Bar Charts and Patterns in Technical Analysis

From Chapter 11, you know how to plot a bar chart. It is the most common chart of price behavior and has been used ever since continuous trading data became available. In Chapter 12, you learned how to determine support and resistance zones and trend lines using bar charts. Bar chart patterns form by combining support and resistance zones and trend lines. In all cases, a pattern finalizes when a breakout occurs from the pattern. In some instances, a pattern will just dribble into inactivity, in which case it should be ignored, but most patterns result in a legitimate breakout in one direction or the other. The breakout may be false, of course, and we look at how to handle that occurrence. We have observed the peculiarities of drawing trend lines and establishing support and resistance zones in previous chapters, and from the previous discussion, the difficulties in recognizing patterns from imperfect data. Patterns are, thus, never exactly the same from example to example and are fit into generic categories with common characteristics based principally on the direction of internal trends and their intersections.

Traditionally, we divide patterns into two categories: continuation and reversal. This is a holdover from Schabacker (1930), and used by Edwards and Magee (revised, 2007), who needed to break patterns into easily understood and recognizable divisions. Unfortunately, as Edwards and Magee recognized, patterns cannot always easily be relegated to a specific reversal or continuation category, and such a description can often be misleading. Instead, patterns can occur in both modes. For this reason, we prefer to abandon the standard method of differentiating patterns into “continuation” and “reversal,” and although we still use the terms when appropriate, we instead describe the simplest patterns first and progress to the more complex.

Source: Kirkpatrick II Charles D., Dahlquist Julie R. (2015), Technical Analysis: The Complete Resource for Financial Market Technicians, FT Press; 3rd edition.

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