Technical analysis is a trading method and technique that makes use of charts as a means to analyze markets, trends as well as securities in order to look for various trading opportunities. Among the many factors and indicators that technical analysis traders look into are price patterns. Looking for these patterns and their careful analysis can give traders a means to gauge the market or individual securities and assets which can then help traders make sound decisions.

Price Pattern Basics

Price patterns may indicate certain transitions between falling and rising trends. A price pattern is basically a recognized pattern in price movement identified usually by the use of trendlines and curves. A price pattern that shows a change in trend direction is known as a reversal pattern. A price pattern that lets a trend continue on its current direction after a brief pause is called a continuation pattern. Traders and technical analysts make use of these price patterns to examine current price movements and also forecast future market direction and trend.

Price Pattern Interpretation Guidelines

Interpreting price patterns should be based on accuracy as much as possible in order to be useful for traders and technical analysts. That is why there are certain basic guidelines that is followed with regards to interpreting price patterns. They are:

  • Identifying. Trying to identify price patterns can either be simple or hard, depending on the situation. They are fairly easy to identify and find on historical data charts. But price patterns can be quite hard to identify just as they are forming. Usually, technical analysts use comparisons with historical price patterns to determine newly formed price patterns along with other methods.
  • Evaluating. Once a price pattern is identified, then it can be evaluated. Analysts take into consideration the duration of the price pattern as well as the accompanying volume and volatility of the price changes or swings found within the pattern. Careful evaluation would provide some added validity to the price pattern.
  • Forecast. Once a price pattern has been identified and evaluated, the information gathered can be used to form a prediction. Although price patterns do not usually cooperate and does not always guarantee a surefire forecast, it can be used to determine what may be more likely to happen, based on the price pattern information. That is why traders should still be on the lookout for possible market changes that might affect the prediction at any instant.