Welcome to part seven of our blog series: A Trader's Journey, where we are covering the second level of the Foundations of Trading class program. Today's blog will cover the teachings in level 2 class 2, and if you wish to review our previous blogs regarding this program, please click on the Foundations of Trading blog category on the right-hand side of the page. That will instantly bring up all the blogs from this series for you to read. As for today's topic, we will take a look at some basic chart patterns.
Chart patterns are examples of behavior that forms during stock price transitions. These patterns reflect the story behind a company's stock price movements. Some patterns indicate that a reversal trend is approaching; however, all chart patterns help us anticipate future price movement. Some examples of basic chart patterns are V-Tops and Bottoms, Double Tops and Bottoms, and Triple Tops and Bottoms.
V-Tops and Bottoms usually reflect a very sudden change in the direction of a stock. Usually, a stock will travel in one direction for an extended period, either trending up or down. Then it will reverse course and quickly trend in the opposite direction over the course of only one or two days. This reversal can be easy to miss since it usually erases the entirety of the previous up or downtrend. It should be noted since V-Tops and Bottoms happen so fast, they are challenging to trade and predict.
Double Tops and Bottoms are similar to Single Tops and Bottoms; however, the difference is this pattern will hit a point of support or resistance, bounce back a little, and pushes up against the same point of resistance or support a second time. Then the second attempt will fail, and the stock tends to reverse.
Compared to the V-Tops and Bottoms, the Double Tops and Bottoms are more commonplace and easier to locate and trade. You can use the first bounce-back point of support and resistance, aka the neckline, as your entry point, and then watch for increased volume as the stock breaks out. Make sure to keep an eye on old resistance as it can become new support as the stock determines its direction.
Whereas Double Tops and Bottoms are similar to V-Tops and Bottoms, Triple Tops and Bottoms are similar to Double Tops and Bottoms, but instead of two points of support and resistance, they have three recognizable attempts to push past the points of support and resistance. This is a strong pattern that signifies the trend has failed to push through established support and resistance points. As with the Double Tops and Bottoms, you can enter a trade at the neckline while using increased volume as an indicator the stock will break out.
In closing, this is an introductory look at V-based chart patterns that traders can find and use when tracking a company's stock performance. Once you start training yourself to look for overall patterns like these, you will quickly be able to locate and execute trade setups. Thank you for reading, and we will see you next week as we discuss our main takeaway from Foundations of Trading Level 2 Class 3!