Price Patterns, Part I
by Martin J.Pring
This veteran market analyst takes a look at the principles of
price formation, one of the basics of technical analysis.
In my recent articles, I have covered many basics of technical
analysis, ranging from peak and
trough analysis all the way to
moving averages. What I
haven't covered is one of the
most widely used concepts of
technical analysis: price patterns. This time, I'll take a look
at the principles of price formations, together with some of
the most common varieties. Next time, I'll examine one-
and two-day patterns, because they can be extremely useful for short-term traders.
In most charts, you'll find that prices rarely reverse on a
dime; rather, they experience clearly definable trading ranges
prior to experiencing a trend reversal. Figure 1 shows such an
example. In the left-hand part of the chart, the price rallies and
then loses upside momentum as a battle between buyers and
sellers gets under way.
Often, it is possible to construct two horizontal trendlines
to mark the top and bottom of the range. Every time the pric
rallies to the upper line, buyers are scared off by the higher
price and selling pressure increases. Then, as it falls to the
lower line, buyers are attracted,but sellers, who naturally
want a higher price for their goods, withdraw their offerings,
so the price bounces again. Eventually, sellers win this battle
as the price slips decisively below the lower end of the range.
The charting activity that separates the uptrend from the
downtrend can be contained by two parallel trendlines known
as a rectangle.