It would be a mistake to assume that most changes in trend are very abrupt affairs. The fact is that important changes in trend usually require a period of transition. The problem is that these periods of transition do not always signal a trend reversal. Sometimes these sideways periods just indicate a pause or consolidation in the existing trend after which the original trend is resumed.The study of these transition periods and their forecasting implications leads us to the question of price patterns. First of all, what are price patterns? Price patterns are pictures or formations, which appear on price charts of stocks or commodities, that can be classified into different categories and that have predictive value.
TWO TYPES OF PATTERNS:
REVERSAL AND CONTINUATION
There are two major categories of price patterns—reversal and continuation. As these names imply, reversal patterns indicate that an important reversal in trend is taking place. The continuation patterns, on the other hand, suggest that the market is only pausing for awhile, possibly to correct a near term overbought or oversold condition, after which the existing trend will be resumed.Volume plays an important confirming role in all of these price patterns. In times of doubt (and there are lots of those), a study of the volume pattern accompanying the price data can be the deciding factor as to whether or not the pattern can be trusted.Most price patterns also have certain measuring techniques that help the analyst to determine minimum price objectives.
Reversal Chart Patterns
The trend reversal chart patterns appear at the end of a trend. If you see a reversal chart formation when the price is trending, in most of the cases the price move will reverse with the confirmation of the formation.In other words, reversal chart patterns indicate that the current trend is about to end and a new contrary move is on its way!
Continuation Chart Patterns
The trend continuation chart pattern appears when the price is trending. If you spot a continuation chart pattern during a trend, this means the price is correcting. In this manner, continuation patterns indicate that a new move in the same direction is likely to occur.