Chart Patterns: Part 1

Hey friends, welcome to Stock’s Knows. In the previous article, we have learned about Candlestick patterns and their interpretation. 

Another important concept of technical analysis is chart patterns. Since market participants are Humans and it is a human psychology to repeat things. Like candlestick patterns, we can also find some chart patterns repeatedly in charts of any tradable security. 

If we somehow know about those chart patterns and interpretation of them, it will be very helpful for us to analyze and predict the direction of price. From this article, we will learn all those chart patterns with their interpretation and also, we will understand how to trade them to get profit.

First, two chart patterns are Head and Shoulder pattern and Inverted Head and Shoulder Pattern.

  1)Head and Shoulder Pattern:

  Head and Shoulder pattern is a combination of three tops, in which 1^st and 3^rd tops are lower than the 2^nd top, they look like left and right shoulders of a human. And the Second top looks like the head of a human. Graphical look of this pattern is like a human’s head with left and right shoulders. Hence this pattern’s name is head and shoulder pattern. 

 Head and shoulder pattern is a strong bearish reversal pattern. It generally forms at the end of an uptrend. In below picture, we can see, how head and shoulder pattern looks like. In the picture, we also see the neckline of Head and Shoulder, which is very important part of it.

Breakout:

Breakout of Head and Shoulder pattern happens if the price falls and closes below neckline with huge volume surge. Volume is very important at the breakout of any pattern.

How to trade?

One can go short when breakout of neckline happens with huge volume. 

Stop loss ideally somewhere above the neckline. 

For target, one needs to measure price difference between head and neckline and project it from neckline to below it.

Image Source: Investing.com

Image Source:Investing.com

  2)Inverted Head and shoulder pattern:

 Inverted Head and Shoulder pattern is the inverse form of Head and Shoulder pattern. Inverted Head and Shoulder forms from three bottoms. First and third bottoms are higher than the second bottom. Inverted Head and Shoulder pattern is a strong bullish reversal pattern. It generally shows at the end of a downtrend. Below are the Inverted head and shoulder pictures. We can see neckline in that picture, which is also very important part of this pattern.

Image Source:Investing.com

Breakout: 

Breakout of Inverted Head and Shoulder pattern happens once price breaks Neckline with huge volume surge.

How to trade?

One can go long when breakout of neckline happens with huge volume surge. 

Stop loss is ideally somewhere below the neckline. 

For target, one needs to measure price difference between head and neckline and project it from neckline to above it.

Note: I have used JP ASSOCIATES chart only for an example, it is not the recommendation.

This was Head and Shoulder twins patterns. In next part, we will learn more chart patterns. If you find helpful above information then please Share our article and Subscribe to the newsletter of our blog.