Traders vote with their chequebooks. If they believe a stock or CFD is going to move higher, they will buy it. If they believe a stock or CFD is going to move lower, they will sell it. When their money is at stake, they will do whatever it takes to be profitable. Often, their actions form quite distinctive price patterns on the charts, and it is well worth your while to learn to recognize these.

Price patterns provide an insight into what stock and CFD traders are thinking and feeling. Learning to recognize various price patterns will give you an advantage over traders who only use fundamentals or technical indicators.

Imagine having the ability to precisely identify the optimum moment to buy as a stock or CFD surges as well as the ability to accurately project how far a stock or CFD is going to rise. Price patterns can give you this a

Price patterns are divided into the following two categories:

Continuation Patterns

Stock and CFD traders continually ask themselves whether a trend can continue. Deciding whether to invest in the middle of a trend or whether to take your profits is difficult. You can never know if a currency pair is going to turn around and start moving in the opposite direction. You can never know. But you can make an educated guess.

Continuation patterns give you advanced warning of when a stock or CFD is likely to resume its trend after a short consolidation period, and they can also tell you how far the stock or CFD is likely to move in that direction. Of course, continuation patterns are not infallible, but they do put the odds of success in your favor.

Take some time to become acquainted with the following price continuation patterns:

Pennants

Pennants are continuation patterns that form as the price of a stock or CFD moves into a tighter and tighter consolidation range. Pennants can be either bullish or bearish, depending on what the trend was before the pennant began to form. If a stock or CFD was on an upward trend before the pennant began to form, then it is a bullish continuation pattern. Alternatively, if a stock or CFD was on a downward trend before the pennant began to form, then it is a bearish continuation pattern.

Pennants usually form over short periods of time. All have the following five characteristics (see Figure 1 ):

• A: Resistance level — there is downward trend in the level of resistance as it converges with the support level.
• B: Support level — there is an upward trend in the level of support as it converges with the resistance level.
• C: Flagpole - this identifies the trend preceding the formation of the pennant. The flagpole spans the distance from the beginning of the trend to the highest point of the pennant (for a bullish pennant). Or, the flagpole spans the distance from the beginning of the trend to the lowest point of the pennant (for a bearish pennant).
• D: Breakout point - this the point at which the stock or CFD breaks up above the downward-trending level of resistance (for a bullish pennant), or the point at which the stock or CFD breaks down below the upward-trending level of support (for a bearish pennant).
• E: Price projection — this is the price to which the stock or CFD will most likely fall after it has broken out of the pennant formation (in a bearish pennant), or the price to which the stock or CFD will most likely rise after it has broken out of the pennant formation (in a bullish pennant). The distance the stock or CFD is projected to move is equal to the height of the flagpole.

Figure 1-Pennant

Flags

Flags are continuation patterns that form as the price of a stock or CFD pulls back from the predominant trend in a parallel channel. Flags can be either bullish or bearish, depending on what the trend was before the flag began to form. If a stock or CFD was on an upward trend before the flag began to form, it is a bullish continuation pattern. If a stock or CFD was on a downward trend before the flag began to form, it is a bearish continuation pattern. Flags usually form over short periods of time.

Flags all have the following five characteristics (see Figure 2 ):

• A: Resistance level is the downward-trending level of resistance that is parallel with the support level (for a bullish flag), or an upward-trending level of resistance that is parallel with the support level (for a bearish flag).
• B: Support level is a downward-trending level of support that is parallel with the resistance level (for a bullish flag), or an upward-trending level of support that is parallel with the resistance level (for a bearish flag).
• C: Flagpole is the trend preceding the formation of the flag. The flagpole spans the distance from the beginning of the trend to the highest point of the flag (in a bullish flag), or the flagpole spans the distance from the beginning of the trend to the lowest point of the flag (in a bearish flag).
• D: Breakout point is the point at which the stock or CFD breaks up above the downward-trending level of resistance (in a bullish flag), or the point at which the stock or CFD breaks down below the upward-trending level of support (in a bearish flag).
• E: Price projection is the price to which the stock or CFD will most likely fall after it has broken out of the flag formation (in a bearish flag), or the price to which the stock or CFD will most likely rise after it has broken out of the flag formation (in a bullish flag). The distance the stock or CFD is projected to move is equal to the height of the flagpole.

Figure 2-Flag

Wedges

Wedges are continuation patterns that form as the price of a stock or CFD pulls back from the predominant trend and moves into a tighter and tighter consolidation range. Wedges can be either bullish or bearish, depending on what the trend was before the wedge began to form. If a stock or CFD was on an upward trend before the wedge began to form, it is a bullish continuation pattern. If a stock or CFD was on a downward trend before the wedge began to form, it is a bearish continuation pattern. Wedges usually form over short periods of time.

Wedges all have the following five characteristics (see Figure 3 ):

• A: Resistance level is a downward -trending level of resistance that converges with the support level (in a bullish wedge), or an upward-trending level of resistance that converges with the support level (in a bearish wedge).

• B: Support level is a downward -trending level of support that converges with the resistance level (in a bullish wedge), or an upward-trending level of support that converges with the resistance level (in a bearish wedge).
• C: Flagpole is the trend preceding the formation of the wedge. The flagpole spans the distance from the beginning of the trend to the highest point of the wedge (in a bullish wedge), or the flagpole spans the distance from the beginning of the trend to the lowest point of the wedge (in a bearish wedge).
• D: Breakout point is the point at which the stock or CFD breaks up above the downward-trending level of resistance (in a bullish wedge), or the point at which the stock or CFD breaks down below the upward-trending level of support (in a bearish wedge).
• E: Price projection is the price to which the stock or CFD will most likely fall after it has broken out of the wedge formation (in a bearish wedge), or the price to which the stock or CFD will most likely rise after it has broken out of the wedge formation (in a bullish wedge). The distance the stock or CFD is projected to move is equal to the height of the flagpole.

Figure 3-Wedge

Triangles

Triangles are continuation patterns that form as the price of a stock or CFD hits a flat level of support or resistance and begins moving into a tighter and tighter consolidation range. Triangles can be either bullish or bearish, depending on what the trend was before the wedge began to form. If a stock or CFD was on an upward trend before the triangle began to form, it is a bullish continuation pattern. If a stock or CFD was on a downward trend before the triangle began to form, it is a bearish continuation pattern. Triangles usually form over long periods of time.

Triangles all have the following five characteristics (see Figure 4 ):

• A: Resistance level is the horizontal level of resistance (in a bullish, or ascending triangle), or a downward-trending level of resistance that converges with the support level (in a bearish, or descending triangle).
• B: Support level is the upward-trending level of support that converges with the resistance level (in a bullish or ascending triangle), or a horizontal level of support (in a bearish or descending triangle).
• C: Flagpole is the trend preceding the formation of the triangle. The flagpole spans the distance from the beginning of the trend to the highest point of the triangle (in a bullish or ascending triangle), or the flagpole spans the distance from the beginning of the trend to the lowest point of the triangle (in a bearish or descending triangle).
• D: Breakout point is the point at which the stock or CFD breaks up above the horizontal level of resistance (in a bullish or ascending triangle), or the point at which the stock or CFD breaks down below the horizontal level of support (in a bearish or descending triangle).
• E: Price projection is the price to which the stock or CFD will most likely fall after it has broken out of the triangle formation (in a bearish or descending triangle), or the price to which the stock or CFD will most likely rise after it has broken out of the triangle formation (in a bullish or ascending triangle). The distance the stock or CFD is projected to move is equal to the height of the flagpole.

Figure 4-Triangle

Reversal Patterns

Stock and CFD traders continually ask themselves the question whether a trend can continue. Deciding whether a trend is over is difficult. You can never know for sure if a stock or CFD is going to turn around and start moving in the opposite direction. You can, however, make an educated guess, and recognizing reversal patterns will enable you to do that.

Reversal patterns give you advanced warning when a stock or CFD is likely to turn around and begin a new trend. They also indicate how far the stock or CFD is likely to move in the opposite direction. Of course, reversal patterns are not infallible, but they do increase the likelihood of you correctly anticipating the market.

Take some time to become familiar with the following price reversal patterns:

Double-Tops/Bottoms

Double-tops and double-bottoms are reversal patterns that form as the price of a stock or CFD hits a support or resistance level two times before the stock or CFD turns around and moves in the opposite direction. Double-tops are bearish reversal patterns and double-bottoms are bullish reversal patterns. If a stock or CFD is on an upward trend, it will form a double-top. If a stock or CFD is on a downward trend, it will form a double-bottom. Double-tops and double-bottoms both usually form over long periods.

Double-tops and bottoms all have the following four characteristics (see Figure 5 ):

• A: Resistance level is the horizontal. or slightly angled, level of resistance.
• B: Support level is the horizontal, or slightly angled, level of support.
• C: Breakout point is the point at which the stock or CFD breaks up above the horizontal level of resistance (in a double-bottom), or the point at which the stock or CFD breaks down below the horizontal level of support (in a double-top).
• D: Price projection is the price to which the stock or CFD will most likely fall after it has broken out of the double-top formation, or the price to which the stock or CFD will most likely rise after it has broken out of the double-bottom formation. The distance the stock or CFD is projected to move is equal to the distance between the support and resistance levels.

Figure 5-Double-top

Triple-Tops/Bottoms

Triple-tops/bottoms are reversal patterns that form as the price of a stock or CFD hits a support or resistance level three times before the stock or CFD turns around and moves in the opposite direction. Triple-tops are bearish reversal patterns and triple-bottoms are bullish reversal patterns. If a stock or CFD is on an upward trend, it will form a triple-top. If a stock or CFD is on a downward trend, it will form a triple-bottom. Triple-tops and triple-bottoms usually form over long periods.

Triple-tops and bottoms all have the following four characteristics (see Figure 6 ):

• A: Resistance level is the horizontal. or slightly angled, level of resistance.
• B: Support level is the horizontal, or slightly angled, level of support.
• C: Breakout point is the point at which the stock or CFD breaks up above the horizontal level of resistance (in a triple-bottom), or the point at which the stock or CFD breaks down below the horizontal level of support (in a triple-top).
• D: Price projection is the price to which the stock or CFD will most likely fall after it has broken out of the triple-top formation, or the price to which the stock or CFD will most likely rise after it has broken out of the triple-bottom formation. The distance the stock or CFD is projected to move is equal to the distance between the support and resistance levels.

Figure 6-Triple-top

Head-and-Shoulders Tops/Bottoms

Head-and-shoulders tops are reversal patterns that form as the price of a stock or CFD hits a resistance level (forming the first shoulder), then breaks through the first resistance level and hits a higher resistance level (forming the head) and then hits the first resistance level again (forming the second shoulder).

Head-and-shoulders bottoms are reversal patterns that form as the price of a stock or CFD hits a support level (forming the first shoulder), then breaks through the first support level and hits a lower support level (forming the head) and then hits the first support level again (forming the second shoulder).

Head-and-shoulders tops are bearish reversal patterns and head-and-shoulders bottoms are bullish reversal patterns. If a stock or CFD is on an upward trend, it will form a head-and-shoulders top. If a stock or CFD is on a downward trend, it will form a head-and-shoulders bottom. Head-and-shoulders tops/bottoms usually form over long periods.

Head-and-shoulders tops/bottoms all have the following five characteristics (see Figure 7 ):

• A: Left shoulder is the horizontal. or slightly angled, level of resistance (head-and-shoulders top), or a horizontal, or slightly angled, level of support (head-and-shoulders bottom).
• B: Head is the higher horizontal, or slightly angled, level of resistance (head-and-shoulders top), or a lower horizontal, or slightly angled, level of support (head-and-shoulders bottom).
• C Right shoulder is the h orizontal, or slightly angled, level of resistance that is in line with the left shoulder (head-and-shoulders top), or a horizontal, or slightly angled, level of support that is in line with the left shoulder (head-and-shoulders bottom).
• D: Neckline is the horizontal, or slightly angled, level of support (head-and-shoulders top), or a horizontal, or slightly angled, level of resistance (head-and-shoulders bottom).
• E: Breakout point is the point at which the stock or CFD breaks up above the neckline (head-and-shoulders bottom), or the point at which the stock or CFD breaks down below the neckline (head-and-shoulders top).
• F: Price projection is the price to which the stock or CFD will most likely fall after it has broken out of the head-and-shoulders-top formation, or the price to which the stock or CFD will most likely rise after it has broken out of the head-and-shoulders-bottom formation. The distance the stock or CFD is projected to move is equal to the distance between the head and the neckline.

Figure 7-Head-and-Shoulders Top