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What are different types of Patterns?
Technical analysis is founded on the principle that stock prices move in trends. Prices do not continue in a trend in perpetuity. When prices change direction, the move seldom comes cleanly and unequivocally. Prices tend to move back and forth, zigzagging up and down as investors try to analyse the market and arrive at new price expectations for the stock.
These price fluctuations often move along in a sideways movement as investors work away at coming to a conclusion about where they feel the price of the stock should be heading. These sideways movements cause price patterns to emerge on the chart.
These patterns fall under two basic headings:
Consolidation of Continuation Patterns
This pattern breaks out in the direction of the previous trend. In other words, the pattern confirms the existing trend, suggesting that investors are considering whether the market is overbought or oversold but ultimately deciding to confirm the existing trend. Examples of this type of pattern include ascending triangles, descending triangles, and symmetrical triangles.
Reversal Patterns
These patterns breakout in a direction opposite to the previous trend. They mark a change in direction of the price of the stock. After pausing to consider their investment strategies, investors decide to reverse an existing trend in a stock's price. Examples of this type of pattern include head and shoulders tops and bottoms, double bottoms or tops, triple bottoms or tops, ascending triangles, descending triangles, and symmetrical triangles.
How long does it take for a pattern to form?
This is a difficult question to answer. It can take days, weeks or months for a pattern to form. The general consensus is, however, the longer the pattern takes to form the more significant the resulting move in the price of the stock will be.
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