Analysis of Trend Continuation and Trend Reversal Chart Patterns

Currency rates are constantly changing because the supply and demand on an asset are unstable as they change greatly due to a number of factors.
Every trader`s main aim is to make profit from
purchasing or selling an asset. Pattern analysis is a tool that helps traders determine the dominating trend at a certain time.
There are two types of chart patterns and these are Reversal patterns and Continuation patterns.

Reversal Patterns

Reversal patterns act as a signal that the trend will change. The first signal of a trend reversal is the breaking of a major trend line. The bigger the pattern formed the more likely it is that there will be a more significant movement in the market.
There are five types of trend reversal patterns and these
are:

Head and shoulders

This chart pattern consists of three peaks that are known as the head and shoulders as
shown in the image above. The head is always formed by a higher peak than both of the
shoulders.
The last price upward movement builds the neckline and this neckline represents support. When price breaks through the neckline this means that the trend is changing to the opposite direction.

If you take a closer look at that image above, you will notice that within the head and shoulders formation we also have a tripple top. Both indicate a trend reversal, however, the tripple top gives us a signal to make a sell decision before the right shoulder forms. 

Inverse Head and Shoulders

This is the opposite of the Head and shoulders pattern. It is formed when there are three
distinct lows and the head is formed by a lower peak than both of the shoulders. When the
price closes above the neckline, the pattern is considered complete.

Spikes

This pattern is also known as V-tops and V-bottoms. Unlike any other trend reversal pattern,
V-patterns occur when there is a sharp trend reversal. V-patterns occur after an excessive
market growth, that is, when there has been a breakout of an extremely steep trend line.
The ongoing trend usually has no intermediate corrections and a few gaps may occur in the
price movement.

Double Top and Double Bottom

The Double top and the Double Bottom are usually referred to as the M and W chart
formations respectively. The pattern is recognized by having two peaks that are seen around the same level. The pattern is complete when price moves below the level of the previous low which is located in the middle of the two peaks, forming a neckline.


If the price retraces back to the neckline it will not break the level (the level becomes support or resistance depending on the market condition).

Tripple top and Tripple bottom

This pattern resembles the Head and shoulders except for the fact that the peaks or lows appear at the same level. The pattern is complete when price breaks through the neckline as
shown in the image above.

Where to set target profit based on these reversal patterns

This method is based on the height of the pattern.

Step 1

Measure the distance from the peak to the neckline and extend the distance down below
the breakout point.

Step 2

Subtract the price at the neckline level from the price at the peak level

Step 3

Now subtract the figure in Step 2 from the breakout price to get the minimum expected
price move ( for the calculations based on an uptrend refer to the image below)

Continuation patterns

These are confirmations that the dominating trend is likely to continue. The main continuation patterns are the triangle, rectangle and pennant

Triangle

This pattern is formed by the convergence of support and resistance lines.

Triangles can be symmetrical, ascending or descending. 

In a symmetrical triangle, the triangle has almost the same slopes but in the opposite direction and the lines cross each other at some point. The triangle is described as a price consolidation level. The direction in which the triangle zone is broken is more important than the pattern`s type.

An ascending triangle is formed by a horizontal resistance line and an ascending line formed by linked lows. This triangle is formed during an uptrend.

The descending triangle is the opposite of an ascending triangle. It is formed by a horizontal support line and a descending line formed by linked highs.

Rectangle

The rectangle occurs in a consolidation period after sharp changes. It is formed when the price is moving between two parallel lines (support and resistance). A breakout is a sign of a trend continuation of either an uptrend or downtrend.

Pennant

A pennant is formed when a rectangle`s parallel lines converge, therefore, it is sometimes mistaken for a triangle.The pennant includes a flagpole at the beginning of the pattern, which is not present in the formation of the triangle. The flagpole is created when price suddenly spikes dramatically in the direction of the current trend, forming an almost vertical line.