Charts and Chart Patterns: A Comprehensive Guide | CFA Level I Portfolio Management

Welcome back! In this lesson, we will explore the various types of charts technicians commonly use and learn how to identify trends and patterns. So, let’s dive in!

Common Charts Used by Technicians

Technicians use several types of charts to spot trends and patterns:

Line charts – Simple graphical plots of data points connected by lines, usually displaying closing prices.

Bar charts – Show the opening and closing prices, as well as the range for a particular time period.

Candlestick charts – Similar to bar charts, but use a box bounded by the opening and closing prices, making it easier to recognize patterns and spot trends.

Volume charts – Displayed below the price chart, showing each period’s volume in a vertical bar.

Linear scale charts – Suitable for small data ranges but can miss significant events in large data ranges.

Logarithmic scale charts – Equal vertical distances correspond to equal percentage changes, making it easier to identify crucial events.

Identifying Trends and Patterns

Uptrends – When prices consistently reach higher highs and higher lows, indicating increasing demand.

Downtrends – When prices consistently reach lower highs and lower lows, indicating increasing supply.

Trendlines can be drawn by joining the lows (for uptrends) or the highs (for downtrends) to identify if a trend is continuing or reversing. These trendlines also act as support and resistance lines.

Reversal Patterns

Reversal patterns include:

Head-and-shoulders pattern – Indicates weakness in buying pressure, leading to a reversal of the uptrend.

Triple top pattern – Similar to the head-and-shoulders, but with three peaks instead of one central peak.

Double top pattern – Prices reach a resistance level, exhausting buying and intensifying selling.

Similarly, the inverse head-and-shoulders, triple bottom, and double bottom patterns apply to the reversal of a downtrend.

Continuation Patterns

Continuation patterns suggest a pause in the trend, where buying and selling temporarily become roughly equal. Common continuation patterns include:

Ascending triangle – Higher lows and a resistance level in an uptrend.

Descending triangle – Lower highs and a support level in a downtrend.

Symmetrical triangle – Higher lows and lower highs, indicating increasingly bullish buyers and bearish sellers.

Rectangle pattern – Prices range between parallel and level support and resistance levels.

Minor continuation patterns, such as the pennant and flag patterns, form over short periods of time (typically a week).

Recap

In this lesson, we explored the principles of technical analysis, compared it with fundamental analysis, and examined common chart types. We also discussed how to identify uptrends and downtrends, as well as various reversal and continuation patterns.

Here’s a quick summary:

• Technical analysis – A method of analyzing financial markets using historical price and volume data.
• Common chart types – Line, bar, candlestick, volume, linear scale, and logarithmic scale charts.
• Uptrends and downtrends – Identified by higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend).
• Reversal patterns – Head-and-shoulders, triple top, double top, inverse head-and-shoulders, triple bottom, and double bottom patterns.
• Continuation patterns – Ascending triangle, descending triangle, symmetrical triangle, and rectangle patterns. Minor continuation patterns include the pennant and flag patterns.

That’s all for this lesson! In the upcoming lessons, we will delve deeper into technical analysis concepts like indicators and cycles. Stay tuned!