Price Patterns

History repeats itself. Price patterns are indispensable from the arsenal of a technician.

Generally, price patterns can be group as either reversal patterns or continuation patterns. There are numerous price patterns under each category and the following discussion will look at two examples from each category.

Reversal Patterns

Head and Shoulders

The Head and Shoulders reversal pattern is one of the most reliable price patterns out there. This pattern is formed by the price first rises to a peak then declines, then rises above the former peak and then declines again, then rises again but fails to clear the former peak this time and starts to decline again. The neckline is formed by connecting the low of first decline with the low of second decline. Neckline represents a potential support hence when it is broken it turns into a potential resistance.

Double Bottom

The Double Bottom reversal pattern resembles a "W" shape when it is formed. This pattern occurs when a stock price drops to a similar level twice before it starts to rebound. The middle point of the “W” should not exceed previous high. In certain cases, the second bottom would go below the first low to create a shakeout of jittery investors. This is a very bullish signal.

Next: Building Blocks of Technical Analysis: Price Patterns - Continuation Patterns


    Table of Contents
  1. Introduction
  2. Technical Analysis Explained
  3. Building Blocks of Technical Analysis: Charts
  4. Building Blocks of Technical Analysis: Trendlines
  5. Building Blocks of Technical Analysis: Moving Averages
  6. Building Blocks of Technical Analysis: Indicators - RSI
  7. Building Blocks of Technical Analysis: Indicators - Bollinger Bands
  8. Building Blocks of Technical Analysis: Indicators - MACD
  9. Building Blocks of Technical Analysis: Price Patterns - Reversal Patterns
  10. Building Blocks of Technical Analysis: Price Patterns - Continuation Patterns
  11. Conclusion
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