Technical Analysis

🔍 What is Technical Analysis?

Technical analysis is a trading approach that studies past price movements, volume, and market statistics, primarily using charts, to forecast future price trends.
Unlike fundamental analysis, it doesn’t consider a company’s financial health or economic factors—only price and volume behavior.

📈 Role of Chart Patterns

Chart patterns are visual representations formed by price movements on a chart. These patterns reflect investor psychology and market sentiment,
often signaling potential reversals or continuations of trends.

They are broadly classified into three categories:

1. Reversal Patterns

These indicate a change in the current trend.

  • Head and Shoulders: Signals a trend reversal from bullish to bearish.
  • Double Top and Double Bottom: Suggests the market is testing a resistance/support level and may reverse.

2. Continuation Patterns

These suggest the current trend will continue.

  • Triangles (ascending, descending, symmetrical): Show price consolidation before a breakout.
  • Flags and Pennants: Indicate short pauses in a strong trend before continuation.

3. Bilateral Patterns aka (zone)

These suggest price can break in either direction, requiring confirmation.

  • Symmetrical Triangle: Traders wait for breakout direction before entering a trade.

⚙️ How Traders Use Chart Patterns

  1. Identify the pattern on a price chart (usually candlestick).
  2. Determine the type (reversal or continuation).
  3. Confirm with volume and other technical indicators (e.g., RSI, MACD).
  4. Set entry/exit points based on breakout or breakdown.
  5. Manage risk with stop-loss orders and position sizing.

📊 Example:

A Head and Shoulders pattern forms at the top of a trend. Once the “neckline” is broken with increased volume, it often signals a price drop. A trader might short the asset after the neckline break and set a stop-loss just above the right shoulder.

✅ Benefits of Chart Pattern Trading

  • Offers visual cues for trade opportunities.
  • Useful in any market (stocks, crypto, forex).
  • Can be used with technical indicators for stronger signals.