more. After the second peak, they drop to the level of the first peak, flatten out, and then decline.
Finally, there is the triangle trading pattern which is characterized by a sharp increase in value, peaking, and then declining to its original level.
While trading patterns can be great indicators of a flourishing market turnaround, they are best viewed in a broader context. This means that while they can be an important aspect of technical analysis, it’s good to look at the history of particular trading patterns. For example, what were the market and world conditions each time a particular trading pattern emerged? What, if any, were the similarities? What happened after?
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