Introduction To Reversal Patterns And
Continuation Patterns
Author: Action Forex

There are two major ways to trade the financial markets: swing
trading and trend following. Swing traders use technical
analysis to look for short-term price movement and capture
gains in a relative short-term period. They look for the price
patterns that hint for a reversal, in order that they can pick
the tops and bottoms of the trend. Trend followers pay
attention to the general direction of the price movement and
enter trades by following the current direction. They would
look for continuation patterns on the price charts to predict
the future direction of the trend, or exit the trade until the
reversal patterns appear.

The following articles discussed the rules for identifying
reversal patterns and continuation patterns, and introduced
some well-known reversal and continuation patterns. The
reversal patterns include: Head and Shoulders, Double Tops and
Bottoms, Triple Tops and Bottoms and Saucers. The continuation
patterns include Triangles (Ascending, Descending, Symmetrical
and Broadening), Flags and Pennants, Wedges and Rectangles.

The patterns exhibit the psychology and momentum of the market.
No matter which type of traders you are, it is always helpful to
be aware of the patterns. Using the patterns is not a
stand-alone method of trading the market, in fact, it is better
to be used with a mix of trend lines and technical indicators.
Beginners might first find it difficult to identify the
patterns; they can familiarise the patterns by looking at the
historical charts and try to identify the patterns.

Rules for identifying Reversal Patterns

The following are the three basic tenets about identifying
reversal patterns. While they may seem obvious and even
simplistic, they are important for successfully using these
patterns.

A Trend Must Exist - A trend must exist before a reversal of
the trend. There can be no reversal if a trend does not exist
in the first place. A reversal pattern that follows a large
trend will have much more movement to retrace, and so the
strength of the move after the reversal pattern will likely be
stronger.

Trend Lines - The first precise signal that the trend is ending
is often the failure of a trend line, that might also come along
with oscillators that show overbought or oversold before a
reversal pattern occurs. Note that the intraday break of the
trend line is not significant until a daily candle closes
through the line. The chart below shows a trend line that is
broken on an intraday basis before the price recovers. The
first strong signal that a reversal may be coming appears when
the price closes below the green support line. The price
subsequently rallies to form a double top, but it does not hold
these gains.

http://www.actionforex.com/images/stories/articles/tut_patterns_2_1.gif


Time Frame - Like relative highs/lows and trend lines, reversal
patterns gain greater significance if they occur over a longer
time frame. A head and shoulders pattern that takes months to
develop will of course signal a reversal of a much larger trend
than a head and shoulders that takes place intraday.


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