When connecting the peaks and throughs of the moving market prices, one can discover geometric formations. Officially, these forms are called chart patterns. Patterns carry reliable information for trading, because they look at the big picture and suggest information about the future behaviour of the prices with high punctuality. Trading volume has a significant role in the interpretation of the patterns, as volume strengthens the role of patterns.
Patterns can be divided into two categories:
- continuations,
- reversals.
Continuations signal that the trend will continue once the pattern is complete. Therefore, opening long positions is highly recommended in this pattern.
On the contrary, reversals indicate that the trend will reverse upon completion of the pattern. In this case, it is suggested to close the long and open short positions. Patterns cannot be interpreted in long term. In longer time horizon, only trends can be taken into account. During technical analysis, one can meet patterns in both medium and short term.
