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Classical patterns of technical analysis are one of the old tools of financial market analysis. The important characteristic of these chart patterns in technical analysis is to pay attention to the geometric shape of price changes in the charts.
Attention: Technical analysis without fundamental analysis will be an incomplete analysis. Therefore, it is suggested not to rely on the results of this analysis alone for investment.
There are various methods for technical analysis; But some traders use volatility and indicators. While others only analyze price movements.
Traders in the past have found a series of recurring patterns by looking at price patterns. The repetition of these patterns is due to the influence of human emotions on market movements. Therefore, we can understand the importance of classic patterns of technical analysis; Because these patterns can provide psychological insight into market trends for traders. Market movement is largely dependent on traders’ reactions to market events.
In general, chart patterns in technical analysis are divided into three categories: classical, candlestick and harmonic patterns. Classic patterns of technical analysis include such patterns as wedges, triangles, shoulder tops, flags, rectangles, ceilings, and double and triple bottoms. By using these charts, you can understand the price of cryptocurrencies in the future and make an easier decision to make transactions. In the rest of this article, I will introduce the classic patterns of technical analysis.
What are the classic patterns of technical analysis?
Chart patterns in technical analysis (chart patterns) are shapes that can be seen in the price charts in a similar and repetitive manner and are usually subject to mathematical and geometric ratios or based on market psychology. The purpose of creating these patterns is to detect the price trend and its growth or decline.
Classic patterns of technical analysis are one of the suitable tools for price analysis, which use price geometry to analyze the situation. Based on the main idea of creating classic patterns of technical analysis, the geometric shapes in the price chart are created based on the traders’ behavior and therefore it is possible to repeat them. Traders in various financial markets such as forex market, stock market and digital currency can use classic patterns to analyze their asset price chart.
Classic patterns of technical analysis can be seen in different time frames of the price chart. It is natural that the larger the time frame, the more valid the classic patterns. Basically, daily and four-hour time frames are the best time frames for this kind of chart patterns in technical analysis.
Returning and continuing price patterns are among the types of classic patterns of technical analysis. These patterns help traders to identify whether the market is bullish or bearish. On the other hand, many traders also use classic patterns of technical analysis to identify entry and exit points, determine the loss limit, etc.
Types of classic patterns of technical analysis
Basically, chart patterns in technical analysis can be divided into the following three categories:
Continuation Patterns
Classic patterns of continuation technical analysis (Continuation Patterns) indicate the continuation of the current price trend in the relevant market. These patterns indicate the continuation of the previous trend in the price chart. Some of these classic patterns are formed in upward trends and others in downward trends and are considered a signal to continue the trend.
Reversal Patterns
These classic patterns of technical analysis are signals to show traders a trend reversal.
Bidirectional price patterns
(Bilateral Patterns)
These neutral price patterns in technical analysis indicate uncertainty in price direction in financial markets. The formation of these patterns in the price chart of financial markets shows the extreme fluctuations of the market. In bilateral price patterns, it is possible for the price to move up or down.
Introducing chart patterns in technical analysis
Below I mention the most important classic patterns of technical analysis:
Head and Shoulders pattern in classic patterns of technical analysis
One of the types of reversal patterns is the head and shoulders pattern, which is created at the end of an upward or downward trend and indicates a change in market direction and the beginning of a reversal trend. This pattern is created with a small upward movement and is followed by a larger upward movement, and finally an upward movement equal to the first movement will be formed.
If this pattern is formed at the end of a downward trend, the Inverse Head and Shoulders pattern has been formed. These patterns, which are formed at the end of a downward trend, change the direction of the market and create an upward movement.
The head and shoulders pattern is used by many traders and investors to identify entry and exit points, price targets and stop loss levels.
The head and shoulders pattern has the following three main components:
- Head: This pattern is created from three peaks or three valleys, the highest peak or valley in the middle is called the head.
- the shoulder: This pattern generally consists of two shoulders that are almost the same size and can be level or non-level.
- Neckline: The line that connects two points resulting from the connection of one head and one shoulder is called the neck line, which is a criterion for pattern recognition.
In this classic pattern of technical analysis, at the ceiling, you can expect a price decrease and at the bottom, you can expect a price increase. Analysts use these classic patterns of technical analysis to reverse the main trend of the chart or to detect cross-sectional chart corrections.
Twin roof and floor pattern (Double Top Double Down)
The double ceiling and double bottom pattern is one of the classic patterns of technical analysis of the reversion type, which indicates the points where the market has made two unsuccessful attempts to cross the support and resistance levels. This pattern can be more profitable than the head and shoulders pattern. In addition, it is easily identified in different time frames.
The double ceiling pattern is created at the end of an upward trend and is shown on the chart when the price of an asset reaches the resistance level twice in a row during an upward trend and creates a shape similar to two peaks on the chart.
The shape of this pattern on the chart is similar to the English letter M and indicates the change of the price trend from ascending to descending.
The double bottom pattern on the chart is like the English letter W, and at the end a downward trend is created. In this classic pattern of technical analysis, when the price of an asset reaches a support level, it turns back and continues to move upwards. But because it cannot continue its upward movement, it goes back down again and creates the second valley. After the double bottom pattern, the price movement reverses and turns upward.
These classic patterns of technical analysis can also appear in the form of three peaks or valleys on the chart, which are called the triple top and triple bottom patterns.
Triangle pattern is one of the classic patterns of technical analysis
A triangle pattern is a chart consisting of a combination of a horizontal line with a trend line and indicates a stop in the prevailing trend. The horizontal line on the chart is the result of connecting the high and low points of the candles.
These classic patterns of technical analysis are introduced as continuing patterns from the point of view of analysts and are classified into three categories: Ascending Triangle, Descending Triangle and Symmetrical Triangle.
Ascending Triangle Pattern
The ascending triangle pattern is formed by crossing the lower trend line of the chart from the upper horizontal line. The upper horizontal line on this chart actually represents the resistance level. After leaving this triangle, the price has been on an upward trend and the power of buyers is still greater than that of sellers.
Descending Triangle Pattern
This pattern is the reverse version of the ascending triangle pattern. In this pattern, the crossing of the trend line at the top of the chart from the lower horizontal line, which represents the support level, causes the failure and formation of this pattern, and then the price reaches below the support and the sellers dominate the market.
Wedge pattern
This price pattern is created by drawing two converging trend lines in the price chart, which is used from the market trend lines on this pattern to connect price floors and ceilings in the range of 10 to 50 candles.
If the trend lines drawn on the chart are above and below the price movement, it is called a rising wedge pattern. This pattern actually occurs when the price of an asset increases, but it can also occur during a downward trend.
Also, if these trend lines come close to each other due to a sharp decrease in price movements, the Falling Wedge pattern has occurred. The ascending wedge pattern indicates the occurrence of a downward trend or price decrease and the descending wedge pattern also indicates the possibility of price increase in the market.
The cup and handle pattern is one of the classic patterns of technical analysis
The cup and handle pattern is one of the classic patterns in technical analysis of the continuation type, which is usually created after a stop in an upward trend and indicates the continuation of the upward trend in the market. In fact, it can be said that the price trend before and after this pattern is upward.
In the cup pattern and the asset group, after going through an upward trend, it faces a sudden selling pressure, which will cause the price to drop to a third of the initial price. The continuation of this trend reduces the power of sellers and sales pressure enters the stabilization period, which causes the bottom of the cup.
After a period of time, the price trend will rise again. In this way, the part of the cup or the body of the cup is also created, which is similar to the English letter U.
After some time, when the part reached the level where it had fallen, it will fall again and thus the previous process will be repeated in a shorter form during which the cup is formed.
The cup and handle pattern can also be formed in a downward trend, which is referred to as the reverse cup and handle pattern.
Flag pattern is one of the classic patterns of technical analysis
The flag pattern is one of the types of continuation patterns in technical analysis, which is created by two parallel lines and generally occurs after an upward or downward movement in the market. This pattern includes two types of bullish flag and bearish flag.
bullish flag pattern
A bullish flag pattern is formed in an uptrend. In this chart, at the beginning, we have a strong upward movement, which immediately after enters a channel with a low and downward slope. Traders see this as a short pause and expect the uptrend to resume.
bearish flag pattern
In the reverse bearish flag pattern the above is true. In this pattern, the price has a strong downward movement and after that it will enter the ascending channel with a gentle slope. Once this pattern appears on the chart, the downtrend will continue after exiting the flag.
Rectangle pattern
The rectangle pattern is one of the classic patterns of technical analysis that is created when the price is between support and resistance levels. This pattern represents a period of price stabilization or uncertainty among buyers and sellers.
The rectangle pattern is one of the types of recurring and continuing patterns in technical analysis, where the price of an asset fluctuates within a certain range and will successively reach the support and resistance level. This pattern will generally form after an uptrend or downtrend where the price is neutral.
The rectangle pattern represents the stabilization period; Because no trend is observed in the market and trading of an asset is done only between its support and resistance level. In this pattern, failure occurs when the price leaves the rectangle pattern and changes direction after hitting the upper or lower lines.
Imagine that a rectangle pattern is formed after an uptrend. There is a possibility that the price of the asset will move up after leaving the rectangular range;
In this case, it is a continuous rectangular pattern. Now, if the price moves down after leaving the rectangle range, the rectangle pattern is called a reversal.
Many traders prefer to trade within the rectangle pattern and some others are waiting for the price to break.
The triplet pattern, like the doublet roof pattern, is a kind of reversed pattern, with the difference that it turns into triplets instead of doublets. In other words, instead of two roofs or floors, it becomes three roofs or floors.
When a symbol is in an uptrend, the formation time of this pattern will change direction and move down. The reverse is also true.
This pattern is used to continue the upward trend. As the asset enters the cup and if it exits, it grows to the size of the bottom of the pattern.
