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Trading and Investment Terminology

Chart patterns

Chart patterns are an integral part of technical analysis which looks at the big picture and help to identify the trading signals. History repeats itself, the theory behind chart patterns is based on this assumption. Means certain patterns occur again and again and tends to produce same outcomes. Though most of the time chart patterns are correct but there is no 100% certainty where the market or a security will head. The process of identifying chart patterns is subjective in nature that is why chart patterns are often seen more of an art than science. Successful traders, investors, scalpers, swing traders, day traders, and position traders combine chart patterns with technical indicators and other forms of technical analysis to maximize their chance of success. Chart patterns are used to project the future price movement of security or index. Investors or traders can trade aggressively or conservatively according to their risk tolerance. With the help of chart patterns, it becomes easy to calculate the risk and reward of entering into a trade. There are three types of chart patterns � Reversal Patterns Reversal means the price trend is going to change the direction; it can be a positive or negative change against the prevailing trend. Reversal pattern is also known as trend reversal, rally, or correction. Reversal patterns indicate that the prior trend will reverse upon completion of the patterns. Like if the current trend is bullish after the reversal pattern the trend will become bearish. Some popular reversal patterns are � Double Top Reversal � Double Bottom Reversal � Triple Top Reversal � Triple Bottom Reversal � Rounding Bottom � Head and Shoulder Top � Head and Shoulder Bottom � Falling Wedge � Rising Wedge � Continuation Patterns Continuation pattern indicates that the trend is likely to continue once the pattern is completed. Continuation pattern can be seen on all time frames from tick chart to daily or weekly chart. Some of the popular continuation patterns are � Flag and Pennant � Rectangle � Cup and Handle � Measured Move Bullish � Measured Move Bearish � Price Channel � Bilateral Patterns Bilateral patterns indicate that price can go either way, depending on whether it breaks to the upside or to the downside. Some bilateral patterns are � Ascending Triangle � Descending Triangle � Symmetrical Triangle By recognizing chart patterns early you can take competitive advantage. The combination of volume, support and resistance levels, RSI, and Fibonacci Retracements can help you to identify trend reversal, continuations, and bilateral patterns.