Prices tend to move
in trends,which last a variable amount of time then typically slow
down, pause, and finally reverse. These stages represent investors
forming new expectations which change the balance between supply
and demand. Price patterns are graphical figures that seem
to appear with surprising regularity, so often in fact, that the
various patterns have names. The time a pattern takes to emerge
varies from minutes to weeks, and usually, the longer it takes to
form, the more extreme the result is. Common patterns include the
"Head and Shoulders", one of the most reliable and well-known chart
patterns which resembles a head with a shoulder on each side. According
to DOW theory, during an up trend, a series of higher highs and
higher lows forms. The first shoulder is when the trend begins to
run out of steam, followed by a new peak as the bulls desperately
try to force it to continue, then the second shoulder forms, marking
the reversal of the trend, confirmed by penetration of the 'neckline'.
Similarly, on down trends, an inverse (upside down) Head and Shoulders
pattern often marks the market bottom.
Another common pattern is the "Rounding Tops and Bottoms" which
occur as expections invert (i.e. from bullish to bearish or vice
versa). Price pattern form a smoother "bowl shaped" effect, in other
words a gentle reversal is taking place.
Triangles happen when the range between peaks and troughs narrows,
making what appears to be a triangular concentration of price moves,
coming to a point near some obvious support or resistance line.
Double Tops and Bottoms happen if price rises to a known level of
resistance before falling back but then return to the resistance
level, while volume decreases all the time. A fall in price then
ensues. A double bottom is an upside down double top.
Many day trading masters trade using patterns, specialising in a
small number which they then become expert at recognizing and exploiting.