Aside from trend channels, a range of well-known chart patterns exist that investors can trade. These are related to the physical shape of price movement (on a chart) and can be identified on a range of liquid shares. These patterns can come in both bullish (upward) and bearish (downward) forms. Below are some of the most common chart patterns (along with real examples) that you can look out for when investing in a share that can help you to predict future share price movement and hence restrict losses or help identify potential gains.
Head & Shoulders Formation
|Bullish H&S for Standard Chartered shares|
The shares recover to roughly the same level as the top of the left shoulder before making one final drop down to around the base of the left shoulder. A line joining these two troughs is the shoulder base. Clearly this is a complex pattern so is not particularly common, but when it does appear it is very reliable. In the case of Standard Chartered, the buy signal exists when the shares move above the neckline following the H&S completion. A sensible stop loss would match the rising neckline. Trading on this basis would have seen a healthy gain in excess of 20%. A bearish H&S formation is when the pattern appears at the top of a trading cycle. In these instances, a sell signal is generated when the shares break below the neckline.
Inverse Head & Shoulders Formation
|Bullish Inverse H&S for Lloyds shares|