The identification of patterns and trends are techniques used by analysts studying the supply and demand of an asset traded on an open market. A trend is the general direction of a price over a period of time. A pattern is a set of data that follows a recognizable form, which analysts then attempt to find in the current data.
The three basic types of trends are up, down and sideways. Trends may be discovered in the short, medium and the long terms. Generally, investors take positions in assets that will be profitable as long as the current trend continues. Taking positions that profit only if a trend reverses is riskier. Analysts use trendlines and channels, which are essentially boundaries for price fluctuations, in an attempt to spot and define trends. Upward trends are characterized by an asset price hitting a series of higher highs and lows, while downward trends are marked by lower highs and lows.
A pattern is a series of data that repeats in a recognizable way. It can be identified in the history of the asset being evaluated or other assets with similar characteristics. Patterns often include the study of sale volume as well as price. Patterns can occur within a downward or upward trend or as marking the beginning of a new trend. There are bottoming, topping and continuation patterns. A “follow-through day” pattern is used by some analysts to identify market bottoms. The “head-and-shoulders” topping pattern is popular among day and swing traders. Continuation patterns include the “cup with handle,” “flat base” and “three weeks tight.”