Introduction to Chart Patterns - II

Introduction to Chart Patterns II

In my previous blog we had gone through chart patterns like Head and Shoulders, Double Top and Double Bottom, Triple Tops and Bottoms. In this blog we will go through few patterns here:

• Symmetrical Triangle

• Ascending Triangle

• Descending Triangle

• Cup with Handle

Symmetrical Triangle pattern

A Symmetrical Triangle generally occurs when there is some indecision in the stock. Demand and supply for this stock is more or less the same. This chart pattern is formed during a trend continuation. Two higher lows (A & B)  and two lower highs (C & D) are formed. Drawing a line from ‘A’ to ‘B’ and then ‘C’ to ‘D’ forms a triangle. Stock when trades out of the Triangle area will explode in the direction from which it breaks the triangle. See Symmetrical Triangle in an uptrend (bullish) the stock move upwards and hence will go up.  Whereas Symmetrical triangle in a downtrend (bearish) chart the stock breaks the lower part of the triangle and thus will go down. This pattern is a high risk as it can give you big profits if it works in your favour or you can loose good amount of money. Best option is to wait until the stock breaks the triangle area and trades out of it. Difference between  ‘A’ and ‘B’ can be taken as a target from the point of stock breaking the triangle.

Ascending and Descending Triangle

Ascending Triangle is continuation pattern in uptrend and is a bullish pattern as it indicates growth. If you see the chart, the top part appears flat where as the bottom part is rising (ascending). Here the stock reaches a certain level and due to selling pressure comes down. Again there seems to be some buying and reaches to its previous level and comes down. Stock rebounces before it reaches previous low thus creating a higher low. This happens more than 2-3 times before it breaks the resistance (Flat part of the triangle). Pattern is complete once the stock breaks resistance level. Target price (---Base--- mentioned in the figure) can be derived as the height between the first high and corresponding low.  One can enter the stock with a stop loss of the ascending part of the triangle.

Descending Triangle is also a continuation pattern in downtrend or could be a reversal pattern at the end of uptrend. This is a bearish pattern. You can make out through the diagram that it is exactly the opposite of Ascending triangle. Here the bottom part of the triangle is flat whereas the upper part is lowering (descending). Stock reaches the low level and rises due to some buyers tries to get this stock as they think the stock has reached its low. After rising, for a small period, bears take control and bring the stock down up to previous low created. Stock rises again but due to selling pressure goes down again creating a lower high. This process repeats more than 2-3 times until stock breaks the support (lower part of triangle). Pattern is complete when stock trades below support level. Target price (---Base--- mentioned in the figure) can be derived as the height between the first low and corresponding high.

Cup and handle pattern

Cup and Handle is a bullish continuation pattern. Here the stock shows consolidation for some period before a breakout. This pattern is divided into 2 parts viz the cup and its handle. Firstly stock after its uptrend dips down after a selling pressure and rises again upto previous high creating a curve or looks like a shape of a cup. Line drawn by the previous high and current high is known as Neckline. Later stock moves in a definite range  over and above the neckline (or sometimes even on the same level of neckline) for quite a while creating a handle of a cup. When stock breaks the higher level of the handle, the pattern is complete. You can see a steep rise in this stock after the pattern is complete. Expected target is the length between the neckline and lowest part of the cup. This pattern can take around 6-10 months or more to complete.

We will be seeing more of such patterns in my next blog. Happy and safe Trading.