When we work in the market we always ask the same question “Where will the price move?” A chart analysis is one of the methods to answer this question. The chart analysis is a study of price patterns on the chart. If you remember them you will be able to foresee the future price movement. When you see the price pattern you met before you will likely suggest where it will end.
As we know the price history repeats and it tells about the different price patterns which result can be foreseen and used. For example, this is the price movement in the trend channel. The price moves in the trend channel in accordance to the definite formation and gives us the signals of the tendency acceleration, deceleration and reversal. Let us consider each variant in detail:
1) The tendency acceleration is the situation when the price chart is not able to return to a trend line approaching to a channel line closer and closer; it breaks the line forming a new tendency with the same direction. You can see the example as on the picture:
2) The tendency reversal is the situation when the price chart cannot return to a trend line, approaching to a channel line closer and closer; and it breaks the line forming a new reversal tendency. It looks as follows:
If you work with the trend channel you can get the information to forecast the tendency changes and trade successfully. Work in accordance to the trend direction is the most effective and reduces the risks to minimum.
Except the signals in the trend channel you can also use the different technical analysis patterns. The technical analysis patterns are the price chart patterns with their definite regularities which help us to learn where the price will go after the model formation. These patterns appear when the tendency is forming and can advise the price direction to trade. There are two types of such patterns:
1) The tendency continuation pattern indicates the current price movement has not stopped yet but will continue after a pause. The continuation formations are a triangle, a pennant and a flag.
2) The reversal pattern is the price movement which indicates a current tendency ends and a new tendency will be formed. The reversal formations are double and triple bottoms, head & shoulders and a diamond.
The reversal patterns can give the signal during and after the tendency. An important advantage of the technical analysis patterns is an opportunity to calculate the potential movement and use these results for buying options. We will consider each model in our following articles.