Chart patterns

In our ideal model for trending action, we tend to portray markets as trending in the direction of the dominant higher time frame trend, retracing counter to that trend and then continuing back in the direction of the higher time frame trend when the counter move has subsided. In the real world, markets don’t always move that way. Quite often markets will trend in the direction of the higher time frame trend, form an area of congestion where the trending action basically moves sideways, then break out above or below the congestion area either in the direction of the higher time frame trend or against it.

Very often, these congestion areas form patterns that have distinctive price action enabling them to be recognised by technical analysts. Quite often these patterns will act in a fairly predictable manner following the breakout above or below their boundaries. The patterns tend to be classified as either reversal or continuation patterns with regard to the likelihood of whether the trend will continue in the direction of the trend prior to the pattern or in the reverse direction to the trend prior to the pattern. Generally, continuation patterns tend to be smaller in size and form faster. Reversal patterns tend to be larger and form over a longer period of time.