Beginner’s Guide: Post 16
Alright, so we’ve talked about reading those candlesticks one by one (Reading the Story of Price: An Introduction to Candlestick Charts) and how to spot those potential floors (Support) and ceilings (Resistance) on your charts (Introduction to Technical Analysis: Finding Support & Resistance Levels). You’re starting to get a feel for the landscape, which is awesome!
But sometimes, the market doesn’t just move straight up or down between those levels. It dances around, leaves little footprints. And if you watch closely, those footprints often form shapes, or patterns, that tend to show up again and again. Learning to spot a few of the really common ones can give you some extra clues – like little road signs telling you what might be coming up ahead.
Think of it like this: Support and Resistance tell you where the market might struggle, and these patterns can give you hints about how it’s behaving around those key areas. Ready to start seeing shapes in the charts? Let’s look at a few easy ones to begin with.
Hang on, What Are Chart Patterns, Really?
Basically, chart patterns are just recognizable shapes that price makes as it moves over time. Why do we care? Well, because people who’ve studied charts for ages noticed that certain shapes often tend to lead to certain outcomes – maybe the price continues its trend, maybe it reverses.
It all comes down to the psychology of the market – that constant battle between buyers wanting higher prices and sellers wanting lower prices. These patterns are like visual summaries of that fight. A certain shape might show buyers getting tired, or sellers pausing before another push.
Now, here’s the BIG disclaimer. The one you need to tattoo on your trading brain: Patterns are NOT guarantees. Period. They don’t promise anything. They just suggest a higher probability that something might happen based on how similar situations played out in the past. If you ever hear someone say “This pattern guarantees the stock will go up!” – run away! That’s not how it works. Think of them as hints, possibilities, tools for analysis – not crystal balls. Believe me, thinking a pattern had to work has cost me money before, especially early on. Don’t make that mistake!
Starting Simple: Drawing Lines (Trendlines & Channels)
Let’s start with the absolute basics – just drawing straight lines.
Trendlines: What’s the Direction?
Super simple concept, but really useful:
- Got a stock making higher lows? Meaning, each time it dips, the dip is a bit higher than the last one? Connect those lows with a line slanting upwards – boom, you’ve got an uptrend line. It shows the general direction is up.
- Stock making lower highs? Each time it bounces, the peak is a bit lower than the last one? Connect those peaks with a line slanting downwards – that’s your downtrend line. Shows the vibe is currently bearish.
These lines just help you see the flow. Sometimes price will come back and bounce right off them, like a dynamic support or resistance.
Channels: Staying Between the Lines
Sometimes price gets stuck moving pretty neatly between two parallel lines:
- Imagine that uptrend line connecting the lows. Now, draw another line parallel to it, touching the highs. If price is mostly bouncing between those two lines like it’s in a corridor, that’s an uptrend channel.
- Same idea for a downtrend – connect the lower highs with a downtrend line, and draw a parallel line connecting the lower lows. Price stuck in that downward-sloping corridor? That’s a downtrend channel.
- You can even have sideways channels where price just bounces back and forth between a flat support level and a flat resistance level.
Channels just show you that the price movement is contained, for now.
Taking a Breather: Flags & Pennants (Continuation Patterns)
Okay, imagine a stock has just made a really strong, sharp move up – like a flagpole. Sometimes, after that big burst, the price will kind of just… pause. It chops around sideways in a very tight little range for a bit.
- If that tight little consolidation range looks like a small rectangle sloping slightly down or sideways, traders call it a flag.
- If it looks more like a tiny symmetrical triangle getting squeezed tighter, they call it a pennant.
The idea behind both? It’s like the market just sprinted and needs to catch its breath (continuation pattern). The expectation (again, no guarantees!) is that after this brief pause, the price might break out of the flag or pennant and continue in the same direction as that initial strong move (the “pole”). Same logic applies in reverse after a sharp drop.
[Suggest image: Two simple diagrams. One showing a sharp up move (‘pole’) followed by a small, tight rectangular consolidation (‘flag’). Another showing a sharp up move (‘pole’) followed by a small, tight symmetrical triangle (‘pennant’). Keep them very basic.]
The key is seeing them after a sharp, almost vertical move.
Hitting the Wall: Double Tops & Bottoms (Reversal Patterns)
Sometimes, instead of just pausing, a pattern might suggest the trend is actually running out of gas and could be about to turn around (reversal pattern). Two classics here:
- Double Top: Think of the letter ‘M’. Price rallies up to a resistance level, gets rejected, and pulls back. Then, the buyers try again, pushing the price back up to roughly that same resistance level… but they fail again. It can’t break through. That second failure to make a new high is a big warning sign. It suggests the buying power just isn’t there, and the sellers might be about to take control, potentially leading to a move down.
- Double Bottom: This one looks like a ‘W’. Price falls down to a support level, bounces, comes back down to roughly that same support level… and holds again! It refuses to make a new low. That second successful defense of the support level suggests the sellers couldn’t push it lower, and the buyers might be stepping in, potentially leading to a move up.
Think of it like price knocking on a door twice. If it doesn’t open the second time (break the level), it often gives up and walks the other way.
Context is Everything! (Don’t Forget This!)
Now, seeing these shapes is one thing, but where you see them matters. A lot.
- Near Key Levels: Patterns generally carry more weight if they form right near important Support or Resistance levels you’ve already identified. A Double Top forming right at a major, multi-touch resistance zone? That’s way more interesting than one appearing randomly in the middle of a range.
- Combine Your Clues: Don’t be a “pattern trader” who only looks for patterns. That’s a recipe for disaster. You need to put it all together. Does the pattern make sense with the overall trend? What’s volume doing during the pattern? Does it align with support and resistance? Use patterns as one more piece of evidence, not the whole story.
So, What’s the Point? Spotting the Shapes
Okay, quick recap. We’ve looked at drawing basic trendlines and channels to see the flow. We touched on flags and pennants as signs a trend might continue after a pause. And we looked at double tops and bottoms as potential signals a trend might reverse.
The main thing I want you to take away is this: these patterns are visual clues. They’re potential hints based on historical tendencies. They are absolutely not foolproof signals. But learning to spot them can add another layer to your chart reading skills.
What should you do now? Just start looking! Pull up your charts, look at different stocks, different timeframes. Can you spot areas that look like flags? Any potential W-shaped double bottoms near support? Don’t worry about trading them yet. Just practice recognizing the shapes. Training your eyes takes time and repetition. Be patient with yourself!
What’s Next?
Alright, so we’ve got candles, S/R levels, and now some basic visual patterns. There’s one more big piece of the technical analysis puzzle that many traders use: indicators. These are tools, usually plotted right on your chart, that use mathematical formulas based on price or volume to give you different kinds of signals or insights. Sounds a bit mathy? Don’t worry, we’ll keep it super simple.
Let’s get a friendly introduction to a couple of the most common indicators out there in Introduction to Basic Indicators (Keep it Simple!)
