Classic Technical Analysis Patterns
Technical analysis began when traders noted specific patterns forming on the U.S. stock market. Over a hundred years ago, most concepts we know and use today were invented.
The so-called classic technical analysis patterns belong to the Western approach to charting. Such patterns stood the test of time and traders using them follow a pattern recognition approach.
Effectively, it means that traders use a documented setup and apply the same rules whenever the price forms a pattern.
Classic Technical Analysis Patterns – The Western Approach
Most of the patterns belonging to the Western approach are known by all traders. Either continuation or reversal patterns, it is impossible for a currency trader to ignore them, especially on the bigger timeframes.
Famous patterns in this category are:
- Head and shoulders
- The pattern resembles the human body, having a head and two shoulders, and by the time the price breaks the neckline the reversal is in place
- Wedges
- Rising and falling wedges reverse a trend as the price has a difficulty advancing or declining, making only marginal highs and lows
- Flags
- Continuation patterns, flags are either bullish or bearish. The price merely pauses and consolidates for a while before continuing the trend.
- Triangles
- Either reversal or continuation patterns, triangles often form on the FX market
These are the most common patterns belonging to the Western approach. Besides them, traders also look at pennants, double and triple tops and bottoms, cup and handle, and so on.
They have one thing in common, and that is they are time-consuming patterns. If forming on bigger timeframes like the daily and above, it takes a while before the patterns end.
However, they all have a measured move that confirms the reversal or the continuation pattern is in place. In most cases, this is enough for traders to start looking for signals that a new trend began.
Conclusion
Many patterns and trading theory belong to the era before computers were invented. Traders documented them using the classic pen and paper as tools to interpret price action.
In one of the following articles, we’ll cover the Japanese approach to technical analysis, and offer another alternative to technical analysis. You’ll be surprised to learn that the Japanese used to forecast rice prices for two hundred years earlier than the U.S. stock market began to trade.