Thread by @SteeleTrading

THREAD: TRADING PATTERNS

Introduction to common trading patterns. The patterns covered here are different versions of consolidation that can be early indications of emerging trends.

There are two main types of patterns:
- Continuation
- Reversals

Before we can address patterns, there are basic terms that traders need to be aware and comfortable with.

- Support and Resistance
- Peaks & Troughs
- Trendlines

Additionally, the longer the price pattern takes to develop, the larger the price movement within the pattern.

The first type of pattern we will address is consolidation.

CONSOLIDATION PATTERNS: A temporary consolidation in an existing trend where the breakout movement is often in the same direction and the initial price movement.

PENNANTS: Pennants occur when two trendlines converge. They occur following a sharp price change (known as a flag pole). A breakout occurs when one of these trendlines overtakes the other, bullish if it breaks. above, bearish if it breaks below.

FLAGS: Flags are created from 2 PARALLEL trendlines, illustrated as a rectangle. Like Pennants, these occur after a sharp price movement (known as a flagpole) and slope in the opposite direction of the flagpole. A downward slope occurs in a bull trend, upwards in a bear trend.

CUP AND HANDLE: This pattern contains two parts, the Cup which is illustrated in a rounding bottom movement, and the Handel which occurs after the cup and resembles a downwards sloping flag. This pattern is often followed by a subsequent breakout from the handle's trading range.

TRIANGLES: Occur between two trendlines but do not follow a flagpole. There are 3 different types of Triangles and the differences between them can be small but are important to understand.
They are...
- Symmetrical Triangles
- Ascending Triangles
- Descending Triangles

SMMETRCAL TRINGLE: have trendlines that are converging at approximately the same pace. It can be much harder to predict the direction of the breakout which is why it is often used in conjunction with other indicators but the direction can only be confirmed after a valid breakout.

ASCENDING TRIANGLE: This is when the top trendline is converging much slower than the bottom and is often horizontal or flat. These BULLISH patterns usually form as a continuation pattern in an uptrend, however, they can scarcely be reversal patterns at the end of a downtrend.

DESCENDING TRIANGLE:
This is the exact opposite of an ascending triangle. This time, the top trend line converges much quicker than the bottom, which again can often be horizontal/flat. This pattern is BEARISH and more times than not is used as consolidation within a downtrend.

The next type of pattern is reversals.

REVERSAL PATTERNS: indicate a change of trend and can be broken down into top and bottom formations.

WEDGES:

Wedges occur between two converging trendlines and can be a reversal or continuation, this is dependant on its prevailing trend.

There are two different types of wedges…

- Falling Wedge
- Rising Wedge

The difference between them lies in their direction.

FALLING WEDGE: The pattern is a cone formation that slopes DOWN as the highs and lows converge. The bullish trend is realized with a breakout above the upper trendline

The pattern is a continuation if the previous trend was bullish or reversal if the previous trend was bearish.

RISING WEDGE: This pattern is a cone formation that slopes UP as the highs and lows converge. The bearish trend is realized with a breakout below the lower trendline

This pattern is a continuation if the previous trend was bearish or reversal if the previous trend was bullish

HEAD AND SHOULDERS: This pattern is an indication of a coming bear trend. It contains 3 successive peaks, with the middle being the highest. The ‘Neckline’ Is a line of support drawn between the end of the left shoulder and the start of the right.

INVERSE HEAD AND SHOULDERS: This pattern is an indication of a coming bull trend. It contains 3 successive troughs, with the middle being the deepest. The ‘Neckline’ Is a line of support drawn between the end of the left shoulder and the start of the right.

DOUBLE BOTTOM: This forms when a support prevents a stock from falling past a certain price on 2 consecutive occasions followed by a break in resistance.

This pattern can sometimes trough on 3 consecutive occasions, this is a triple bottom.

The DOUBLE TOP is the exact opposite as the double bottom as it bounces off resistances and breaks out below supports.

Understanding these patterns and what they indicate is very important for analyzing potential trades and to gain confidence in our actions. The topic of developing criteria for potential trades will be addressed in a coming thread.

Big shout out to the people that taught me the importance of patterns and pushed me to learn more.
@yatesinvesting @The_RockTrading @RadioSilentplay @dantheholy