5 Powerful Price Patterns in Technical Analysis

What are the most powerful price patterns in technical analysis?

Understanding price patterns is one of the first concepts that technical traders become familiar with from the very beginning of their stock market. Graph patterns are an important part of classical technical analysis and traders who use charts to buy and sell stocks. , Should be familiar with these patterns.

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One of the most prominent features of technical analysis tools is their reproducibility, so that they can be easily viewed in any chart and any time frame. Price patterns can be used as a signal to enter, a confirmation tool or to predict the direction and extent of market price movements. In this article, based on popularity and efficiency, we will explain 5 of the most powerful graphic patterns with important details. These patterns are:

Head and shoulders, rectangles, twin floors and ceilings, triple floors and ceilings, and flags. Identifying these patterns in charts helps us better understand the market and be mindful of future price movements. In general, price patterns are divided into two categories: continuous and recurring, with twin and triple head and shoulders, ceiling and floor patterns being recurring, and flags and rectangles being classified as continuous patterns. According to the researches, among the mentioned cases, the head and shoulder pattern is the most widely used graphic pattern from the point of view of many traders. Proper knowledge and deep understanding of these patterns will lead to a broader view of trading, which can lead to capital growth and long-term success.

General tips on price patterns

When creating a chart pattern, changing the trading volume is an auxiliary tool to confirm the accuracy and strength of the pattern.
Each price pattern, by its very nature, has a predetermined graphic purpose. The extent to which these expectations are met depends entirely on market trends.
The longer it takes for a pattern to form, the greater the price movement is expected.
Many graphic patterns are very similar in detail. Therefore, in order to distinguish them from each other, we must pay attention to factors such as price breaks, volume changes, and so on.
One of the best ways to detect failure is to increase trading volume as prices move out of support or resistance areas. Always keep this in mind when using price patterns.
Some experts believe that in order for graphic patterns to be more powerful, during the formation of the pattern, the trading volume at the floor and ceiling points should be reduced from left to right of the chart, respectively, and at the breaking point, we should see an increase in trading volume.

1- Head and shoulder pattern

It can be said that it is almost the most popular and reliable recursive graph model in technical analysis, the efficiency of which has been proven over time and under different conditions. The formation of this pattern can lead to a very important turning point or a normal short-term price correction. According to the chart, the classic head and shoulder pattern is a bearish signal and the reverse head and shoulder is an indication of the possibility of an uptrend. Geometrically, the classical head and shoulder pattern consists of the formation of three peaks in a row, the second peak (head) relative to the others (shoulders). It is taller and eventually has a design similar to human heads and shoulders in the diagram. If such an arrangement is formed by the valleys, we will have an inverted head and shoulder pattern. This pattern usually occurs after a strong trend and, depending on market conditions, can be a sign of a change in collective trends and the potential for an imminent price return.

Careful analysis of supply and demand flows governing the process of shaping the head and shoulders pattern in the classical case shows that first buyers dominated the market and increased the price to a certain level, then a number of sellers reduced their prices by offering their shares and the first The peak is formed in the diagram. Furthermore, given that buyers are still hoping for a price increase, the market will start growing again as the volume of purchase orders increases and sellers retreat. This time, due to the strengthening of positive expectations among traders and citing the end of the price correction and the beginning of a new uptrend, the inflow of money has strengthened and the level of resistance ahead (previous peak) It is also broken and the price registers a new high point in the chart. Then, due to rising prices, some previous buyers sell in order to protect profits, and at the same time, with the addition of other sellers, the price is reduced to the support level (previous peak or resistance, which is protected according to the law of conversion of levels ) It turns out that with increasing sales pressure, this level is also broken and eventually, with the formation of a heavy downward wave, the price falls to around the first valley. At this stage, again a number of stubborn buyers with their purchase orders cause prices to rise, with the difference that this uptrend does not last and after climbing to the first peak, sellers dominate the market for the third time and with their sales form a strong downward trend. be. The price decline has not stopped even when it reaches the support line due to the connection of the previous two pairs, which is called the neck line, and after the failure of this level with a heavy trading volume, a strong downward trend begins. Psychologically, this pattern represents three times the unsuccessful attempt of buyers in order to continue the uptrend, which, finally, with the downward failure of the neckline of the pattern, a strong downward signal appears. The price target of this model is at least the distance from the second peak to the neckline. The inverted head and shoulder pattern is exactly a mirror image of the classical state, which can be distinguished by the way the valleys are formed. The difference is that, unlike the classical mode, the formation of this pattern is reminiscent of an ascending signal.

2- Twin ceiling and floor pattern

One of the most common recurring patterns is the graph. Therefore, it should be used in special situations or in conjunction with other analytical tools, to greatly reduce possible errors. The best performance of this pattern is after strong and long price movements. The twin ceiling is a bearish signal and the twin floor pattern is a sign that the market is likely to rise. Graphically, this pattern represents a double failure of the price to continue the main movement, which is finally expected to change the dominant trend and the market to continue in another direction. The twin floor pattern theoretically indicates that, after a strong downtrend, buyers have finally been able to reverse the market trend by beating sellers. The first uptrend occurs after a strong downtrend, which eventually declines as vendors re-dominate. The result of these interactions is the formation of the first valley and peak. As we approach the support level resulting from the formation of the first valley, buyers will start working again and the price will increase up to the previous ceiling. At this stage, due to the formation of two consecutive rounds and as a result, the existence of a strong support level, the trading volume has increased significantly and with the failure of the first peak resistance area, the trend change and the uptrend signal are confirmed. In the twin roof, exactly the conditions of pattern formation are the opposite of the mentioned situation and its property is the reduction of prices. The minimum technical purpose of this graphic pattern in both roof and floor types is equal to the distance between the peak and the valleys from the breaking point. In the twin roof, exactly the conditions of pattern formation are the opposite of the mentioned situation and its property is the reduction of prices. The minimum technical purpose of this graphic pattern in both roof and floor types is equal to the distance between the peak and the valleys from the breaking point. In the twin roof, exactly the conditions of pattern formation are the opposite of the mentioned situation and its property is the reduction of prices. The minimum technical purpose of this graphic pattern in both roof and floor types is equal to the distance between the peak and the valleys from the breaking point.

3- Triple ceiling and floor pattern

If the twin pattern is unable to break down price levels and the interactions between buyers and sellers are repeated in the same way, the observed graph pattern is called the triple floor and ceiling. Usually the formation of this pattern in the chart is a potential sign of the possibility of a change in market trends. Since this model was originally a twin floor and ceiling, it is very similar to it in terms of psychology and technical properties and is considered a recurring model. The psychological philosophy of this model shows the three unsuccessful attempts of a group of traders to continue the dominant market trend. Since the formation of a triple pattern takes longer, it can be inferred that it emits a stronger signal and as a result, the price moves more in the direction of breaking the pattern. In the triple floor pattern, for example, after sellers see the price inability to break the first peak, they conclude that the market uptrend is completely depleted and they have to wait for the downtrend to continue. But then, reaching the support level, buyers again raise prices with the entry of smart money into the market, but this time on the eve of the hard resistance caused by the peaks, with the arrival of new buyers and a significant increase in trading volume at the breaking point, the pattern is confirmed and A new trend is taking shape in the chart. The most obvious point when breaking chart areas is that many sellers are queuing up when they see the volume of trades crossing the levels and the long time it takes to form a pattern. As in the previous model, after the failure, we are expected to fluctuate in price at least as much as the floor-to-ceiling distance of the pattern in the chart. But then, reaching the support level, buyers again raise prices with the entry of smart money into the market, but this time on the eve of the hard resistance caused by the peaks, with the arrival of new buyers and a significant increase in trading volume at the breaking point, the pattern is confirmed and A new trend is taking shape in the chart. The most obvious point when breaking chart areas is that many sellers are queuing up when they see the volume of trades crossing the levels and the long time it takes to form a pattern. As in the previous model, after the failure, we are expected to fluctuate in price at least as much as the floor-to-ceiling distance of the pattern in the chart. But then, reaching the support level, buyers again raise prices with the entry of smart money into the market, but this time on the eve of the hard resistance caused by the peaks, with the arrival of new buyers and a significant increase in trading volume at the breaking point, the pattern is confirmed and A new trend is taking shape in the chart. The most obvious point when breaking chart areas is that many sellers are queuing up when they see the volume of trades crossing the levels and the long time it takes to form a pattern. As in the previous model, after the failure, we are expected to fluctuate in price at least as much as the floor-to-ceiling distance of the pattern in the chart. The most obvious point when breaking chart areas is that many sellers are queuing up when they see the volume of trades crossing the levels and the long time it takes to form a pattern. As in the previous model, after the failure, we are expected to fluctuate in price at least as much as the floor-to-ceiling distance of the pattern in the chart. The most obvious point when breaking chart areas is that many sellers are queuing up when they see the volume of trades crossing the levels and the long time it takes to form a pattern. As in the previous model, after the failure, we are expected to fluctuate in price at least as much as the floor-to-ceiling distance of the pattern in the chart.

4- Flag pattern

The first type of continuous pattern that we introduce is the flag pattern. This pattern often occurs in corrective situations after the formation of a strong market trend. The formation of the flag pattern after a strong process, so-called rests and revitalizes the market in order to continue the main trend. Due to the graphic nature of the flag pattern, it should be noted that it can be used only when we have a clear and reliable trend, and the use of this pattern in neutral and trend-free markets is not recommended at all. According to the diagram, the flag pattern is a sharp upward or downward movement that is stopped by a series of small corrective movements in the form of horizontal, diagonal or angular channels, and after a short time, the market continues its main trend. The longer the correction phase lasts and the more it moves to the corner, the greater the price movements are expected after the failure. Contrary to the return patterns, the formation of an uptrend is a sign of a rise in prices and the formation of a downtrend indicates a continuation of the downtrend. After failure and confirmation by the heavy trading volume, we expect the market to move at least as much as the base of the flag, ie the beginning of the movement until the first peak or valley is formed.

5- Rectangular pattern

The rectangular pattern can be considered a kind of flag. But we have to distinguish between them, because they are very different in terms of efficiency. In general, this pattern is a continuation of the trend and is a neutral movement between the main movements of a powerful process. When a certain trend is significant, if you see a rectangular pattern in the chart, you can make a decision based on it. But like the flag pattern, it does not apply at other times when the market direction is not clear. On the other hand, the rectangle is very similar to the patterns of the roof and the floor of the polygon. Because in all of these chart shapes, the price fluctuates for a while in a small range between support and horizontal resistance after moving in a certain direction. Accurate identification of these patterns is possible by the direction and conditions of price failure. The oscillation range is the place where buyers and sellers meet, the result of which determines the future direction of the market.