When interpreting price charts, technical analysts typically use a variety of well established techniques. These might include drawing trend lines or channels to identify trends, recognizing classic chart patterns and classifying the market’s observed price action according to type.
Trends consist of a series of higher highs and higher lows, for an upwards trend, or a series of lower highs and lower lows for a downward trend. Technical analysts will look over the key reversal points seen on price charts to note whether such a pattern exists.
If they do observe a trend, then they will draw an upper line between the major highs and a lower line between the major lows. When these lines are parallel, they form a pattern known as a channel which indicates that strong directional movement is occurring in that market.
In addition to looking for trends on charts, traders also use charts to identify reliable chart patterns that include triangles, flags, pennants, head and shoulders and double tops and bottoms, etc. These classic chart patterns often provide useful predictive information about the future levels of exchange rates.
Such patterns also often have so-called “measured moves” that allow technical traders to set price objectives and stop levels once a “breakout” has been observed.
Classifying Market Types
Markets tend to fall into two main categories: trending and non-trending, and they also show various trading pattern types. These include: up and down trends, as well as choppy, sideways, ranging and consolidative markets.
These markets types are useful to identify since doing so can provide good profit making opportunities. For example, trending markets usually make profits for traders that follow them, while non-trending markets often allow traders to make money by buying low and selling high with stops placed outside extreme points